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ALJ Rules Former Amaranth Trader Manipulated Gas Markets

February 1, 2010
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A FERC administrative law judge (ALJ) has issued an initial decision finding that former Amaranth natural gas trader Brian Hunter manipulated the gas futures market between February and April 2006, which subsequently took a toll on physical gas contracts over which the Federal Energy Regulatory Commission (FERC) has jurisdiction.

"The record evidence in this case demonstrates that Hunter violated the Commission's anti-manipulation rule. Hunter's violations were serious, willful and harmful," said ALJ Carmen A. Cintron, who presided over the FERC enforcement case against Hunter since August. FERC can either approve or reject her ruling in full or in part.

The anti-manipulation rule, which FERC broadened in 2006, makes it illegal for any entity, directly or indirectly, in connection with the purchase or sale of natural gas or electric energy, or in providing transmission or transportation services subject to FERC regulation, to do the following: 1) defraud using any device, scheme or artifice; 2) make a false statement of material fact or omit a material fact; or 3) engage in any act, practice or course of business that operates or would operate as a fraud or deceit.

"Hunter intended to manipulate the price of natural gas futures contracts, which in turn affected the price of jurisdictional [physical gas] transactions. Hunter knew his conduct was improper," Cintron said. He had been 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).

The bottom line is "Hunter's conduct was fraudulent, with the requisite scienter [requisite knowledge of wrongness/illegality] and with reckless disregard to jurisdictional transactions," she ruled.

Cintron further said Hunter's arguments in his defense were not credible and that it was "indisputable" that his trading strategy was driven by profits. Amaranth dominated trading in the U.S. financial market in 2006. It frequently held 40% or more of the open interest in natural gas futures in a particular contract month, according to the initial decision.

Hunter faces up to $30 million in penalties if the manipulation claims are upheld by the Commission. Because Hunter was reportedly uncooperative during the investigation, failing to appear at a deposition and refusing to give sworn testimony, "it appears that Hunter does not deserve any credit for reduction of his penalty," Cintron said.

However, she pointed out that one thing in "Hunter's favor is that [he] has no known previous violation of the Commission rules."

Last August FERC and the Commodity Futures Trading Commission entered into separate settlements requiring failed Amaranth Advisors, affiliates and former trader Matthew Donohoe to pay a total of $7.5 million in penalties to settle the two-year-old claims involving manipulation of gas futures prices (see NGI, Aug. 17, 2009). Hunter refused to participate in the settlements.

Specifically the settlements resolved allegations that they manipulated or attempted to manipulate 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.

In its initial show cause order in mid-2007, FERC sought civil penalties and disgorgement of profits totaling $291 million for Amaranth's activities that occurred in February, March and April 2006 (see NGI, July 30, 2007).

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