Jurors in the Houston trial of two natural gas traders accused of trying to manipulate prices in 2000 waded through often complicated explanations of trading, hedging, spot and futures markets. They also were treated last week to review of numerous trader phone calls and e-mails that offered some saucy language along with insight into the high-stakes world of gas markets, where a few pennies this way or that can make or lose a small fortune.

For instance, during the summer of 2000 for every penny the index price at Malin went down El Paso stood to make an extra $127,000 on its gas trades, and for every penny decline in the Permian index, the company stood to make $82,000, one lawyer said evidence will show.

Michelle Valencia, a former Dynegy Inc. trader, and Greg Singleton, who had worked for El Paso Merchant Energy, were indicted in November 2004 on charges of conspiracy, false reporting and wire fraud related to the transmission of allegedly bogus trade data to Inside FERC Gas Market Report and/or Natural Gas Intelligence (see NGI, Dec. 6, 2004). Gas Daily is another price survey publication that was mentioned repeatedly last week although it is not named in the indictments of Valencia and Singleton.

Assistant U.S. Attorney John Lewis Tuesday told jurors that during the trial — expected to last a month — they will hear how Valencia and Singleton reported false trades for the financial gain of their employers and themselves through salary and bonuses. “It’s these dollars that provided the incentive to do what we, the government, is alleging is a crime,” Lewis said.

Valencia attorney Chris Flood and Paul Nugent, Singleton’s lawyer, devoted large portions of their opening statements to characterizing the go-go energy trading scene during the late 1990s and 2000, prior to the collapse of Enron in 2001. Flood characterized Valencia’s intentions as anything but criminal, and Nugent maintained his client was just following the orders of his superiors at El Paso and not committing any crime.

Flood told the jury, “We don’t send people to jail unless they have criminal intent.” He said Valencia had no intention of manipulating the gas market and was only following what he claimed had become general industry practice: providing false data that favored the trading interests of one’s own company.

Said Nugent of the era of bogus price reporting: “Nobody thought it might possibly be considered illegal,” he said. “They didn’t think six years later a couple of low-level traders would be indicted.”

Last week’s two principal witnesses for the government were Jeff Hornback, a former western physical gas trader for Dynegy and desk mate of Valencia; and Alison Reitze, who used to do the same for El Paso, sitting at the side of Singleton. Hornback’s testimony filled two days; Reitze took the stand Thursday afternoon and was still testifying at press time Friday.

Hornback, who is now a trader supervisor at BP in Houston, and Reitze, who is now a stay-at-home mom in Chicago, both testified that they were under pressure from managers to report gas trades and prices that would support the trading books of their respective companies. In the case of Hornback — and Valencia, as he testified — pressure to misreport trades/volumes/prices came from Dynegy west desk chief Steve Barron.

Hornback testified that from the time he joined Dynegy from Amoco in 1998 until Barron showed up to run the desk things had been fine for him at work. Up until that point Hornback testified any misreporting was done largely out of convenience rather than as an attempt to deceive.

That changed with the arrival of Barron, a “hands-on” manager who wasn’t shy about berating subordinates on the trading floor, according to Hornback. This was around the time that Enron was gaining traction with its new electronic trading venue, EnronOnLine, on which the now disgraced company was a counterparty to every transaction.

(During the trial’s first week — the same week Enron founder Ken Lay was eulogized in a memorial service — the ghost of Enron was very much in the courtroom. So much so that presiding U.S. District Judge Nancy Atlas instructed jurors: “Whatever you may think about Enron is immaterial to what we’re doing here.”)

But back in 2000, price volatility was on the rise, and Enron was very much on the mind of Barron and others who were buying and selling gas, particularly for delivery at Southern California points. The EnronOnline system listed Topock as its point of trade for Southern California deals. Compared to other SoCal receipt points, Topock is small in physical capacity. But back in 2000 traders were alleging that Enron was gaming the market by pumping up Topock volumes and making the single, small point a proxy for the SoCal index..

Fearful that Enron would “own the index,” Barron, according to Hornback, directed that Dynegy price reports be submitted with inflated volumes/bogus trades to increase the company’s influence over Southern California prices. “I thought they were outrageous in terms of the volumes and the price levels he wanted me to report,” Hornback recalled of numbers Barron once wanted sent to Gas Daily.

Hornback testified that he eventually asked to be excused from the task of reporting prices to trade publications. He said he raised ethics questions internally and also clashed with Barron over the issue. Not long after this he left the company for a job at Pros Revenue Management in Houston but eventually settled at BP as a trader.

