A lawsuit has been filed against the liquidated hedge fund Amaranth Advisors LLC in a federal court in New York to recover damages for allegedly perpetrating a fraud on the natural gas futures market prior to the company’s collapse in September 2006.

The lawsuit, which was filed in U.S. District Court for the Southern District of New York, has been brought as a class action on behalf of all persons who purchased or held New York Mercantile Exchange (Nymex) natural gas futures contracts between Feb. 23, 2006 and Sept. 20, 2006. The number of potentially affected persons is “in the thousands,” the lawsuit said.

The action was filed by Roberto E. Calle Gracey, a self-described trader of natural gas futures contracts on Nymex during the time that Greenwich, CT-based Amaranth dominated the gas trading market. Gracey is no stranger to class-action lawsuits. In June 2006, Western Gas Resources Inc. agreed to pay $5.95 million to settle a lawsuit brought by Gracey and two other parties alleging that the Denver-based energy company manipulated prices of natural gas futures on Nymex.

Also named as a defendant is JPMorgan Chase & Co., which acted as prime broker to Amaranth and “aided and abetted Amaranth’s violation” of the Commodities Exchange Act, according to the lawsuit that was filed on July 12.

It seeks to recover damages for Gracey and other natural gas futures traders “in an amount to be established at trial.”

The latest lawsuit follows a separate suit filed by the San Diego County Employees Retirement Association and a probe by the Senate Permanent Subcommittee on Investigations into Amaranth’s trading activities. In fact, the lawsuit cited a recent report by the Senate panel, which found that Amaranth engaged in “excessive speculation” that ultimately affected the natural gas prices paid by consumers last winter (see NGI, July 2).

“Defendants through diverse means, lawful and unlawful, manipulated and made artificial the prices of natural gas futures contracts traded on [Nymex] in this district,” the lawsuit alleged.

It accused Amaranth of “repeatedly violating Nymex exchange rules and amassing positions on natural gas futures contracts that drastically exceeded applicable position limits,” and further caused gas futures contract prices to be artificial by “surreptitiously amassing a huge position in natural gas swaps on the IntercontinentalExchange [ICE], the other major U.S. energy exchange.”

The lawsuit alleged that defendants “concealed their manipulative trading from regulators and market participants and eventually [increased] the size of defendant Amaranth Advisors LLC’s natural gas portfolio on the ICE after being ordered by the Nymex to reduce [its] positions (which were so large that they were disrupting the market).”

Amaranth’s actions caused Gracey and other traders to incur “substantial losses,” according to the lawsuit. It noted that after Amaranth’s collapse the price of the Nymex futures contract for gas delivery in October 2006 fell to $4.80/MMBtu from $8.45/MMBtu. And the price for immediate delivery, or the spot price, fell to $3.66/MMBtu in early October of last year from $7.49/MMBtu in late August.

Amaranth was a dominating influence in the gas futures market, the lawsuit said. Prior to its collapse, the hedge fund held as many as 100,000 gas futures contracts at once, representing 1 Tcf of natural gas, or 5% of the natural gas used in the United States in a year.

During parts of the class period — February 2006 through September 2006 — “Amaranth controlled up to 40% of all of the open interest on Nymex for winter months (October 2006 through March 2007),” the lawsuit said. In late July 2006, Amaranth held more than 80,000 Nymex and ICE contracts for January 2007 alone, representing a volume of natural gas that equaled the amount eventually used in that month by U.S. residential consumers nationwide, it noted.

Amaranth switched to the less-regulated ICE exchange after Nymex in August 2006 ordered the hedge fund to reduce its positions. In doing so, “Amaranth deliberately exploited the opacity of the ICE swap market in order to effectively flout regulators’ attempts to curtail its excessive speculative trading on Nymex,” the lawsuit said.

In the end, “Amaranth lost more than $2 billion in the natural gas market during the first three weeks of September 2006, precipitating the liquidation of the entire $8 billion fund.”

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