Buttressed by support from a coalition of futures market associations that include the New York Mercantile Exchange (Nymex), Amaranth Advisors LLC last Wednesday again asked a New York district court to stay a FERC enforcement action against it until a parallel case by the Commodity Futures Trading Commission (CFTC) is completed.
Separately, the CFTC argued that the Commodity Exchange Act (CEA) clearly gives it "exclusive jurisdiction" over the natural gas futures market, and said the Energy Policy Act of 2005 (EPAct) did nothing to alter that. At the same time, however, it asked the New York court to deny Amaranth Advisors' request to stay FERC's enforcement action against the fallen hedge fund.
In a reply memorandum to filings by the CFTC and the Federal Energy Regulatory Commission (FERC) on Sept. 28 (see NGI, Oct. 1), Amaranth, which is accused of manipulating natural gas markets, asked the U.S. District Court for the Southern District of New York to allow the CFTC legal proceeding to be completed first (1:07-cv-06682-DC).
"At the heart of this motion...is whether the FERC has the power to prosecute its enforcement action...based on the exact same conduct at issue in the instant CFTC action -- allegedly improper trading of the Nymex natural gas futures contracts," the Amaranth memorandum stated. "Only the FERC concludes that its assertion of jurisdiction over Amaranth's trading in natural gas futures is proper. The industry associations and exchanges that filed an amicus brief, including Nymex, where the trading at issue took place, strongly maintain that the CFTC has exclusive jurisdiction."
The filings in support of FERC reiterated the agency's arguments, but "their silence on the issue of jurisdiction is deafening," the Amaranth brief stated. "The FERC's own statements in adopting its anti-manipulation rule similarly concede that the CFTC has exclusive jurisdiction. In short, based on the submissions and the law, it is beyond a doubt that the FERC's administrative proceeding is ultra vires" (beyond the power).
To avoid "judicial reckoning," stated the Amaranth reply, "FERC hides behind procedural arguments," and it "also argues that this court should ignore the doctrine of primary jurisdiction, which requires deference to the CFTC's expertise as to futures markets...The law is clear, however: when an agency exercises power ultra vires, the object of that ultra vires exercise of power is irreparably harmed. Competing and inconsistent regulatory standards and enforcement regimes over a market that Congress has placed in the exclusive hands of the CFTC also causes irreparable harm..."
In an amicus brief in support of the CFTC's jurisdictional authority in the case, a futures group composed of the Managed Funds Association Inc., the International Swaps and Derivatives Association Inc., the Futures Industry Association Inc., Nymex and the Chicago Mercantile Exchange Group Inc. (CME), followed up on some of the statements by futures' executives last month (see NGI, Oct. 1).
In its filing, the futures group said it "expresses no view on Amaranth's guilt or innocence." However, "exclusive jurisdiction is not a matter of agency turf: it was intended instead to make the CEA and CFTC regulations supreme as the body of law for futures markets and trading thereon. CEA exclusive jurisdiction is therefore central to the public interests served by, as well as the operation and competitiveness of, the U.S. futures markets. Allowing FERC to proceed now would undermine those interests."
The group noted that for 32 years the CEA and the CFTC regulations have provided a "single legal standard -- the intentional creation of an artificial price -- for deciding whether a futures market price was manipulated. Every day, the Nymex, CME and other self-regulating futures exchanges apply that standard to discharge their statutory duties..."
FERC's "claim has generated considerable uncertainty among self-regulatory bodies like Nymex and CME, as well as futures market participants," the group stated. "Congress enacted CEA exclusive jurisdiction because it did 'not believe the public interest would be served by duplicating in one or more additional agencies regulatory authority over futures markets that presently exist in the CFTC.' Neither does the futures group. Neither should this court."
The CFTC separately asked the New York court to "set aside" Amaranth's challenge to FERC's claim that it has jurisdiction when activities in the gas futures market negatively impact physical gas prices. It noted that the issue involving the scope of FERC's jurisdiction is already before the U.S. District Court for the District of Columbia and FERC as well.
"FERC should now have the opportunity to interpret the new mandate that Congress has given it [in EPAct], and to determine how to apply its new [authority] in light of the exclusive jurisdiction that Congress granted [the CFTC] in CEA...with respect to futures trading" on Nymex, the agency said.
The CFTC and FERC brought parallel enforcement actions against Amaranth in July for alleged manipulation of gas markets (see NGI, July 30). FERC alleged that Amaranth and its former traders, by manipulating gas futures on Nymex, influenced the price in the physical gas markets over which FERC has exclusive jurisdiction. The agency said 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.
In seeking a stay, Amaranth claims that FERC exceeded its jurisdiction when it sought to penalize the hedge fund for alleged activities in the gas futures market. The Greenwich, CT-based hedge fund contends that only the CFTC, not FERC, has the authority over the futures markets. It argued that FERC's jurisdiction is limited solely to the physical gas markets.
But FERC, in asking the court to reject Amaranth's plea, has countered that the EPAct gave it new authority to combat manipulation wherever it saw it (see NGI, Oct. 1). "EPAct 2005 did not limit FERC's jurisdiction to manipulation by entities traditionally regulated by FERC, nor did it limit FERC's jurisdiction to manipulative conduct solely concerning physical markets. Rather, Congress granted FERC broad authority to police market manipulation by 'any entity' who engages in conduct that is...'in connection with' any jurisdictional transaction," FERC said in a court brief.
The CFTC took issue with FERC. "The Energy Policy Act did nothing to affect the scope of the CFTC's exclusive jurisdiction. Nor did it change the scope of FERC's jurisdiction over natural gas transactions," the CFTC told the district court.
"Had Congress intended in the Energy Policy Act to reverse 30 years of unbroken precedent regarding the application of...the CEA to futures trading on designated contract markets, it would have done so clearly and unambiguously. Because nothing in the Energy Policy Act explicitly repeals any provision of the CEA, the question arises whether Congress's grant of authority to FERC...implies an intention to do so."
The CFTC does not believe this was the case. "Repeals by implication are not favored in law, and they will not be found unless a congressional intent to repeal 'is clear and manifest,'" said the agency, citing a 1987 Supreme Court ruling.
"The general authority provided to FERC in the Energy Policy Act to combat the effects of manipulative behavior on FERC jurisdictional markets is insufficient to carve out an implicit exception to the exclusive jurisdiction that the CEA adopted as part of a carefully crafted statutory regime to specifically govern futures trading on designated contract markets. In short, nothing in the text or legislative history of the Energy Policy Act evinces a congressional intention to change the long-settled law in this area."
Despite its assertion of exclusive jurisdiction over the gas futures market, the CFTC asked the district court to deny Amaranth's request to stay FERC's enforcement action. Pointing out that the issue of FERC's jurisdiction is already before another court and the FERC itself, the CFTC called Amaranth's motion a "thinly veiled attempt to forum shop for a favorable ruling on the jurisdictional issue."
The CFTC "submits that this court should refrain from ruling prematurely on the jurisdictional argument presented by Amaranth so that normal administrative processes...can be permitted to work as Congress intended."
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