Three former El Paso Corp. natural gas traders were found guilty last Thursday in U.S. District Court in Houston of conspiracy, as well as some charges of wire fraud and false price reporting in an attempt to influence published price indexes from about April 2000 to about May 2002.

Former traders James Brooks, 48, Wesley Walton, 45, and Pat Phillips, 48, were charged with submitting or directing colleagues to submit false trade information to publications Inside FERC’s Gas Market Report and Natural Gas Intelligence. They each faced one count of conspiracy, 24 counts of false reporting and 24 counts of wire fraud.

Prosecutors contended that Brooks ordered the false reporting, Walton directed it and Phillips and other traders carried it out. After deliberating for two and a half days, jurors found Brooks guilty of 45 counts; Walton was found guilty of 23 counts, and Phillips was found guilty of 21 counts.

Each of the defendants was found guilty of conspiracy. Brooks was found guilty of 22 counts each of false reporting and wire fraud. Walton was found guilty of 11 counts each of false reporting and wire fraud. And Phillips was found guilty on 10 counts of false reporting and wire fraud.

The wire fraud counts carry a maximum penalty of five years in prison and/or a $250,000 fine (or twice the amount of the loss). The false reporting counts carry a maximum penalty of five years in prison and/or a $500,000 fine. The conspiracy count carries a possible five-year prison sentence. Sentencing is scheduled for 10 a.m. CST May 23. The defendants remain free on bond pending sentencing.

“With these convictions, we have enforced and will continue to enforce the laws and regulations which govern the way people do business in the marketplace,” said U.S. Attorney Don DeGabrielle.

Kevin Colby, a juror who contacted NGI after the verdict was rendered, said he and fellow jurors had a difficult time deciding to convict the defendants of both false reporting and wire fraud.

“By the definitions of False Reporting and Wire Fraud the only additional burden of wire fraud is that the fraud be to obtain “Money, Property or other things of Value,” Colby explained in an e-mail to NGI. “By reporting their positions, [the traders] were benefiting El Paso’s financial bottom line. This sealed the deal on wire fraud. There was much discussion and we tried very hard to find a way to not convict on both. In the end the verdict shows a direct 1 to 1 relationship.”

The trial of the El Paso traders was similar in some ways to the earlier trial of former Dynegy Inc. trader Michelle Valencia and former El Paso trader Greg Singleton. But after four weeks of testimony and two days of deliberation, jurors rendered a split verdict (see NGI, Aug. 7, 2006). Valencia was convicted on seven counts of wire fraud. Singleton was convicted on one count of wire fraud. Neither was convicted on multiple charges of reporting false data to trade publications Inside FERC’s Gas Market Report and Natural Gas Intelligence. The split verdict in the Valencia-Singleton trial was puzzling to the lawyers involved. Sentencing of Valencia and Singleton is still pending.

In the trial of the El Paso Traders, Colby said the jury had the most trouble with the conspiracy count. “Conspiracies are dark, evil things,” he said in his e-mail. “The word carries with it a connotation. A conspiracy is not what to us certainly looked like a very normal way of doing business in large numbers of companies. That’s like saying suddenly outsourcing is a conspiracy to deprive people of jobs.”

Walton attorney David Gerger told NGI that he and his client aren’t giving up. “The only thing that I’m commenting on is making a comment to the effect that it takes great courage and faith for someone to go to trial, and I respect the jury, but I’m going to continue to fight for this case, which I believe in. That’s about the only thing I’m saying. We’ll take it one step at a time,” Gerger said.

During his opening statement when the trial began in early December, prosecutor John Lewis, assistant U.S. district attorney, told jurors that indexes play a “critical role in determining the price of natural gas in the United States.” He said jurors would hear Phillips “flat out lying” to one price editor during a telephone conversation (see NGI, Dec. 10, 2007).

“You will hear that [the defendants] understood that by reporting trades at a high price they pulled up the index…,” Lewis said. The traders’ bonuses were determined by their trading performance, and that was their incentive to try to influence the indexes in their company’s favor, Lewis said. “Pennies counted.”

Brooks, as managing director, was the head of gas trading at El Paso Merchant Energy and was paid a salary of $180,000 and a bonus of about $1.2 million in 2000, according to the indictment. Walton was a gas trader with the title of vice president at a salary of about $150,000 and a bonus of about $865,000 in 2000. Philips, also a trader and vice president, was paid about $140,000 and a bonus of about $425,000 in 2000.

The trial had been expected to last a month and ended up at about 37 days including testimony and deliberations.

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