In a lawsuit filed against the Commodity Futures Trading Commission, Dow Jones & Co. has accused CFTC Chairman Philip McBride Johnson of having an illegal conflict of interest in a proposal to create a futures contract based on the Dow Jones Index of stock prices.
Dow Jones lawyers are scheduled to seek a temporary restraining order in U.S. District Court today to stop the CFTC from approving the stock index futures proposal of the Chicago Board of Trade.
Dow Jones sued the CFTC on Monday in the latest of a series of administrative and legal maneuvers to try to block the use of its widely quoted index for futures trading. The CFTC recently has approved futures contracts based on Standard & Poor's 500 Stock Index, the New York Stock Exchange Index and the Value Line Stock Index, whose creators licensed the use of their indexes.
Traders in stock futures contracts speculate on the rise and fall of the stock market in the same way that grain traders try to profit from changes in future corn or wheat prices. The stock futures trading is based on a hypothetical portfolios of stocks that make up the Dow and other indexes.
Dow Jones, which owns The Wall Street Journal, Barron's and other financial publications, has refused to permit use of the Dow Jones Index "partly out of fear that the investing public may associate Dow Jones with the highly speculative futures market," the lawsuit says.
Unable to get permission to use the DJI, the Chicago Board of Trade has proposed a clone index, using the same group of stocks as Dow Jones, but not the publishing company's name. The CFTC is scheduled to vote on the CBOT application on Thursday.
CFTC Chairman Johnson has a conflict of interest because he represented the Board of Trade as a private attorney before being named to the regulatory post a year ago, Dow Jones contends.
As a partner in the Chicago law firm of Kirkland & Ellis, Johnson not only served as attorney for the CBOT, he also drafted the board's original plan for stock index futures, the Dow Jones complaint says.
Johnson's "participation in these proceedings is a conflict of interest prohibited by law," Dow Jones' lawsuit contends. It also complains of unofficial, off-the-record contacts between CFTC commissioners and staff members and representatives CBOT.
As recently as February, Johnson discussed the proposal by telephone with CBOT President Robert K. Wilmouth, Dow Jones complained, citing a Feb. 23 memo by Wilmouth detailing the phone conversation.
The Wilmouth memo says Johnson told his former client, "I think you are headed in the right direction," saying, "I personally will not object to the contract if Dow Jones asks me to delay approval or not to approve the contract."
The same memo says Johnson told Wilmouth "it is my opinion" that the Dow Jones Index futures application "would probably fly, but I cannot speak for the other commissioners." Wilmouth says Johnson also warned him, "You probably will get a lawsuit from Dow Jones, but you might be able to win it."
Neither Johnson nor the CFTC has filed a response to the Dow Jones lawsuit, but a press representative for the agency said yesterday that Johnson has recused himself from the case and has not participated in any of the four actions the commission has taken on the matter..
The Dow Jones lawsuit, however, claims Johnson did not disqualify himself "until the very last moment."
"Chairman Johnson's clear partiality and conflict of interest all render this proceeding a sham," Dow says.
Johnson "was personally involved in the development of the futures plan now before the commission," said Dow Jones' attorney Togo D. West Jr. "A more blatant conflict of interest could not be imagined."