Natural gas hedge fund Amaranth LLC, which exploded in a $6.4 billion debacle last year, has turned the tables and is suing J.P. Morgan Chase & Co. for $1 billion for the bank's alleged role in the fund's demise.

The 32-page lawsuit was filed last Tuesday in the Supreme Court for the State of New York (Amaranth LLC and Amaranth Advisors LLC v J.P. Morgan Chase & Co., J.P. Morgan Chase Bank NA and J.P Morgan Futures Inc., No. 603756).

Amaranth, which also sent a letter to its investors, stated that it was a "long-time" client of Chase companies, and that the financial group "had virtually complete access to information" about the fund's natural gas derivatives trading positions. However, by May 2006, "the fund's formerly profitable natural gas derivatives trading strategies began to generate losses. In the summer of 2006, [Chase] traders heard rumors from other natural gas derivatives traders that the fund's positions were becoming well known to competing traders."

By mid-September 2006 the fund was falling apart (see NGI, Oct. 9, 2006; Oct. 2, 2006; Sept. 25, 2006), and Amaranth claims that Chase took advantage of the situation.

On Sept. 15, 2006, with the fund down more than $2 billion from its August value, Amaranth claims a Chase treasurer, Artie DiRocco, "did his best to meet the fund's increasing need for cash to post margin..." That afternoon, Amaranth said, its founder Nick Maounis called a partner at Goldman Sachs, Howard Weitschner, who invited Maounis to send him information about trading the gas book.

"Goldman Sachs employees analyzed the natural gas book with the goal of devising a trade" with Amaranth "that would shift substantially all of the risk...to Goldman Sachs," the lawsuit claimed. The following day, Sept. 16, 2006, Sachs proposed a trade for the gas book, but "expressed concern about the size of the portfolio." Amaranth "then made a smaller trade with an affiliate of Merrill Lynch...in an attempt to bring down the size" of the book. In that trade, Amaranth said Merrill assumed about a quarter of the gas book's risk.

The second day, Sept. 17, 2006, as Sachs "continued to work out the details," Amaranth COO Charlie Winkler talked with Jim Greenberg of Chase, Amaranth claimed. Greenberg apparently told Winkler that the defendants "were angry" that Amaranth had approached Sachs instead of Chase to discuss a trade of the gas book. By that evening, Amaranth claims Sachs had agreed to a gas book trade in return for a concession payment from Amaranth of $1.85 billion.

The following day, Sept. 18, Amaranth and Sachs officials held a conference call, which the lawsuit said "should have been a mere formality. Goldman Sachs and advisors had worked out the details of the trade and Nymex [New York Mercantile Exchange] officials were happy about the pending trade..."

Amaranth claims that because the Sachs trade would have reduced Chase's exposure to the gas book, and because Amaranth said it complied with all of the provisions of its client agreement, Chase "was contractually obligated" to execute the order for the Sachs trade. However, Amaranth claims Chase refused to execute the order, and "Goldman Sachs walked away from the trade. The effects on the fund were devastating..."

Amaranth stated, "With Goldman Sachs out of the way, the defendants prepared to take control of the natural gas book in hopes of making substantial profits." However, Kenneth Griffin of Citadel Investment Group LLC contacted Amaranth's Winkler that day and agreed to enter into a trade comparable to the Sachs trade, requiring a concession payment of $1.85 billion from Amaranth, and requiring Amaranth to absorb two-thirds of the market losses from the Sept. 18 trading day.

The lawsuit claimed that Griffin called Winkler back later that day and indicated that Chase executives told him Amaranth was "not as solvent" as he had thought, even though "it was false and with the intent to lower Mr. Griffin's estimation of the fund and the reputation of the advisors, and to deter Mr. Griffin from completing Citadel's trade..." The "interference worked...and ultimately killed the trade Mr. Griffin had agreed upon earlier in the day."

The following day Amaranth employees met for a conference call to discuss the status of the Citadel trade, according to the lawsuit. However, a Chase executive led the call, and told Amaranth that "there was a new trade, this time with the defendants. Under the terms of the new trade, the fund would trade with [Chase] and [Chase] would, in turn, trade with Citadel. The defendants won."

Amaranth said that at a banking and financial services conference in New York City last November, a Chase executive "spoke bluntly about the way the defendants used their insider status to take unfair advantage..." Among other things, the executive apparently said that Chase is "not exposed from a credit perspective, materially, which allows us to respond quickly to opportunities when they come up, Amaranth was one obvious example of that...I imagine there will be others as we go through time where our ability to be on the inside, but not compromised, is extremely powerful."

Amaranth has hired a team of lawyers for its case led by Phil Beck of Barlit Beck and David Boies. Boies' clients have included former Vice President Al Gore in his arguments before the U.S. Supreme Court in the 2000 presidential election, and former Enron Corp. CFO Andrew Fastow.

"Reflecting its confidence in this case, and reducing the out-of-pocket expenses for the fund, Barlit Beck has agreed to take a substantial portion of its fees on a contingency basis," Amaranth stated in a letter to investors. "It is our view that absent J.P. Morgan's actions, the Fund's losses, though significant, would have been survivable and far less dramatic."

The lawsuit, said a Chase spokeswoman, "is an effort to rewrite history, and to blame J.P. Morgan for losses that were the result of Amaranth's disastrous trading. The firm intends to defend this baseless lawsuit with the utmost vigor."

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