Nearly five years after high-flying hedge fund Amaranth Advisors collapsed with a $6 billion loss, FERC Thursday determined that leading Amaranth trader Brian Hunter manipulated the gas futures market and imposed a civil penalty on him of $30 million (see Daily GPI, Sept. 26, 2006).
The Federal Energy Regulatory Commission (FERC) endorsed an initial decision of administrative law judge (ALJ) Carmen A. Cintron that cited Hunter for manipulating the gas futures market between February and April 2006.
Hunter has 30 days to pay the penalty to the U.S. Treasury.
FERC found that Hunter "sold significant numbers of futures contracts during the settlement periods of the at-issue months with the intent to depress prices and financially benefit his significant derivative positions held on other platforms," and that "Hunter's manipulative scheme had a direct and substantial effect upon FERC-jurisdictional natural gas transactions."
"Amaranth was basically trading on steroids," John Olson, chief investment officer for Poole Capital Partners LLC, said at the time. "They would take positions 20 or 30 times the size of what were considered normal transactions. It appeared Amaranth was applying a strategy of overwhelming force in the marketplace, and they did not have enough ammunition to sustain themselves in a falling market."
In his January decision, Cintron said evidence in the case demonstrated violations by Hunter that "were serious, willful and harmful" (see Daily GPI, Jan. 26, 2010). Hunter 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 Daily GPI, Sept. 22, 2006).
In 2009 FERC and the Commodity Futures Trading Commission entered into separate settlements requiring Amaranth, affiliates and former trader Matthew Donohoe to pay a total of $7.5 million in penalties to settle claims involving manipulation of gas futures prices (see Daily GPI, Aug. 13, 2009). Hunter refused to participate in the settlements.
Hunter and Donohoe were alleged to have engaged in a scheme that included the sale of large amounts of natural gas futures contracts that were then sold during the New York Mercantile Exchange settlement periods in February, March and April 2006, with the aim of driving down the settlement price to benefit derivatives whose values rose as the settlement prices fell.
The Commission, which had the option to either approve or reject Cintron's ruling in full or in part, imposed the maximum penalty. Hunter, who had no known previous violation of FERC rules, was reportedly uncooperative during the investigation, failing to appear at a deposition and refusing to give sworn testimony.
In its initial show cause order in mid-2007, FERC sought civil penalties and disgorgement of profits totaling $291 million for Amaranth's activities (see Daily GPI, July 27, 2007).
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 defraud using any device, scheme or artifice; make a false statement of material fact or omit a material fact; or engage in any act, practice or course of business that operates or would operate as a fraud or deceit (see Daily GPI, Jan. 20, 2006).
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