Down the street at El Paso traders were under similar pressure, according to Reitze.

Although she had made her way around the Houston energy patch with stints at Dynegy predecessor NGC Corp., Vastar and the former Equitable Resources (now AEP), Reitze had never filed a price report with a trade publication until she came to El Paso in April 2000. She testified that it was a connection with Singleton, established through Valencia, that helped her land the El Paso job in April 2000. She stayed until December 2002.

In the fall of 2000 the head of El Paso Merchant Energy’s western gas trading desk, Jim Brooks, e-mailed his traders and asked whether the group should report its “book bias” or actual verifiable physical gas trades to price index publishers, including Inside FERC and NGI. The majority said the company should report its book bias, i.e., report “trades” that supported its market position rather than real transactions that actually took place.

The details of these e-mails and others were revealed during Reitze’s testimony on the trial’s fifth day.

In the case of El Paso, prices were subject to review by the company’s basis traders prior to submission to index publishers. This was at the direction of Brooks, who also has been indicted in the scandal. Reitze testified that physical gas traders, such as herself, did not have an incentive to submit false price reports, but basis traders “could lose or make millions” for El Paso (and large bonuses for themselves) depending upon where index prices were set.

“He [Brooks] just wanted them [the basis traders] to look at it and be sure they didn’t need to make any changes [to the reported trades],” Reitze said during questioning by Lewis.

Reitze’s testimony suggested that there were discrepancies between what was sent to Inside FERC and NGI. For instance, some trades taking place at Southern California border points went to Inside FERC but not NGI. In other instances, trades were not reported to either publisher.

The jury also heard a recorded conversation between Valencia and Singleton in which Valencia expresses to Singleton concern that prices at San Juan stay high. “I’m going to be buying it every day and I hope that you join me in that effort,” Valencia said to Singleton.

Next in the call, the two seem to be discussing a report to index publisher(s). “I’m going to tack on another 100,000 that I’m going to buy and you’re going to sell,” Valencia said to Singleton.

Lewis asked Reitze whether Dynegy’s Valencia and El Paso’s Singleton were doing an actual trade in the call and she said, “no.” However, she admitted that the “trade” appeared on her report of El Paso trades to Inside FERC and NGI as if it had occurred.

Reitze also recalled a directive from Tim Bourn, El Paso senior managing director, that traders only report legitimate trades to index publishers. This was in September of 2000, during the California energy crisis. This was at a time when El Paso was coming under scrutiny for allegedly manipulating the California market through locking up pipeline capacity. There also had been an explosion on El Paso Natural Gas Pipeline (see NGI, Sept. 4, 2000), which affected capacity to California. “We had problems getting gas out to California,” Reitze said. Also around this time El Paso was planning to go to FERC with a complaint of false price reporting against Enron, Reitze testified.

Later, Brooks queried his traders on whether they should report real trades or fictitious deals to support the company’s positions. The majority of e-mail responses were votes for bogus trade reporting. Star basis trader Robert “Bo” Collins, who later would head the New York Mercantile Exchange, cited scrutiny from Congress, the California Public Utility Commission, the Commodity Futures Trading Commission, the Federal Trade Commission and others and voted for submitting legitimate trades only, according to an e-mail.

A subsequent e-mail from Collins to his fellow El Paso traders would prove to be prescient: “I think we should avoid discussing this on e-mail.”

The trial resumes this week.

The case against Valencia and Singleton is believed to be the first time the Depression-era Commodity Exchange Act has been used against a member of the energy industry in a criminal court. Superseding indictments were handed down in March (No. 4:06 CR-00080). Valencia is charged with 22 conspiracy and fraud counts; Singleton faces 10 counts. Both face one overarching conspiracy charge alleging they worked together and with others “known and unknown” to report inaccurate gas trades. Singleton also faces one count of obstruction. U.S. District Judge Nancy Atlas is presiding over the case in Houston.

A year earlier, Valencia had been charged with three counts of false reporting and wire fraud while she worked at Dynegy, but her trial was stayed because of the complex wording of the original charges (see NGI, Oct 11, 2004; Nov. 24, 2003).

Valencia and Singleton pleaded innocent, and the government agrees that some or none of the false trades submitted were actually part of the publications’ calculations. However, under federal law, the government only has to prove that false trades were reported; whether they were published or whether they affected the markets is irrelevant.

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