A federal court in New York last Monday denied pleas by Amaranth Advisors LLC, Amaranth Advisors (Calgary) ULC and former natural gas trader Brian Hunter to dismiss charges of attempted manipulation of the natural gas market that were brought by the Commodity Futures Trading Commission (CFTC).
In July 2007 the CFTC filed a complaint in the U.S. District Court for the Southern District of New York, accusing the Amaranth companies and Hunter of scheming to manipulate natural gas futures on the New York Mercantile Exchange (Nymex) in 2006 in violation of the Commodity Exchange Act (CEA) (see NGI, July 30, 2007). That same court last Wednesday denied the parties' motions to dismiss the charges.
Amaranth and Hunter sought to dismiss the attempted manipulation charge by arguing that the CFTC had failed to make its case. However, the court held that the CFTC sufficiently argued both elements of an attempted manipulation: 1) an intent to affect market prices; and 2) an overt act in furtherance thereof. More specifically, the court ruled that the CFTC had sufficiently alleged facts from which one could reasonably infer an intent on the part of Amaranth and Hunter to affect the prices of natural gas futures contracts.
Hunter, a Canadian citizen who directed part of the trading while in Amaranth's Calgary office, sought to dismiss the complaint against him because he argued that the New York court lacked jurisdiction. But the court rejected his argument, holding that his personally placing orders through a Nymex broker and directing other Amaranth traders to trade on Nymex showed that he was clearly transacting business in New York and thus was subject to the court's jurisdiction. Hunter currently is involved with another hedge fund, Calgary-based Solengo Capital Advisors ULC.
In the complaint the CFTC alleged that Amaranth and Hunter engaged in a scheme to attempt to manipulate the price on the last day of trading of the March 2006 and May 2006 natural gas futures contracts traded on Nymex. For each of the days at issue the defendants acquired more than 3,000 Nymex gas futures contracts in advance of the closing range, which they planned to, and for the most part did, sell during the closing range, according to the CFTC. Amaranth and Hunter also held large short natural gas financially settled swaps positions, primarily on the 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 CFTC 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 charged that, in violation of the CEA 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 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.
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