The honeymoon is over. When the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) complied with a Congressional mandate in the Energy Policy Act of 2005 (EPAct) to execute a Memorandum of Understanding (MOU) agreeing to coordinate and share information in connection with their respective oversight of physical and financial energy markets, it looked like the two agencies could be on the road to a cooperative relationship in policing their respective markets. Indeed, only a few months later, FERC and the CFTC used the MOU to share information and coordinate their respective investigations into anomalous trading activity in the March, April and May 2006 NYMEX Natural Gas Futures Contract (NG Futures Contract) by the hedge fund Amaranth Advisors (Amaranth), its head natural gas trader, Brian Hunter, and his subordinate, Matthew Donohoe. When the Commission issued its Order to Show Cause and Notice of Proposed Penalties to Amaranth, Mr. Hunter and Mr. Donohoe on July 26, 2007 (Amaranth Show Cause Order),1 FERC Chairman Joseph Kelliher effusively praised the Commodity Futures Trading Commission (CFTC) and commended the leadership of Acting CFTC Chairman Walter Lukken and former Chairman Reuben Jeffrey III for its close collaboration with FERC in the Amaranth investigation. Only two months later, however, the CFTC and FERC have found themselves at odds in federal court over whether FERC has jurisdiction to pursue enforcement action against Amaranth.

Dueling Government Banjos

In July 2007, Amaranth and Mr. Hunter found themselves in the unenviable position of facing simultaneous enforcement actions from two different regulators for alleged violations of two different statutes arising from the same conduct. On the administrative front, FERC is alleging that Amaranth’s trading in the NYMEX Natural Gas Futures Contract (NG Futures Contract) violated the prohibition on market manipulation in the NGA2 and FERC’s regulations3 by driving down the settlement price of the NYMEX contract which is used to set the price for some FERC-jurisdictional sales of physical gas. FERC is proposing to assess civil penalties and to order disgorgement of profits totaling close to $300 million. In the United States District Court for the Southern District of New York (Southern District of New York), the CFTC has filed a complaint alleging violations of the Commodity Exchange Act (CEA) (CFTC v. Amaranth). The CFTC seeks civil penalties, which could exceed one-hundred million dollars, and injunctive relief restraining Amaranth from committing future violations and from engaging in certain trading activity. In a recent speech to the American Public Gas Association, CFTC Commissioner Bart Chilton described these two simultaneous enforcement proceedings as a “rendition of dueling government banjos.”4

Not liking the tune from the FERC banjo, Amaranth moved the Southern District of New York to issue a preliminary injunction to stay the FERC proceeding until the CFTC’s action has been concluded. In support of its motion, Amaranth argued that FERC’s enforcement action exceeds its jurisdiction and unlawfully encroaches upon the CFTC’s exclusive jurisdiction over futures trading. Mr. Hunter is pursuing similar relief in the United States District Court for the District of Columbia (D.C. District Court) where he has asked the court to issue a declaratory judgment finding that FERC’s assertion of jurisdiction over him is unlawful and to issue a temporary restraining order and preliminary injunction against the FERC enforcement action.

Although in an act of comity to the Commission the CFTC opposed Amaranth’s motion for a preliminary injunction so that FERC may determine in the first instance the scope of its new antimanipulation authority in light of the CFTC’s exclusive jurisdiction over the futures markets, at the request of Judge Denny Chin, the CFTC did address the jurisdictional issue. The CFTC clearly believes that FERC has no place enforcing its anti-manipulation rule in financial markets that are regulated by the CFTC. In its memo in opposition to Amaranth’s motion, the CFTC argues vociferously that the plain language, legislative history and case law interpreting the CEA all lead to the unavoidable conclusion that the CFTC has exclusive jurisdiction over activity in the markets that it regulates. Addressing Section 315 of EPAct, which added a new section 4A to the NGA and prohibits fraud or deception “in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of [FERC],”5 the CFTC argued that this language did nothing to affect the scope of the CFTC’s exclusive jurisdiction.

In addition to its legal arguments, recent comments by Commissioner Chilton suggest that the CFTC is more than a bit peeved at FERC’s enforcement foray into the financial markets. Referring to the MOU between the CFTC and FERC, Commissioner Chilton said: “Guess what? In that MOU it says that the CFTC has exclusive jurisdiction over risk management markets. But, MOUs are only as good as those [who are] supposed to use them. The CFTC-FERC MOU didn’t work so well.”6 Commissioner Chilton summed up the jurisdictional flap over the Amaranth enforcement action thusly: “[t]he problem arose when FERC decided to take their new Act for a little jurisdictional test drive in the Amaranth case. But they took their new Act on the road too soon, I think . . . . And that is very disappointing.”7

For its part, FERC opposed Amaranth’s motion and argued that, in passing EPAct, Congress specifically contemplated overlapping enforcement actions like those against Amaranth. To FERC, in crafting the prohibition on market manipulation in EPAct, Congress intended to extend FERC’s enforcement authority to entities and transactions that are not directly regulated by the Commission. For example, by providing that the prohibition on market manipulation would apply to “any entity,” Congress clearly intended to include entities that are not otherwise subject to FERC jurisdiction under the NGA. The “in connection with” language was also crafted so as to capture a broad range of conduct that could affect FERC-jurisdictional rates and services. FERC has made similar arguments in opposition to the motion for a temporary restraining order and preliminary injunction in the Hunter v. FERC proceeding in the D.C. District Court.8

Judge Chin Refuses to Stop the Music

At least for now, Amaranth’s hopes for relief from the FERC enforcement action appear to have been dashed by Judge Chin’s November 1, 2007 Opinion denying the motion for a preliminary injunction. Judge Chin denied the motion9 based on his findings that Amaranth had failed to satisfy the test for granting a preliminary injunction under Rule 65 of the Federal Rules of Civil Procedure and under the provisions of the All-Writs Act.10 In reaching his decision, Judge Chin declined to rule on the issue of FERC’s jurisdiction, finding that, under the section 19(b) of the NGA,11 this issue must be resolved by the Commission on rehearing and then by a United States Court of Appeals. Judge Chin did, however, recognize Amaranth’s predicament and urged “FERC to work with the CFTC and Amaranth to coordinate their efforts in the two proceedings, to maximize efficiency and minimize duplication.”12 Although Mr. Hunter’s motion for a preliminary injunction is still pending before Judge Leon in the D.C. District Court, it seems unlikely that Judge Leon will take a different course than Judge Chin and enjoin FERC from taking enforcement action against Mr. Hunter.

For now, it appears that Mr. Hunter and Amaranth will have to wait for a resolution of the jurisdictional issue in the FERC administrative proceeding and then at a United States Court of Appeals. Amaranth, Mr. Hunter and Mr. Donohoe have each filed requests for rehearing of the Amaranth Show Cause Order raising the same jurisdictional arguments that they and the CFTC have presented to the district courts. FERC has committed to processing these requests for rehearing as quickly as possible and has granted Amaranth and Mr. Hunter an extension of time, until 14 days after it rules on the requests for rehearing, in which to file their respective answers to the Show Cause Order. If the Commission denies rehearing, and presumably it will, Amaranth and Mr. Hunter will likely seek review of FERC’s orders in a United States Court of Appeals. In all likelihood, it will take at least another year for these processes to resolve the jurisdictional issue at the heart of the Amaranth Show Cause Order.