The CTRM Blog

The following article is published with permission from the authors. I post it here because it may be of interest to readers of the blog. You will recall that Amaranth, a large hedge fund, crashed a couple of years ago as a result of its natural gas positions causing some ramifications in markets. Brian Hunter, the “can do nothing wrong”, trader involved in this issue was held responsible for the problems and this article is about how the FERC have now found him to be in violation of Anti-Manipulation rules.

On January 22, 2010, a Federal Energy Regulatory Commission (FERC) administrative law judge ruled that Brian Hunter, a former natural gas trader at Amaranth Advisors LLC, violated the Commission’s Anti-Manipulation Rule. This case marks the first time that FERC has found market manipulation by a futures trader. Judge Carmen Cintron found that “Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts. His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges.” This initial decision is now subject to review by the full Commission.

The judge specifically found that Hunter’s conduct violated FERC’s Anti-Manipulation Rule, which prohibits (1) fraudulent or deceptive behavior (2) with the requisite scienter, (3) in connection with the purchase or sale of jurisdictional natural gas or electric energy.

(1) Fraudulent or Deceptive Behavior – The judge found that Hunter’s trading of a significant volume of natural gas futures contracts during the final settlement periods in March, April and May 2006 constituted fraudulent behavior. By aggressively selling at prices generally below those of other traders during the last half hour of trading in these three months, Hunter was able lower the price of the prompt month contract. This lower price benefited Hunter’s larger short swap positions in other trading platforms.

(2) Scienter – The judge concluded by a preponderance of the evidence that Hunter intended to manipulate prices during this period. According to the judge, Hunter knew that the natural gas futures market could be manipulated and that his positions in other exchanges would benefit from a lower NYMEX settlement price. The judge found that Hunter’s explanations for his activities during these months were not credible.

(3) In Connection with the Purchase of Jurisdictional Natural Gas – The judge found that Hunter’s conduct was done in connection with natural gas transactions. Since NYMEX futures settlement prices have a significant impact on physical natural gas prices, the judge ruled that Hunter acted recklessly with regard to the effect of his trades on jurisdictional transactions.

The administrative law judge’s decision comes in the wake of a lengthy FERC investigation of Hunter and his former employer, Amaranth Advisors. Hunter was the lead energy trader with the hedge fund. In 2007, FERC accused Amaranth of violating its anti-manipulation regulations for natural gas futures trades conducted in March, April and May 2006 on the New York Mercantile Exchange. Amaranth and trader Matthew Donohoe settled with FERC and the Commodity Futures Trading Commission (CFTC) for $7.5 million in August 2009, but Hunter did not participate in the settlement. Amaranth collapsed in September 2006 after losing approximately $6 billion from natural gas trades.

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Michael A. Yuffee is a partner in the law firm of McDermott Will & Emery LLP based in the Firm’s Washington, D.C. office. As a member of the Energy and Derivatives Markets Group, Michael represents wholesale power marketers, financial institutions, merchant generators and integrated energy companies in a variety of regulatory, investigation, litigation and transactional matters. Mr. Yuffee can be reached at +1 202 756 8066 or myuffee@mwe.com.

Christopher J. Polito is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office. As a member of the Energy and Derivatives Markets and Global Renewable Energy, Emissions and New Products Groups, C.J. focuses his practice on representing energy and commodity companies, financial institutions and trade associations in a variety of transactional, regulatory and risk management matters. Mr. Polito can be reached at +1 202 756 8168 or cpolito@mwe.com.

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