The word manipulation gets tossed around pretty loosely these days as politicians and others look for scapegoats for higher prices, but commodity price manipulation is more than just a talking point, it is a crime — and the Commodity Futures Trading Commission (CFTC) recently brought charges of oil price manipulation against two companies for their alleged actions in 2008.
Parnon Energy Inc., an oil logistics company, and Arcadia Petroleum Ltd., a London-based oil trader, are named in the complaint. It also names two individuals in the suit, Nicholas Wildgoose and James Dyer.
According to the complaint, the defendants allegedly manipulated oil prices from late 2007 through April 2008 and stopped after learning about a CFTC investigation. It goes on to say the scheme was based on acquiring a "dominant position" in physical oil at Cushing, Okla. and taking long futures positions with the intent to inflate the values of those contracts. The defendants held those physical positions to give the impression that supplies were tight and sold their inflated long contracts, then sold futures short in the next contract month. After trading closed on the front-month contract, they dumped their physical position in the cash market, surprising the market with the sudden supply and inflating the value of their short positions as price fell in response to increased physical supply.
The CFTC alleges that Wildgoose and Dyer enacted this scheme in January and March 2008. While they took a $15 million loss on the physical trade, the inflated prices on the derivatives contracts resulted in a net profit of more than $50 million.
Daniel Waldman, partner at Arnold & Porter LLP and former general counsel at the CFTC, says the scheme is a little different from most historical squeezes in that it was very short-term in scope. "Usually, you are withholding a portion of your large physical position from the marketplace and squeezing the shorts by making it difficult for them to make delivery against their futures position," he says.
In a statement released after the charges were filed, Arcadia Petroleum said, "Arcadia has reviewed extensively the facts related to our trading over this period more than three years ago and we are confident that no manipulation was attempted or occurred, and that no laws were broken. Our crude oil trading activity over this period was lawful and appropriate."