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Amaranth Ordered to Pay $7.5M to Settle Manipulation Claims

The Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) entered into separate settlements requiring failed hedge fund Amaranth Advisors LLC and affiliates to pay a total of $7.5 million in penalties to settle two-year-old claims that they manipulated or attempted to manipulate natural gas futures prices.

Both the FERC and CFTC settlements, which were approved last Wednesday, requires Amaranth, seven affiliates and former trader Matthew Donohoe to pay a total of $7.5 million to the U.S. Treasury to resolve allegations that they manipulated or attempted to manipulate the New York Mercantile Exchange (Nymex) natural gas futures contract, which settles at the Henry Hub and has a direct bearing on physical gas prices over which FERC has jurisdiction. Amaranth and affiliates are required to pay a total of $5.5 million immediately and $2 million no later than one year from the effective date of the settlement, according to the FERC order.

In its initial show-cause order, FERC sought civil penalties and disgorgement of profits totaling $291 million for Amaranth's activities that occurred in February, March and April 2006 (see NGI, July 30, 2007). The FERC settlement was "driven in large part by the current state of the settling respondents' financial assets," the settlement order said, adding that there was a "very small chance" that FERC would be able to collect penalties if its enforcement staff continued to litigate the case against Amaranth and affiliates.

Given its current authority, FERC "[was] and still is unable to attach or otherwise...prevent the dissipation [wasteful spending] of their assets during the pendency of a proceeding," the settlement order said. "As a result substantially all of the assets previously held by the settling respondents are no longer available to satisfy any monetary remedies that might have been imposed at the conclusion of litigation in this proceeding," it said.

"The aggregate cash payment required to be made to the FERC and the CFTC as part of the settlement is materially less than the estimated legal defense costs that would have been required to defend the settling parties through trial and appeal," Amaranth founder Nick Maounis said in a Wednesday letter to investors.

The FERC action was coordinated with the separate CFTC settlement, which was approved in U.S. District Court for the Southern District of New York. The court order, entered by Judge Denny Chin, resolves claims that Amaranth Advisors and and Amaranth Advisors (Calgary) ULC attempted to manipulate the price of natural gas futures contracts on Nymex on Feb. 24 and April 26, 2006.

In addition, the court order permanently enjoins the Amaranth companies from violating the anti-manipulation provisions of the Commodity Exchange Act, and prohibits Amaranth Advisors from making false, fictitious or fraudulent statements to registered entities, such as Nymex. The court order responds to a CFTC complaint filed against Amaranth in July 2007 accusing it of attempted manipulation of the price of gas futures contracts in early 2006 and making false statements to Nymex to cover up its attempted manipulation (see NGI, July 30, 2007).

The FERC settlement is more expansive than the CFTC's -- applying to Amaranth Advisors, Amaranth LLC, Amaranth Partners LLC, Amaranth Capital Partners LLC, Amaranth Management LP, Amaranth International Ltd., Amaranth Group Inc., Amaranth Advisors (Calgary) ULC and Donohoe.

The FERC settling respondents did not admit or deny allegations in the show-cause order, issued in July 2007, but they did stipulate to a number of facts. They stipulated that FERC properly raised questions about the effects of futures contracts trading on prices in the physical natural gas market because the trading at issue appeared "atypical, anomalous and unusual," and therefore had the potential to erode public confidence in the validity of the settlement prices, according to FERC.

Amaranth Advisors, Amaranth Advisors (Calgary) and Donohoe acknowledged that they were accountable for their trading in Nymex natural gas futures contracts."The settling respondents stipulate that the [natural gas] futures contract settlement price on those days [Feb. 24, March 29 and April 26, 2006] would likely have been different if Amaranth Advisors LLC and Amaranth Advisors (Calgary) ULC had not traded during the settlement periods on those days, and that the value of their swap positions would have been lower if the [natural gas] futures contract settlement price had been higher than it actually was," said the order approving the FERC settlement.

The Amaranth parties also agreed to dismiss their pending appeal in the U.S. Court of Appeals for the District of Columbia Circuit challenging FERC's enforcement action, as well as to not to make any public statement denying allegations in the show-cause order or the settlement agreement.

"Although the terms of the settlements require the settling parties not to deny any of the allegations made by the FERC or the CFTC, each of the Amaranth parties remains free to deny any similar allegations made by persons other than the CFTC or the FERC," such as plaintiffs in a civil class action alleging manipulation of gas futures prices, Maounis wrote.

Neither the FERC nor CFTC settlements resolve claims against former Amaranth trader Brian Hunter. The FERC hearing in the case against Hunter is scheduled to start on Aug. 18. And pending in the D.C. appellate court is Hunter's petition for review of a district court's rejection of his request for a temporary restraining order and preliminary injunction to enjoin the Commission from exercising its enforcement action over him.

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