Opening statements were heard in U.S. District Court in Houston last Wednesday in the trial of three former El Paso Corp. natural gas traders accused of attempted market manipulation through false reporting to price index publishers.

Former traders James Brooks, Wesley Walton and Pat Phillips are charged with submitting or directing colleagues to submit false trade information to publications Inside FERC's Gas Market Report and Natural Gas Intelligence from about April 2000 to about May 2002. They each face one count of conspiracy, 24 counts of false reporting and 24 counts of wire fraud. The trial is expected to last about four to six weeks.

During his opening statement prosecutor John Lewis, assistant U.S. district attorney, told jurors that indexes play a "critical role in determining the price of natural gas in the United States." He said jurors would hear Phillips "flat out lying" to one price editor during a telephone conversation.

"You will hear that [the defendants] understood that by reporting trades at a high price they pulled up the index...," Lewis said. The traders' bonuses were determined by their trading performance, and that was their incentive to try to influence the indexes in their company's favor, Lewis said. "Pennies counted."

Brooks, as managing director, was the head of gas trading at El Paso Merchant Energy and was paid a salary of $180,000 and a bonus of about $1.2 million in 2000, according to the indictment. Walton was a gas trader with the title of vice president at a salary of about $150,000 and bonus of about $865,000 in 2000. Philips, also a trader and vice president, was paid about $140,000 and a bonus of about $425,000 in 2000.

Lewis said Brooks ordered the false reporting, Walton directed it and Phillips and other traders carried it out.

Brooks attorney Wendell Odom Jr. described the system of reporting prices to the trade publications as "imperfect."

"What [the defendants are] guilty of is not following the instructions of the private magazine" with regard to price reporting, Odom said. "The evidence is going to show that what we reported was always within the range of what was [actually] bought and what was sold."

Phillips attorney David Adler said his client was not trying to deceive index publishers or the market when he reported trades. Because he didn't have any fixed-price baseload deals done during bidweek to report to the trade publications, Adler said Phillips took actual trades and adjusted their prices to account for basis differentials. "That's what he sent in to Inside FERC," he said. He noted that Phillips' deliberate decision to not submit internal company trades to the publishers is evidence of his desire to not mislead the publications or market.

Each of the three defense attorneys was given 20 minutes for opening remarks in the court of Judge Melinda Harmon. Walton attorney David Gerger used a portion of his time to head off the shock jurors might experience when they hear recorded trader calls containing language that "would make a sailor faint." Gerger also disclosed that the calls will reveal an extramarital affair Walton was having during the time in question.

"That's not a crime that he's on trial for here, and that horrible language...he's not on trial for," Gerger said.

Gerger also sought to preempt the impact of prosecution witnesses testifying as part of plea agreements. "People will come here and be asked to remember conversations that happened years ago," he said.

The trial of the El Paso traders is similar to the earlier trial of former Dynegy Inc. trader Michelle Valencia and former El Paso trader Greg Singleton. After four weeks of testimony and two days of deliberation, jurors rendered a split verdict (see NGI, Aug. 7, 2006). Valencia was convicted on seven counts of wire fraud. Singleton was convicted on one count of wire fraud. Neither was convicted on multiple charges of reporting false data to trade publications Inside FERC's Gas Market Report and Natural Gas Intelligence. Each wire fraud count is punishable by up to five years in prison and/or a fine of up to $250,000. Sentencing of Valencia and Singleton has been slated for Dec. 12-13.

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