On May 24, 2011, the U.S. Commodity Futures Trading Commission (CFTC) filed a civil complaint in the United States District Court for the Southern District of New York alleging that three speculators, Parnon Energy Inc. (Parnon) of California, Arcadia Petroleum Ltd. (Arcadia Petroleum) of the United Kingdom, Arcadia Energy (Suisse) SA (Arcadia Suisse) of Switzerland, including two individuals, James T. Dyer of Australia and Nicholas J. Wildgoose of California, manipulated (and attempted to manipulate) the price of the New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) futures contract in January 2008 and March 2008. The price of the NYMEX WTI futures contract is based on the price of crude oil delivered to Cushing, Oklahoma and is a crucial benchmark for crude oil prices around the world.

Although the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) substantially expanded the CFTC’s authority to pursue claims of market manipulation, Parnon’s conduct occurred before the Dodd-Frank Act was passed. Therefore, the CFTC will need to prove its allegations under the more difficult pre-Dodd-Frank manipulation standard. Indeed, the CFTC, and its predecessor agency have only successfully litigated a handful of actual manipulation claims. In DiPlacido v. CFTC, 364 Fed. Appx. 657 (2d Cir. 2009), the CFTC held (and the U.S. Court of Appeals for the Second Circuit affirmed) for the first time in a litigated case that the respondent violated the CEA’s anti-manipulation provision.  

The Parnon case represents the second enforcement action to arise out of the CFTC’s broad investigation into potential manipulation of the crude oil markets during 2008. In July 2008, the price of the NYMEX WTI futures contract reached an all-time high of $147 per barrel. The CFTC filed the first enforcement action as part of the “Nationwide Crude Oil Investigation” approximately three years ago against Optiver Holding BV and certain affiliated entities of the Netherlands-based proprietary trading firm.  

In this second case, according to the CFTC’s complaint, Parnon, Arcadia, Arcadia Suisse and the two named individuals engaged in a manipulative trading scheme that used futures and related derivatives contracts to drive the price of crude oil to artificial highs and then back down for the purpose of generating unlawful profits. Specifically, the CFTC alleges that Dyer and Wildgoose repeatedly executed a manipulative strategy designed to exacerbate the tight supply of crude oil at Cushing in early 2008 by:  

  1. amassing a dominant position in WTI crude oil at Cushing to be delivered in the next month (even though they did not have a commercial need for crude oil);  
  2. simultaneously purchasing futures on NYMEX and ICE Futures Europe with the intent to artificially inflate the value of the physical position by driving WTI prices higher;  
  3. holding their dominant physical position to signal to other market participants that supply would remain tight as they sold their futures position for a profit;  
  4. establishing a short futures position at artificially high price; and  
  5. unexpectedly releasing the dominant supply of physical crude oil in order to drive down the market price as they closed out their short futures position at a more favorable price.

According to the CFTC, Dyer and Wildgoose successfully used this strategy to drive the price of crude oil up and then back down in January and March 2008 (and unsuccessfully in February 2008), thereby realizing over $50 million in profits. The complaint alleges that this activity violates Sections 6(c), 6(d) and 9(a)(2) of the Commodity Exchange Act. The CFTC is seeking permanent injunctive relief, disgorgement, restitution, trading and registration bans, imposition of civil monetary penalties and all other appropriate remedial relief against Dyer, Wildgoose, and the three firms.

 Although answers to some of the legal questions raised in the Parnon case may have a limited practical impact in light of the new manipulation standard in the Dodd-Frank Act the outcome of this case may be used as a bellwether for future enforcement actions in the commodity and derivatives markets.