The U.S. District Court for the Southern District of Texas dismissed a twenty-six-count indictment that the Commodity Futures Trading Commission (CFTC) and Justice Department had brought against four former BP traders for allegedly attempting to manipulate the TET propane market in 2004 in violation of the Commodities Exchange Act (CEA). In doing so, the court appears to have narrowed significantly the CFTC’s (and possibly other regulators’) authority to prosecute allegations of price manipulation. According to the indictment, BP traders and others cornered the TET propane market by acquiring a dominant long position in forward TET propane contracts and withholding a portion of the commodity from sale in order to inflate artificially the price. The indictment further alleged that the defendants engaged in activities to conceal their trading motives, and that BP executives with knowledge of the trading activities spearheaded the strategy, telling the traders to “go make money,” and that any “reputational risk” to the company was already a “sunk cost.” The opinion is noteworthy in several respects.

First, the opinion holds that by excluding “swaps” from the CFTC’s CEA jurisdiction, § 2(g) of the Commodity Futures Modernization Act of 2000 excluded the BP traders’ TET propane transactions from the CFTC’s reach. Specifically, § 2(g) states that: “[n]o provision of this chapter . . . shall apply to any agreement, contract or transaction . . . if [it] is—(1) entered into only between persons that are eligible contract participants at the time they enter into the agreement, contract or transaction; (2) subject to individual negotiation by the parties; and (3) not executed or traded on a trading facility.” 7 U.S.C. § 2(g) (2006). Defendants claimed that the section 2(g) exclusion fits the over-the-counter (OTC) futures transactions in question here, and therefore exculpates all four defendants on the manipulation counts. The court agreed.

In addition and of potentially greater consequence, the court held that the CEA term “manipulation” as applied in the government’s complaint to the BP traders is too vague and therefore in violation of the due process clause of the Fifth and Fourteenth Amendments to the U.S. Constitution. The court observed that common law incorporated into the CEA has so broadly defined price artificiality and manipulation that a person of ordinary intelligence would not have been able to determine whether the BP traders’ actions constituted price manipulation or were simply the product of “legitimate forces of supply and demand.” In holding that the manipulation counts could not constitutionally apply, the court explained that “[a]cting in a manner that shifts the price of a commodity in a favorable direction is the business of profit-making enterprises, and if it is done without fraud or misrepresentation, it does not violate the CEA.” The court thus appears to hold that the manipulation claims under the CEA are not actionable absent allegations of deception and untruthfulness.

Given the scope of the court’s findings regarding: (1) the significance of the CEA § 2(g) exclusion for OTC commodities agreements, contracts, and transactions, and (2) the constitutional infirmities found by the court regarding the application of “manipulation” as used in the Act, it is likely that an appeal will be taken by the government. Until such an appeal is addressed, however, this opinion will raise significant issues regarding the ability of the government to bring actions under § 13 of the CEA for commodities trading violations on similar facts. The Radley court all but confirmed this conclusion, noting “[t]he court is sympathetic to the government’s desire to discourage the types of behavior alleged here, but its ability to do so is currently limited by a confusing and incomplete statutory and common-law regime. Until such time as Congress or a higher court speaks more clearly regarding the trading activities alleged here, it is the finding of this court that they do not violate the [Act]. . . .”