John Gifford and his friend Karl Holtz were enthusiastic followers of the commodities market, the market in which such products as wheat, cotton, tobacco, and coffee are bought and sold for future delivery. However, they did not have sufficient capital to engage in the market themselves, and so they played a game: They would "buy and sell" futures in various commodities under three-month contracts for delivery and then "settle" their fictional gains and losses on the delivery date. Karl did very well in the game and over a two-year period "earned" over $100 000 at John's expense.

One day John finally said to Karl, "I think I have a real winner here: The price of coffee is going to rise sharply in the next three months. At what price do you want to sell to me?"

Karl disagreed with John's prediction and replied, "I'll sell you $20 000 worth of coffee at today's price. The price is going to drop, and you'll lose as usual."

"For once, not only am I right, but I'm prepared to back up my words. Are you?" asked John. "Let's make this a real transaction. If the price goes up, you pay me the difference. If it goes down, I pay you."

"Okay, it's your funeral. It's a deal," Karl replied, and they shook hands on it.

Three months later, the price of $20 000 worth of coffee had risen by 30percent, making John richer by $6000. When John demanded payment, Karl said he didn't have that much in the bank but grudgingly gave John three cheques for $2000 each, one payable immediately and the other two postdated one month and two months, respectively.

John cashed the first cheque at Karl's bank at once. A month later, he used the second cheque to buy a used car from Grace Bukowsky. She has not yet presented it to Karl's bank for payment. John still has the third cheque.

Karl has heard from a friend studying law that the whole transaction might be "illegal." Give him your opinion with reasons.