The heady days of natural gas trading in Houston, circa 1999-2000, were recalled Tuesday in opening statements by attorneys arguing the case against two former physical gas traders charged with reporting bogus trades to industry publications in an attempt to manipulate the market.
Michelle Valencia, a former Dynegy Inc. trader, and Greg Singleton, who had worked for El Paso Merchant Energy, were indicted in November 2004 on charges of conspiracy, false reporting and wire fraud related to the transmission of allegedly bogus trade data to Inside FERC Gas Market Report and/or Natural Gas Intelligence (see Daily GPI, Nov. 30, 2004).
Assistant U.S. Attorney John Lewis Tuesday told jurors that during the trial — expected to last a month — they will hear how Valencia and Singleton reported false trades for the financial gain of their employers and themselves through salary and bonuses. “It’s these dollars that provided the incentive to do what we, the government, is alleging is a crime,” Lewis said.
Lewis told jurors the government will present testimony saying that during the summer of 2000 for every penny the index price at the Malin trading point went down El Paso stood to make an extra $127,000 on its gas trades. And for every penny decline in the Permian index, the company stood to make $82,000, Lewis said a future witness will testify.
However, Valencia attorney Chris Flood and Paul Nugent, Singleton’s lawyer, devoted large portions of their opening statements to characterizing the go-go energy trading scene during the late 1990s and 2000, prior to the collapse of Enron in 2001. Flood characterized Valencia’s intentions as anything but criminal, and Nugent maintained his client was just following the orders of his superiors at El Paso and not committing any crime.
Flood told the jury, “We don’t send people to jail unless they have criminal intent.” He said Valencia had no intention of manipulating the gas market and was only following what had become general industry practice: providing false data that favored the trading interests of one’s own company.
Prosecuting attorney Lewis told jurors that during frequent conversations with Inside FERC Editor Kelly Doolan, who is expected to testify, Valencia complained that Enron was manipulating markets through its recently launched electronic trading platform, Enron Online. He also said the two discussed in recorded telephone conversations how markets could be manipulated through the reporting of false trades. “She explains to him [Doolan] that people can make a large amount of money off of these index prices,” Lewis said. He said Doolan told Valencia that people can go to jail for manipulating prices.
“Well, they [Enron] can get away with it,” Valencia is alleged by Lewis to have told Doolan. Later, Valencia began submitting false information to Inside FERC herself, Lewis said.
Lewis went on to recount a recorded phone conversation between Valencia and Singleton. It relates to a July 2000 deal in which Valencia buys from Singleton 10,000 MMBtu/d for delivery at Malin. “Don’t get that index all jacked up,” Valencia is alleged to have told Singleton. Lewis told jurors that instead of reporting the Malin trade to industry publications, Singleton kept it quiet and reported bogus trades.
Lewis also read to jurors a portion of a letter from former Dynegy trader Jeff Hornback in which he criticized the company for “blatant lies” in its price reporting. Lewis said that Hornback, also expected to testify, was moved to write the letter when he was asked to sign to Dynegy’s ethic’s policy but refused to do so.
Valencia attorney Flood said it’s not important what his client did but why. His opening remarks went a long way toward painting a wild west picture of Houston’s energy corridor around the turn of the century. “We’re talking about when it was Enron’s ballpark in downtown Houston…and Ken Lay was a shining star.”
“All Ms. Valencia did was ignore Kelly Doolan’s instructions” on how to report natural gas trades, Flood said, making the point that the publishers of index prices are not government entities and reporting traders do not swear to the veracity of their reports to industry publications.
And prior to Enron Online, filing the trade report with industry publications was largely an afterthought on the trading floor, “the last 10 minutes of bidweek.” But once Enron started pumping up the market with what Flood said were bogus volumes of gas traded, it became critical for energy traders and their companies to be well represented in industry price surveys. Dynegy higher-ups told Valencia to make sure that all deals were reported “otherwise Enron owns the index,” said Flood.
“She was trying to work within a system that was broken. It’s not what happened. It’s why did she do it. All she was trying to do was the job that she was told to do. She knew nobody followed Kelly Doolan’s instructions [for reporting price data].”
While Lewis pointed out in his opening remarks that Singleton was able to rise to the level of vice president at El Paso, Singleton attorney Nugent characterized his client as a low man on the totem pole among the company’s physical gas traders, who as a group took a back seat to the basis or financial traders. “Put your minds back in time,” Nugent told the jury. “Six years ago this month is when Greg Singleton was faithfully working as a member of the El Paso team…. Yes, he was well paid, but he was at the bottom of the trading ladder.”
The first time Singleton reported trades to industry publications was in July 2000, Nugent said. At that time, El Paso’s policy was to “report the bias,” in other words, “send in numbers that support our financial positions.”
Nugent said he will introduce evidence of a meeting of the El Paso trading floor in September 2000 to discuss its policy on reporting prices/trades. The question on the table, he said, was whether the company should change policy and only report legitimate trades and prices. The decision was made to only report legitimate deals, and after the switch was made, Nugent said Singleton only reported legitimate trades. Prior to the switch, Singleton had only been involved in one other incidence of false price reporting, Nugent said.
But during the preceding summer the policy at El Paso, and across the industry, was quite different: Send in the numbers that support the company, Nugent said.
“Nobody thought it might possibly be considered illegal,” he said. “They didn’t think six years later a couple of low-level traders would be indicted.”
The case against Valencia and Singleton is believed to be the first time the Depression-era Commodity Exchange Act has been used against a member of the energy industry in a criminal court. Superseding indictments were handed down in March (No. 4:06 CR-00080). Valencia is charged with 22 conspiracy and fraud counts; Singleton faces 10 counts. Both face one overarching conspiracy charge alleging they worked together and with others “known and unknown” to report inaccurate gas trades. Singleton also faces one count of obstruction. U.S. District Judge Nancy Atlas is presiding over the case in Houston.
A year earlier, Valencia had been charged with three counts of false reporting and wire fraud while she worked at Dynegy, but her trial was stayed because of the complex wording of the original charges (see Daily GPI, Oct. 6, 2004; Nov. 18, 2003).
Valencia and Singleton pleaded innocent, and the government agrees that some or none of the false trades submitted were actually part of the publications’ calculations. However, under federal law, the government only has to prove that false trades were reported; whether they were published or whether they affected the markets is irrelevant (see Daily GPI, July 11).
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