FERC last week granted Amaranth Advisors LLC an additional month to respond to a show cause order that accuses the failed hedge fund of manipulating the price of physical natural gas transactions, while former Amaranth trader Brian Hunter continued to challenge the regulatory agency's jurisdiction in the case.
Amaranth, seven affiliates and former traders Hunter and Matthew Donohoe had asked for an extension until Sept. 28 to respond to charges that the Federal Energy Regulatory Commission (FERC) brought against them in July. In their request for more time, they stated that FERC spent more than a year investigating Amaranth, "the body of supporting material the Commission points to is massive, the case relies in significant part upon computerized modeling by an outside economic expert, and the interplay of legal and factual issues is novel and highly complex...to develop a detailed response to the Commission's 75-page show cause order will be an enormous undertaking."
On July 26, FERC issued show cause orders in separate investigations, one in the Amaranth case and the other naming Dallas-based Energy Transfer Partners LP (ETP). At the same time, the Commodity Futures Trading Commission (CFTC), which had leveled a complaint against Amaranth for attempted manipulation of the natural gas futures market, followed up with an enforcement action against ETP. The civil complaint filed against Amaranth by the CFTC also listed Hunter, who directed the fund's natural gas trading (see NGI, July 30).
Greenwich, CT-based Amaranth is accused of manipulating the New York Mercantile Exchange (Nymex) natural gas futures contract, which settles at the Henry Hub and influences physical gas prices, while ETP is alleged to have manipulated the natural gas physical market at the Houston Ship Channel. FERC has accused Amaranth of committing 219 violations over a three-month period, while ETP was accused of violations in five different categories.
The actions against both companies marked the first prosecution of market manipulation by the Commission with its new enforcement authority, granted under the Energy Policy Act of 2005. It also is the first time the Commission has proposed maximum civil penalties. FERC's Amaranth show cause order gave the company and its traders 30 days to state 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. Amaranth collapsed in September 2006 after losing $6 billion in the gas futures market (see NGI, Oct. 9, 2006, Sept. 25, 2006).
The Commission recommended penalties of $200 million for Amaranth, $30 million for Hunter and $2 million for Donohoe. The Commission also proposed that Amaranth disgorge more than $59 million in unjust profits, plus interest.
The FERC show cause order was issued after Hunter lost out in a last-minute court attempt to fend off the charges. In July a federal judge in Washington, DC, 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. FERC said it has jurisdiction because the futures market activities affect the Nymex settlement price, which determines the price of a substantial volume of jurisdictional gas sales, notably in the eastern, midwestern and Gulf Coast markets.
On Aug. 3 attorneys representing Hunter filed documents in U.S. District Court for the District of Columbia in support of their own motion for an injunction and declatory judgment that FERC lacks the statutory authority to pursue the pending enforcement action. In the filing, Hunter stated that "FERC's ongoing enforcement action threatens the very existence" of Solengo Capital Advisors ULC, a company Hunter founded after leaving Amaranth. Several employees have left Solengo, "prospective investors have lost interest" and "Solengo Managed Fund's directors have now all resigned, shortly after being informed of the FERC action and the significant penalties FERC seeks," according to Hunter's motion. Hunter's attorneys alleged that FERC is acting outside the anti-manipulation provisions of the Natural Gas Act, which they said restrict FERC's jurisdiction to entities and not individuals, and also authorize FERC to bring enforcement actions in the wholesale physical gas markets, not futures markets.
"FERC's lawless enforcement action is a significant force in the disintegration of Hunter's business, and Hunter respectfully petitions this Court to compel the FERC to obey the law. While the FERC argues that it serves the public good for the agency to pursue the type of enforcement action that is at issue here, this Court should send a clear message that the proper remedy for the FERC is to ask Congress to amend the statute and if appropriate to grant such authority to the FERC, not to pursue a ultra vires enforcement action," Hunter's attorneys stated in the filing.
Hunter is not challenging the merits of FERC's enforcement action, they wrote, but "is challenging FERC's final and unequivocal determination that it has the statutory authority to pursue an enforcement action against a...person who is only alleged to have traded natural gas futures contracts." Because Hunter is not alleged to have traded physical natural gas, FERC has no authority in the case, they said.
The case against ETP involves manipulation of wholesale natural gas markets at Houston Ship Channel and Waha, TX, trading hubs on various dates from December 2003 through December 2005. The Commission is proposing to assess ETP civil penalties totaling $97.5 million, and require total disgorgement of $69.9 million in unjust profits. The Commission also is seeking to revoke ETP's blanket certificate to sell natural gas for one year, beginning 120 days from July 26. On Aug. 2 FERC granted ETP an additional month to respond to the charges (see NGI, Aug. 6).
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