The Commodity Futures Trading Commission (CFTC) Wednesday brought a civil enforcement action against Amaranth Advisors LLC, Amaranth Advisors (Calgary) ULC and Brian Hunter, a former natural gas trader with the firm, alleging that they schemed to manipulate the natural gas futures market in 2006 in violation of the Commodity Exchange Act (CEA).
The CFTC held a rare press briefing Wednesday to announce its filing of a civil complaint against Amaranth and Hunter in U.S. District Court for the Southern District of New York. The complaint was the result of a year-long investigation into Amaranth conducted by the CFTC's New York staff. Amaranth collapsed in September 2006 after losing $6 billion in the gas futures market.
The CFTC complaint alleges that Amaranth and Hunter "intentionally and unlawfully attempted to manipulate the price of natural gas futures contracts on the Nymex on Feb. 24 and April 26, 2006." 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.
The CFTC can only bring civil actions. "I'm not going to comment on whether we did or [did not]" refer the case to the Department of Justice for criminal prosecution, Mocek said. The CFTC complaint was unrelated to the pressure that the agency has been under from the Senate Permanent Subcommittee on Investigations, which was aware of the CFTC's probe into Amaranth, Mocek said. Hunter's attorney, however, claimed otherwise, calling the CFTC's action "politically motivated."
The complaint alleges that for each of the gas futures contract expiry days at issue the defendants acquired more than 3,000 gas futures contracts on the New York Mercantile Exchange (Nymex) in advance of the closing range, which they planned to, and for the most part did, sell during the closing range. The complaint also alleges that they held large positions on short natural gas financially settled swaps, primarily on 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 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 charges 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 defendants "attempted to cover up [their] tracks by sending fraudulent information to Nymex," Mocek told reporters.
Hunter's attorneys said Wednesday that they planned to "combat aggressively" the CFTC's enforcement action. "Brian Hunter simply did not undertake any manipulative trading and we are going to prove it," said Michael S. Kim of Kobre & Kim LLP, counsel to Hunter. "Without proof of artificial price movements, the CFTC cannot show that any investors or market participants were harmed by Mr. Hunter's trading because the fact is, there was no price manipulation."
The CFTC "fully coordinated the timing of [its] action" with the Federal Energy Regulatory Commission, Mocek noted. FERC has scheduled a press briefing Thursday to announce its enforcement action against Hunter.
Hunter has gone to court to block "imminent enforcement action" by FERC. In a complaint filed Monday, Hunter asked the U.S. District Court in the District of Columbia to issue a temporary restraining order pending an injunction to prohibit the Commission from bringing an enforcement action against him, as well as to issue a declaratory judgment stating that the agency has exceeded its statutory authority.
The former Amaranth trader said FERC informed him by letter last Friday that it intends to issue a show cause order and notice of proposed penalties "no sooner than five days after the date of the letter."
Hunter, who has left Amaranth to start Calgary-based hedge fund Solengo Capital Advisors ULC, argues that FERC's jurisdiction is limited to the physical natural gas market and does not extend to gas futures contracts. FERC's threat of enforcement against him is an "impermissible encroachment on the exclusive statutory jurisdiction of the CFTC," which oversees the energy futures markets, he said in his lawsuit.
He further argued that the future of his new hedge fund, which he called a fledgling company, is dependent on Solengo and its principals maintaining an "unblemished regulatory record." A FERC show cause order "will substantially derail Solengo's ability to obtain the necessary legal authorizations in Alberta and the ability of the Solengo-advised investment funds to register in the Cayman Islands," he said. In short, Hunter told the court he would lose his new business if FERC is permitted to bring action against his company.
When asked whether investors should put their money in Hunter's new hedge fund, the CFTC's Mocek laughed quietly and said, "No comment."
A report issued last month by the Senate Permanent Subcommittee on Investigations found that Amaranth engaged in "excessive speculation" in the natural gas futures market in 2006, which it said ultimately influenced the prices that consumers paid for gas last winter (see Daily GPI, June 26). The CFTC, Nymex and ICE have been on the hot seat recently in Congress for their actions or lack of action leading up to and following the collapse of Amaranth in 2006 (see Daily GPI, July 13).
Hunter's attorney said the CFTC complaint, which maintains that Amaranth stood to benefit from a fall in natural gas futures prices, contradicts the Senate subcommittee's report, which maintains that Amaranth sought rises in gas futures prices. "None of these various government bodies can come up with a consistent theory of Mr. Hunter's alleged misconduct because, in fact, there was no misconduct," Kim said.
"These accusations from the CFTC and the FERC against Brian Hunter are aimed at finding a scapegoat to bear the public outrage over ever-increasing energy prices. We will not stand idly by as regulators use Brian for political cover."
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