A former natural-gas trader at Amaranth Advisors LLC, backed by the U.S. Commodity Futures Trading Commission, asked a federal appeals court to overturn a $30 million fine imposed by another regulator over alleged manipulation of the gas-futures market.
In a case that could determine the limits of the Federal Energy Regulatory Commission’s power to punish market manipulation, a lawyer for Brian Hunter told a three-judge panel in Washington today that the CFTC has sole jurisdiction over futures trading on the New York Mercantile Exchange. The CFTC, which filed papers supporting Hunter, also argued today.
“There was no notice, much less fair notice, to Brian Hunter that his conduct was being regulated by FERC,” Hunter’s lawyer, Michael Kim of Kobre & Kim LLP, said during the 40- minute argument.
The dispute highlights FERC’s growing role as a regulatory enforcer. Congress beefed up the agency’s powers in 2005 to ensure order in the energy trading markets after Enron Corp. traders triggered California blackouts earlier in the decade. Since January 2011, the commission has publicly disclosed 13 investigations it has conducted of alleged market manipulation.
The Hunter case addresses at least two questions, Marc Spitzer, a former FERC commissioner, said in an interview: What determines market manipulation, and which agency has jurisdiction over violations involving futures trading?
“Hunter is the test case as far as the court is concerned,” said Susan Court, a former director of FERC’s enforcement office.
FERC argues that the CFTC’s exclusive jurisdiction over regulating futures contracts and futures markets doesn’t extend to manipulation.
“Market manipulation transactions go beyond mere futures trading and involves conduct in several markets,” Robert Solomon, a FERC lawyer, told the judges. If the transactions have “a direct and profound effect on physical natural gas markets, then FERC does have a role.”
In those circumstances, as in the Hunter case, both agencies would have enforcement authority, he said.
Two of the three judges on today’s panel said FERC’s position on overlapping authority appeared to conflict with Congress’s intent to have one agency regulate futures trading.
“Doesn’t that create the exact situation Congress sought to avoid when it gave the CFTC commodity futures regulation authority?” U.S. Circuit Judge David Tatel asked Solomon.
Hunter sued FERC in December 2011 after the agency ordered him to pay $30 million in penalties, ruling he manipulated the price of contracts on the New York Mercantile Exchange in 2006 while boosting the value of financial derivatives.
Hunter, according to court documents, dumped large numbers of contracts within the last 30 minutes of trading in an effort to drive down the closing price of the futures. The move benefited Amaranth’s larger opposing positions in off-exchange derivatives, according to regulators.
Amaranth lost $6.6 billion betting on the price of natural gas. The Greenwich, Connecticut-based hedge fund that once controlled half of the gas market collapsed in 2006. In August 2009, the company agreed to pay $7.5 million to end U.S. cases brought by FERC and the CFTC over price manipulation.
On April 11, a federal judge in Manhattan gave final approval to a $77.1 million settlement by Amaranth to resolve a class action brought by traders.
FERC filed an administrative case against Hunter the day after the CFTC brought a civil enforcement action against him in federal court in Manhattan over the same trading. FERC alleged Hunter violated anti-manipulation provisions of the Natural Gas Act, which the agency said it has the authority to enforce.
Hunter claims his actions didn’t amount to market manipulation.
The CFTC’s civil case against Hunter was put on hold in January 2012 due to the FERC court challenge in Washington, according to court records.
The CFTC claims FERC’s assertion of jurisdiction clashes with its own authority to oversee futures trading.
Congress gave the CFTC “exclusive jurisdiction among federal regulatory agencies not only to set standards for on- exchange futures trading, but also to determine the lawfulness of such futures trading,” the commission said in court papers.
Mary Connelly, a lawyer for the CFTC, told the judges today that Congress never repealed her agency’s exclusive jurisdiction when it added regulatory authority to FERC.
She said the law expanding FERC’s authority over the physical markets it regulates makes no reference to the futures markets or the CFTC.
“A transaction has not stopped being a transaction when it is manipulation,” Connelly said.
Hunter argues that the Natural Gas Act’s anti-manipulation provisions apply only to entities such as utilities, not individuals.
FERC, with an enforcement staff of 200 people, hasn’t shown much indication of backing down in its oversight. The agency’s staff on Jan. 28 backed $488 million in penalties for Barclays Plc and four former traders for alleged gaming. The London-based bank has vowed to challenge the matter in court.
An energy-trading unit of Deutsche Bank AG on Jan. 22 agreed to pay FERC’s proposed penalty of $1.6 million for alleged violations, rather than fight the matter in court. The agency is also investigating a JPMorgan Chase & Co. unit for alleged manipulation and has suspended its electricity-trading authority for six months starting in April.
The case is Hunter v. Federal Energy Regulatory Commission, 11-1477, U.S. Court of Appeals for the District of Columbia (Washington).