A federal court judge in New York last Thursday denied a plea by failed hedge fund Amaranth Advisors LLC to bar FERC from proceeding with an enforcement action against it until a parallel complaint brought by the Commodity Futures Trading Commission (CFTC) is resolved, although he said he believed it would be “prudent” for FERC to defer to the CFTC case. The court left the critical issue of whether FERC has jurisdiction in futures markets unsettled.
U.S. District Judge Denny Chin for the Southern District of New York rejected Amaranth Advisors’ request for a preliminary injunction to block the Federal Energy Regulatory Commission from pursuing its case against Amaranth, several affiliates and two ex-traders for alleged attempted manipulation of natural gas markets. The agency is seeking penalties and disgorgement of unjust profits totaling $291 million.
“Although I agree that it would be prudent for FERC to defer” to the CFTC’s complaint against Amaranth, “I decline to order FERC to stay its administrative action,” Chin said. “I am not persuaded that the FERC proceeding will ‘seriously impair’ this court’s ability to reach and resolve the merits of the [CFTC] case before it, or that it will frustrate the administration of justice in the instant case.”
As for the issue of whether FERC has jurisdiction over Amaranth’s activities in the futures market, Chin said that issue was for an appeals court to decide. However, “I do note that Congress intended the CFTC and FERC to coordinate their efforts, at least to some degree. Amaranth’s concern in having to defend itself in two separate actions for the violations of two acts based on the same underlying conduct does not justify a stay of the FERC proceeding, but the concern [by Amaranth] is understandable,” he said.
Chin urged FERC and the CFTC to “coordinate their efforts in the two proceedings.”
In seeking the injunction, Amaranth claimed that FERC exceeded its jurisdiction when it brought an enforcement action in July against the company for alleged manipulative activities in the natural gas futures markets. The Greenwich, CT-based hedge fund argued that only the CFTC, not FERC, has authority over the futures markets. It said that FERC’s jurisdiction is limited solely to the physical gas markets. But FERC argued otherwise, saying it has jurisdiction when activities in the futures market affect prices in the physical gas market over which it has exclusive jurisdiction.
FERC in late July issued a show-cause order that alleged Amaranth and its former traders, by manipulating natural gas futures on the New York Mercantile Exchange (Nymex), influenced the price in the physical gas markets (see NGI, July 30). The agency said that many participants in physical gas markets use the settlement price of the Nymex gas futures contract to determine the price of FERC-jurisdictional physical gas transactions. The CFTC filed its complaint alleging attempted manipulation of gas markets by Amaranth in the New York court around the same time.
Citing the court’s decision, three West Coast senators last Thursday sent a letter to the chairmen of FERC and the CFTC giving them 45 days to develop a plan to deliver effective oversight of energy markets and implement anti-manipulation provisions. The court ruling “definitively” upheld both agencies’ jurisdiction to police the energy markets, wrote Sen. Maria Cantwell (D-WA), Dianne Feinstein (D-CA) and Ron Wyden (D-OR).
“A jurisdictional battle between FERC and CFTC [in the Amaranth case] is compromising both agencies’ enforcement authorities. FERC and [the] CFTC have complementary roles to play with the same goal of preventing energy market manipulation,” they said. The lawmakers noted that a memorandum of understanding (MOU) signed by the two agencies to coordinate oversight and enforcement of energy markets is “likely inadequate,” and they urged the agencies to initiate discussions to broaden the scope of the MOU.
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