Top energy regulators last week issued major enforcement actions against failed hedge fund Amaranth Advisors LLC, affiliates and former traders, accusing them of manipulation and attempted manipulation of the natural gas futures market in 2006. At the same time the regulators charged Energy Transfer Partners LP with manipulating prices in the physical gas market (see separate story).

The federal agencies are seeking multi-million-dollar penalties and disgorged profits, the latter of which would go to those who were harmed by the alleged actions.

The Federal Energy Regulatory Commission last Thursday issued a show cause order that alleges Amaranth and its former traders, by manipulating natural gas futures on the New York Mercantile Exchange (Nymex), also influenced the price in the physical gas markets over which FERC has jurisdiction. The agency said that many participants in physical gas markets use the settlement price of the Nymex gas futures contract to determine the price of FERC-jurisdictional physical gas transactions. FERC, which began investigating Amaranth in May 2006, is seeking penalties and disgorgement of unjust profits totaling $291 million from Amaranth, seven affiliates and two ex-traders.

And, in a rare press briefing last Wednesday, the Commodity Futures Trading Commission (CFTC) announced the filing of a civil complaint against Amaranth and former head trader Brian Hunter in federal court in New York. The complaint was the result of a year-long investigation into Amaranth conducted by the CFTC's New York staff. Amaranth collapsed in September 2006 after losing $6 billion in the gas futures market.

The CFTC complaint alleges that Amaranth and Hunter "intentionally and unlawfully attempted to manipulate the price of natural gas futures contracts on the Nymex on Feb. 24 and April 26, 2006." The agency is seeking permanent injunctive relief and civil penalties. It has requested $130,000 for every violation, which could turn out to be a "fairly significant amount," said CFTC Enforcement Director Greg Mocek. FERC's Amaranth show cause order also named Hunter and ex-trader Matthew Donohoe.

The CFTC and FERC coordinated their enforcement efforts against Amaranth and its former traders. The two agencies also took action last Thursday against Dallas-based Energy Transfer Partners, owner of pipeline assets and a natural gas trading affiliate, for allegedly manipulating or attempting to manipulate physical gas prices at the House Ship Channel delivery hub. FERC is seeking $167 million in penalties and disgorged profits from Energy Transfer (see other story).

At a press briefing at FERC's headquarters, Chairman Joseph Kelliher said Amaranth was accused of committing 219 violations over a three-month period. The actions against Amaranth and Energy Transfer marked the first prosecution of market manipulation by the Commission with its new enforcement authority granted under the Energy Policy Act of 2005, and also is the first time FERC has proposed maximum civil penalties, he said.

Kelliher cited several reasons for proposing maximum penalties against the companies. "First, the violations in question involve market manipulation...Second, the harm to the market caused by Amaranth and Energy Transfer Partners was significant. Third, in both cases, we find the violations were intentional. In both cases, we find there was involvement of senior management. Further, in both cases, we find the level of cooperation does not merit any reduction in civil penalties," he said.

FERC's Amaranth show cause order gives the company and its traders 30 days to dispute why they should not be assessed civil penalties and be required to disgorge profits totaling $291 million for allegedly manipulating the price of Commission-jurisdictional transactions by trading in the Nymex natural gas futures contract in February, March and April 2006. "This [will] not be their first opportunity to dispute our findings," said Kelliher, adding that the agency has been working with the company for several months.

While the FERC accusations against Amaranth are couched as preliminary findings, which the company must rebut, the CFTC action is a complaint, which must be litigated. The two agencies said they cooperated on the investigations, but their actions come under separate laws and the cases will follow separate paths. "There will be differences in the way we prosecute" manipulation, Kelliher noted.

The Commission's action last Thursday came after Amaranth's Hunter lost out in a last-minute court attempt to fend off the charges. A U.S. District Court judge in Washington, DC, last Tuesday denied Hunter's petition for a temporary restraining order to block the FERC enforcement action. Hunter argued that FERC lacked standing because its regulatory jurisdiction covered only physical natural gas trading, not futures trading. Kelliher countered that FERC has jurisdiction because the futures market activities affect the Nymex settlement price, which determines the price of a substantial volume of jurisdictional sales in the physical gas market, notably in the eastern, midwestern and Gulf Coast markets.

But FERC has no authority over futures transactions per se. "We recognize the CFTC has exclusive jurisdiction over futures," Kelliher said.

Kelliher gave high marks to the CFTC for helping to coordinate the investigations. "There is a relationship between physical gas sales and gas futures, and coordination between the two agencies is necessary to effectively police market manipulation." While the two agencies signed a memorandum of understanding several years ago to coordinate market monitoring activities, these actions are the first substantive evidence of that cooperation.

The FERC case against Amaranth involves manipulation of the Nymex settlement price on Feb. 24, March 29 and April 26, 2006, which the hedge fund allegedly accomplished by selling an extraordinary amount of these contracts during the last 30 minutes of trading before these future contracts expired, with the purpose and effect of driving down the settlement price.

