On May 4, 2018, the U.S. Court of Appeals for the Second Circuit (“Second Circuit”) dismissed a private suit filed by a group of investors (“Plaintiffs”) seeking damages for Total Gas & Power North America, Inc., Total S.A., and Total Gas & Power Limited (collectively, “Total”) for allegedly manipulating natural gas markets at four western trading hubs. In doing so, the Second Circuit held that Plaintiffs – who did not trade at the four western trading hubs at which Total traded, but argued that Total’s trading impacted Plaintiffs’ trading at the Henry Hub – established constitutional standing but failed to plead sufficient facts to establish a plausible substantive cause of action.

On December 7, 2015, the U.S. Commodity Futures Trading Commission (“CFTC”) approved a settlement with Total for alleged violations of the CFTC’s regulations and Commodity Exchange Act (“CEA”) provisions prohibiting market manipulation and attempted market manipulation (see December 14, 2015 edition of the WER). Specifically, the CFTC found that Total traded fixed-price natural gas at the El Paso Permian Basin, El Paso San Juan Basin, Southern California Gas Co., and West Texas Waha hubs in a manner intended to affect the monthly index settlement prices at those hubs, which in turn would benefit Total’s related financial positions. In addition, on April 28, 2016, FERC directed Total and two of its traders to show cause why they should not be assessed civil penalties in excess of $216 million for violating the Natural Gas Act and FERC’s regulations for the same conduct (see June 12, 2017 edition of the WER). FERC’s enforcement action against Total is ongoing.

Plaintiffs filed a private action in the U.S. District Court for the Southern District of New York (“District Court”) seeking damages for Total’s alleged manipulation and alleging violations of the CEA and Sherman and Clayton Acts. In the complaint, Plaintiffs acknowledged that they did not trade at the hubs at which Total traded; rather, Plaintiffs argued that, due to the cointegration between regional hubs, Total’s trading affected their derivatives based on Henry Hub prices. After the District Court found that Plaintiffs failed to establish either harm or intent and thus failed to establish standing or a cause of action under the CEA or antitrust laws, Plaintiffs appealed to the Second Circuit. On appeal, Plaintiffs argued that they had standing to sue because prices at natural gas hubs are so interconnected that Total’s alleged manipulation of the four western hubs impacted the prices at the Henry Hub. Similarly, Plaintiffs argued that natural gas trading in the United States occurs in one integrated market, and thus Total’s trading was inextricably linked to Plaintiffs’.

In its opinion, the Second Circuit disagreed with the District Court’s determination that Plaintiffs lacked standing under Article III of the U.S. Constitution, but affirmed the District Court’s dismissal of Plaintiffs’ claims for failing to plead a substantive cause of action. The Second Circuit first explained that the pleading standard for constitutional standing — whether the Plaintiffs plead a colorable cause of action — is lower than the standard for a substantive cause of action — in this case, the injury must be plausible. Regarding standing, the Second Circuit found that Plaintiffs’ pleadings place the interconnection of natural gas hubs “within the realm of possibility,” and thus the Plaintiffs satisfied the constitutional standing standard.

With respect to substantive causes of action, the Second Circuit first noted that simply stating that markets are interconnected would allow almost any trader to sue for any manipulation. Thus, the Second Circuit held that Plaintiffs failed to plead a substantive cause of action under the CEA because they failed to provide sufficient facts to establish a plausible connection between their trading and Total’s. In addition, the Second Circuit pointed out the disparity between the relatively small number of contracts Total traded in the western hubs compared to the highly liquid Henry Hub, concluding that it was implausible that Total’s trades could have distorted trading at the Henry Hub. Furthermore, the Second Circuit found that, because Plaintiffs did not plead sufficient facts, the Plaintiffs’ complaint contained as much support for the proposition that Plaintiffs benefited from Total’s trades as for the proposition that they were harmed by it. Lastly, regarding Plaintiffs’ antitrust claims, the Second Circuit similarly concluded that Plaintiffs failed to plead sufficient facts and noted that Plaintiffs did not present evidence that they actually traded at “artificial prices.”

A copy of the Second Circuit’s opinion is available here.