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FERC Expert Witness Doesn't Use 'M' Word for Amaranth Trader

September 7, 2009
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An expert witness for FERC last Tuesday came close to testifying that a former natural gas trader for failed hedge fund Amaranth Advisors LLC manipulated natural gas futures prices, but she never crossed that line.

On cross-examination by attorneys for Brian Hunter, Kathleen King, principal of economics consulting firm Bates White, acknowledged that she had said Amaranth's trading activity during three settlement months in early 2006 was either "consistent" with or "coincident" with price manipulation, but she noted that she was not retained by the Federal Energy Regulatory Commission (FERC) to make that determination.

"I am not attributing causation" of the price reversals to Amaranth during three settlement month periods in early 2006 -- February, March and April -- but "there are a number of graphs that describe the volume that they sold, and I don't think that happened by happenstance," she said during a hearing before FERC Administrative Law Judge (ALJ) Carmen A. Cintron.

King disputed the Amaranth expert's conclusion that the collapsed hedge fund's trading activity during the three settlement periods was not unusual. She cited the speed at which Amaranth sold off its positions, the price changes and other factors to back up her position. "I found that the price changes in the three at-issue settlement periods were unusual to other price [changes]," she said.

King said the number of contracts sold by Amaranth during the settlement periods were significantly higher than those by other sellers. Amaranth sold nearly 3,000 contracts in the first settlement period; 1,300 contracts in the second settlement period; and more than 2,500 in the third period, she said. No other companies sold more than 2,500 contracts in these periods, according to King.

In pre-filed testimony, King wrote that "Amaranth sold heavily in seven out of eight minutes in [the] settlement period on Feb. 24, 2006," during which "prices fell continuously." In some of those minutes, Amaranth's sales accounted for almost half of the total volumes traded, and the former hedge fund's sales were more than a quarter of the total volume traded during the entire eight-minute block, she noted.

Hunter's attorney took issue with King's statement, saying she was trying to tie Amaranth's trading to the drop in prices. "Do you understand that a man is on trial for [price] manipulation?" she was asked.

Hunter was the head gas trader at Amaranth, which made a number of wrong-way trades that led to more than $6 billion in gas trading losses and the collapse of the hedge fund in September 2006 (see NGI, Sept. 25, 2006).

Hunter is alleged to have manipulated the New York Mercantile Exchange gas futures contract, which settles at the Henry Hub and has a direct bearing on physical gas prices over which FERC has jurisdiction (see NGI, July 30, 3007). He faces a penalty of up to $30 million. Hunter was not a party to the recent FERC and Commodity Futures Trading Commission settlements, which required Amaranth Advisors, affiliates and former gas trader Matthew Donohoe to pay a total of $7.5 million in penalties to settle the two-year-old claims that they manipulated or attempted to manipulate futures prices (see NGI, Aug. 17).

The ALJ hearing on the charges against Hunter, which began in late August, wrapped up last Wednesday. The ALJ will issue an initial decision later, recommending to FERC that either the charges be sustained or that some or all of them be dropped. FERC has the option to accept or reject the ALJ's decision in full or in part.

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