Investigators in the Commission's Office of Enforcement found that Amaranth had previously taken positions in various financial derivatives that were several times larger and whose values increased as a direct result of the fall in the Nymex settlement price. Thus, for every dollar lost on its sales of the futures contracts, Amaranth would gain several dollars on its derivative financial positions.

Evidence uncovered by the investigation includes instant messages (IM) written by traders. According to one such IM, the scheme began as "a bit of an expiriment [sic]" devised by Hunter on or before Feb. 23, 2006, the day before the first manipulation occurred. The Feb. 24 "experiment" was then repeated and refined on March 29 and April 26.

These alleged market manipulation violations took place well before Amaranth's demise in the fall of 2006, when it experienced massive trading losses and ceased trading operations. Amaranth's collapse was not related to these manipulations, FERC said. This investigation was initiated in the summer of 2006 by Commission staff, well before those losses and collapse.

Based on the facts and circumstances and the absence of any material mitigating factors, the Commission is recommending penalties of $200 million for Amaranth, $30 million for Hunter and $2 million for Donohoe. The Commission also proposes that Amaranth disgorge more than $59 million in unjust profits, plus interest. The penalties will go to the U.S. Treasury, while the unjust profits are to go to those harmed by the action, according to FERC.

FERC noted that the alleged manipulative actions of both Amaranth and Energy Transfer sought to lower the price of natural gas for the profit of their physical and/or financial derivative positions. "Manipulation designed to lower prices is as offensive as manipulation that raises prices," Kelliher said. "In any form, market manipulation undermines the integrity of markets by driving away legitimate participants.

"When it raises prices, manipulation harms consumers immediately and in ways that are easy to understand. Manipulation that lowers prices also hurts consumers, over a longer period and more indirectly," he noted.

Kelliher said it was important to note that FERC is not opposed to legitimate risk-taking and trading. "The core element of manipulation is fraud - fraud on consumers and fraud on the market. Manipulation is deception, period. It is not legitimate trading, risk-taking and speculation."

The CFTC's civil complaint alleging attempted manipulation of gas futures by Amaranth Advisors, Amaranth Advisors (Calgary) ULC and Hunter was filed in U.S. District Court for the Southern District of New York last Wednesday.

The CFTC has the authority to only bring civil actions. "I'm not going to comment on whether we did or [did not]" refer the case to the Department of Justice for criminal prosecution, said the CFTC's Mocek. The CFTC action was unrelated to the pressure that the agency has been under from the Senate Permanent Subcommittee on Investigations, which was aware of the CFTC's probe into Amaranth, Mocek said. Hunter's attorney, however, claimed otherwise, calling the CFTC's action "politically motivated."

The complaint alleges that for each of the gas futures contract expiry days at issue (Feb. 24 and April 26, 2006) the defendants acquired more than 3,000 gas futures contracts on Nymex in advance of the closing range, which they planned to, and for the most part did, sell during the closing range. The complaint also alleges that they held large positions on short natural gas financially settled swaps, primarily on IntercontinentalExchange (ICE). The settlement price of the ICE swaps is based on the Nymex natural gas futures settlement price determined by trading done during the closing range on expiry day. The complaint said the defendants intended to drive down the prices of the Nymex gas futures contracts to benefit their larger swaps positions on ICE and elsewhere. Nymex and ICE are the two major energy trading exchanges.

The complaint further charges that, in violation of the Commodity Exchange Act and in response to an inquiry from Nymex about the April 26, 2006 trading, Amaranth lied to Nymex to cover up the attempted manipulation. The defendants "attempted to cover up [their] tracks by sending fraudulent information to Nymex," Mocek told reporters.

Hunter's attorneys last Wednesday said that they planned to "combat aggressively" the CFTC's enforcement action. "Brian Hunter simply did not undertake any manipulative trading and we are going to prove it," said Michael S. Kim of the New York-based law firm of Kobre & Kim LLP. "Without proof of artificial price movements, the CFTC cannot show that any investors or market participants were harmed by Mr. Hunter's trading because the fact is, there was no price manipulation."

A report issued last month by the Senate Permanent Subcommittee on Investigations found that Amaranth engaged in "excessive speculation" in the natural gas futures market in 2006, which it said ultimately influenced the prices that consumers paid for gas last winter (see NGI, July 2). The CFTC, Nymex and ICE have been on the hot seat recently in Congress for their actions or lack of action leading up to and following the collapse of Amaranth in 2006 (see NGI, July 16).

Hunter's attorney said the CFTC complaint, which maintains that Amaranth stood to benefit from a fall in natural gas futures prices, contradicts the Senate subcommittee's report, which maintains that Amaranth sought rises in gas futures prices. "None of these various government bodies can come up with a consistent theory of Mr. Hunter's alleged misconduct because, in fact, there was no misconduct," Kim said.

"These accusations from the CFTC and the FERC against Brian Hunter are aimed at finding a scapegoat to bear the public outrage over ever-increasing energy prices. We will not stand idly by as regulators use Brian for political cover."

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