FERC lacks power to regulate futures contracts, court rules

Trader's $30 million fine thrown out

Gavel Gavel

The Federal Energy Regulatory Commission lacks authority over futures contracts, a U.S. appeals court ruled, handing a victory to the Commodity Futures Trading Commission and an ex-Amaranth Advisors LLC trader fined $30 million by FERC.

Congress intended to centralize oversight of futures contracts in the CFTC, the U.S. Court of Appeals in Washington said today. It brushed aside FERC’s contention that the two agencies share jurisdiction over aspects of energy markets that allowed FERC to fine trader Brian Hunter for alleged market manipulation.

“FERC lacks jurisdiction to charge Hunter with manipulation of natural-gas futures contracts,” U.S. Circuit Judge David Tatel wrote for a three-judge panel. The Commodity Exchange Act gives the CFTC, which joined the case against FERC, “exclusive jurisdiction,” he said.

The case highlights a turf battle between the two agencies developing at least in part from expanded powers Congress granted FERC in 2005 to regulate energy trading in the wake of blackouts in California triggered by Enron Corp. traders.

FERC had argued that the CFTC’s exclusive jurisdiction over regulating futures contracts and futures markets doesn’t extend to manipulation.

Dropped Fine

The ruling returns the case to FERC, where Hunter’s fine will be thrown out, according to Suedeen Kelly, a FERC commissioner at the time the case was filed.

“Purely from the perspective of the traders it’s a good thing,” said Kelly, an attorney with Akin Gump Strauss Hauer & Feld LLP in Washington.

They will no longer have to worry about competing regulatory demands from two agencies, she said.

At an appeals court hearing on Feb. 7, Robert Solomon, a FERC lawyer, argued that “market manipulation transactions go beyond mere futures trading and involves conduct in several markets.” If the transactions have “a direct and profound effect on physical natural gas markets then FERC does have a role.”

In such circumstances, as in the Hunter case, both agencies would have authority, Solomon said.

Steve Adamske, a spokesman for the CFTC, and Tamara Young Allen, spokeswoman for FERC, declined to comment on the ruling.

‘Unjustly Vilified’

Hunter’s attorney, Michael Kim, of Kobre & Kim LLP, said in a statement that “FERC unjustly vilified Mr. Hunter for years, but in fact it was the FERC which had acted outside the law.”

Hunter dumped large numbers of contracts within the last 30 minutes of trading in an effort to drive down the closing price of the futures, according to court documents. The move benefited Amaranth’s larger opposing positions in off-exchange derivatives, regulators said.

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.

Administrative Case

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 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.

The CFTC’s case against Hunter was put on hold in January 2012 after Hunter sued to challenge FERC’s authority in the matter, according to court records.

FERC, with an enforcement staff of 200 people, hasn’t backed down in its oversight. The agency’s staff on Jan. 28 proposed $488 million in penalties for Barclays Plc and four former traders for allegedly gaming the electricity markets. 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.

Today’s decision doesn’t directly impact those cases because they don’t involve futures, Kelly, of Akin Gump, said.

The case is Hunter v. Federal Energy Regulatory Commission, 11-1477, U.S. Court of Appeals for the District of Columbia (Washington).

Bloomberg News

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