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CFTC Files Civil Injunctions Against 15 Former Gas Traders

The Commodity Futures Trading Commission (CFTC) filed five federal civil injunctions last week against 15 former natural gas traders and energy company Concord Energy LLC for reporting fake natural gas trading information to index publishers in an attempt to manipulate gas prices. The CFTC said the violations of the Commodity Exchange Act (CEA) could draw penalties of up to $120,000, or triple the monetary gain, per offense.

These are the latest actions in a long series of investigations into false price reporting by the CFTC. So far, the CFTC has investigated about 55 energy companies and won settlements with more than 20. The agency also previously filed and settled charges against several other individuals. Its total efforts to date have netted nearly $300 million in fines.

The traders targeted in these latest complaints include former employees of Golden, CO-based Enserco Energy: Enserco President Shawn McLaughlin and traders Matthew Reed, Darrell Danyluk, who later formed Lakewood, CO-based Concord Energy. Defendants also include Michael Wallen, Christopher McDonald and Paul Atha, former Mirant traders.

Other actions were filed against Michael Whitney, formerly an energy trader with Duke Energy Trading and Marketing; Jeffrey A. Bradley and Robert L. Martin, formerly of CMS Field Services; and, Denette Johnson, Courtney Cubbison Moore, Robert Harp, Anthony Dizona, John Tracy and Kelly Dyer, all former employees of Shell Trading Gas and Power Co. and Coral Energy Resources.

The CFTC complaints against them cite excerpts of taped telephone conversations, emails, spreadsheets and other evidence to illustrate how they allegedly carried out various schemes to manipulate the indexes published in Gas Daily, Inside FERC, Natural Gas Intelligence, Btu Daily and Natural Gas Week for their own or their company's financial gain.

The complaint against Reed, Danyluk and McLaughlin includes taped conversations in which the defendants discuss ways to fool publishers into believing their false gas trades are legitimate. "Reed and Danyluk engaged in coordinated scheme, with McLaughlin's knowledge and consent, whereby each would submit fictitious trade information for not only those hubs within his geographic region, but for the hubs within the others geographic region as well," the CFTC said in its complaint filed in the U.S. District Court for the District of Colorado.

"For instance throughout the relevant period, Reed reported fictitious trade information to Gas Daily for Stanfield and Sumas, natural gas trading hubs located within Danyluk's designated trading region [in the Pacific Northwest] that Reed rarely traded. Reed and Danyluk referred to this scheme as 'double dipping.'

"Defendants Reed and Danyluk perpetrated their double-dipping scheme upon the reporting firms by portraying Enserco's Calgary and Colorado offices as autonomous trading operations with separate trading books and separate profit and loss calculations," the complaint said. In fact, the two Enserco offices did not operate autonomously.

In a telephone conversation recorded on Nov. 30, 2000, the two conspired to report false trade information for a monthly index at the Southern California border:

On the days when Reed was out of the office, McLaughlin, the highest ranking officer at Enserco, would assume his trading responsibilities and "coordinate the submission of false trade information to reporting firms with Danyluk and at least one other Enserco employee located in the company's Calgary office," the CFTC said, citing a conversation taped on Dec. 18, 2000:

To have a greater impact on indexes, the three defendants often added significant volumes to their false trade information. The CFTC said Reed's false reports often contained volumes that exceeded 500,000 MMBtu/d. The complaint also says that Reed continued the false reporting and attempted manipulation scheme while employed by Concord Energy LLC. During the period Sept. 10, 2002 through Oct. 9, 2002, Reed and Concord reported more than 1.2 million MMBtu in fictitious trades to Gas Daily. The CFTC said that over those two months, Concord's trading profits exceeded $3.2 million.

During the total 2000-2002 period cited in the complaint, Reed, Danyluk and McLaughlin received massive monetary bonuses exceeding C$7-9 million based on their natural gas trading profits, according to the CFTC.

In the complaint against the former employees of Shell Trading and Coral Energy, the CFTC said the defendants faxed and emailed to index publishers monthly baseload transactions that they did not execute. They also circulated an Index Directions email to coordinate their false price reporting scheme in a way that was most likely to boost Coral Energy's revenues, CFTC said. The Coral complaint was filed in the U.S. District Court for the Southern District of Texas.

"On a monthly basis from as early as October 2001 and continuing to at least June 2002, trader defendants knowingly delivered reports containing knowingly inaccurate fixed-price, physical, baseload trade information for at least nine (9) locations, including El Paso Permian Basin, San Juan Basin, Southern California, PG&E Citygate, PG&E Topock, Malin, Rockies [and] Northwest Pipeline," the complaint said.

As an example, the CFTC said on June 28, 2002 the defendants submitted 158 separate fixed-price trades at these locations to a publisher, but in reality all of the traders at Coral Energy's West Desk only executed 13 trades on that day. Furthermore, only one trade that was actually executed appeared on the sheet submitted to the publisher.

The CFTC also said that defendant Dyer circulated an "Index Directions" email to West Desk traders, including the other defendants, typically on the last bidweek trading day each month. The email contained a spreadsheet attachment in which the trading locations were listed. There were three columns of information. One with a heading "trader's mark," under which each trader (responsible for submitting information on specific locations to publishers) put their best estimate of what the published index would be. "The second and third columns were titled 'Up' and 'Down,' respectively," CFTC said. "Under the Up and Down columns were the words 'bad' and 'good,'" colored red and green. respectively. "This particular Index Direction email also includes the text, 'Please see the attached email about where we should report indexes.'

"Defendant Dyer inputted the words 'good' or 'bad' in the email's spreadsheet depending whether the index publishing above or below the traders mark would positively or negatively affect Coral's revenues," the CFTC said. "The purpose of the Index Directions email was to direct trader defendants to report trade information to the price indexes so that it would benefit Coral's revenues."

The CFTC's complaint against Jeffrey A. Bradley, formerly the manager of marketing for CMS Field Services, and Robert L. Martin, formerly the director of gas supply for the same company, said that between January 2001 and October 2002 Bradley submitted 848 daily natural gas transactions, 261 of which were fake. Another 158 of the total transactions contained false price or volume information, while 310 of the 848 transactions were based on non-fixed price transactions actually executed by CMS Field Services.

"Bradley submitted or caused to be submitted these false, misleading or knowingly inaccurate transaction reports on at least 119 days during the relevant period," the CFTC said.

On at least one occasion, the complaint said, Martin conspired and coordinated with Bradley, and caused the false reports to be submitted to publishers. A telephone conversation between the two includes an open discussion of a plan to "make up some numbers and turn them in [to the reporting firms]," the complaint alleges.

The complaint against Whitney, formerly with Duke Energy, was filed in the U.S. District Court for the Southern District of Texas, and the other complaint against Wallen, McDonald and Atha, former Mirant traders, was filed in the U.S District Court for the Northern District of Georgia. Robert Sussman, Denette Johnson's attorney, said the complaint against his client is ridiculous. He said the facts would prove Johnson did nothing wrong. Chris Flood, an attorney representing both Atha and former Coral trader Moore, called the complaints "bogus" and also said his clients have done nothing wrong.

The CFTC previously has indicated that its actions against energy companies regarding false price reporting are nearly complete. Two weeks ago AEP paid the Department of Justice, the CFTC and the Federal Energy Regulatory Commission $81 million to settle charges of reporting false trades in order to manipulate natural gas prices and providing preferential treatment to affiliates. However, the CFTC's Paul Hayeck could not say whether more civil injunctions against gas traders should be expected.

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