Wending its way to FERC on exception (appeal) is Administrative Judge Carmen Cintron’s January 22 initial decision finding that lead natural gas trader for hedge fund Amaranth Advisors, Brian Hunter, manipulated the price of New York Mercantile Exchange (NYMEX) natural gas futures contracts in order increase earnings on futures look-alike contracts (primarily swaps) that Amaranth concurrently held on the largely unregulated exchanges, Intercontinental Exchange (ICE) and Clearport, or over-the-counter (OTC). How FERC rules on legal issues on appeal should be instructive of how the agency will define market manipulation in both natural gas and electric power markets going forward.

The Judge’s factual findings are unremarkable and supported in the record of Mr. Hunter’s hearing. The final price of a NYMEX futures contract is the volume-weighted average price (VWAP) of all trades made during the last half-hour of the last trading day of the contract, which falls three business days before the delivery month. The look-alike contracts, including ICE natural gas swaps, settle at prices tied to the closing prices of NYMEX futures. Mr. Hunter was found to have accumulated on four occasions large net long positions in NYMEX natural gas futures and then in the last half-hour of trading to have directed their sale below VWAP, taking a loss, in order to increase the settlement value of his much-larger net short positions in natural gas look-alike contracts on ICE, Clearport or OTC. By intending to create and creating an artificially low price for the NYMEX contract to increase the settlement value of inverse positions in other contracts, Mr. Hunter, the Judge ruled, manipulated the market in violation of § 4A of the Natural Gas Act and was liable for civil penalties as provided in the Act. (Various Amaranth companies and co-defendant Matthew Donohoe earlier settled with FERC enforcement and paid significant civil penalties.)

What is noteworthy is how the Judge addressed the legal issues that the FERC set for hearing: “Whether Mr. Hunter’s activity in the natural gas futures contract market on the days in question was intended to create a price that was not reflective of supply and demand, and if so, whether the activity resulted in artificial prices”? Answering this question in the affirmative, the Judge concurred in legal arguments that the agency’s enforcement staff advanced, concluding that “the only definition of market manipulation that makes sense is subjective — it focuses entirely on the intent of the trader” to create an artificial price. Judge Cintron in Mr. Hunter found “serious, willful and harmful” intent by reason of his driving down final closing prices and losing money in consecutive months in the NYMEX market, in violation of the Amaranth compliance manual, in order to offset those losses and make tens of millions of dollars in the look-alike markets, to which his personal compensation was tied. While a subjective test of intent may seem straightforward on strong documentation as in Mr. Hunter’s case, it could prove problematic in closer cases where intent is not so apparent. As reported in another recent Energy Legal Blog post on US v. Radley,, a federal district court acquitted defendants in a criminal prosecution for market manipulation under similar provisions of the Commodities Exchange Act because price “artificiality” and “manipulation” were so vague as applied in that case as to violate the Constitutional guarantee of due process. The Radley court directed 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 is not market manipulation.