On September 17, 2009, the U.S. District Court for the Southern District of Texas dismissed a twenty-six count indictment brought by the Commodity Futures Trading Commission ("CFTC") and U.S. Department of Justice ("DOJ") against four former BP employees for allegedly attempting to manipulate the Texas Eastern Transmission Corporation ("TET") propane market in 2004. The opinion may materially impact the government's ability to bring future actions under prevailing federal commodities laws.

The indictment alleges that in the first quarter of 2004 BP traders and others attempted to corner 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 artificially inflate the price. According to the indictment, over several days in early February, BP traders bought large quantities of TET propane for late February delivery, and, with direct approval of BP management, then set out to increase the commodity price through strategically placed offers to buy and sell the commodity on Chalkboard — a central website where commodities traders can post anonymous bids and offers for commodities such as TET propane — thus creating the impression that multiple counterparties wished to buy propane. The government claimed that over the course of BP's activities during this period that the price of TET propane rose by more than fifty percent, from approximately $0.60 to $0.94 per gallon. 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." United States v. Radley, et al., No. 08-411 at 6 (S.D. Tex. Sept. 17, 2009) (memorandum opinion and order dismissing indictment).

The CFTC and DOJ argued that each of the four named defendants violated section 13(a)(2) of the Commodities Exchange Act (the "Act"), which makes it a felony for: "any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce . . . or to corner or attempt to corner any such commodity or knowingly to deliver or cause to be delivered for transmission through the mails or interstate commerce . . . false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect . . ." commodities prices. 7 U.S.C. § 13(a)(2) (2008). Specifically, the indictment brought twenty-six criminal counts against all four defendants for violations of the Act, including: one count of conspiracy to manipulate and corner the TET propane market; eleven counts of price manipulation and attempted price manipulation, based on eleven separate communications about price with counterparties; five counts of price manipulation and attempted price manipulation for each day the OPIS-reported prices were allegedly inflated by defendants' bids/offers; two counts of cornering or attempting to corner the market; and seven counts of wire fraud.

The lynchpin in the government's case, however, turned on the application of section 2(g) of the Commodity Futures Modernization Act of 2000, which excludes "swap transactions" from coverage by the Act. Specifically, section 2(g) states that: "[n]o provision of this chapter . . . shall apply to an 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) (2008). Defendants claimed that the section 2(g) exclusion precisely fits the transactions in question here, and therefore completely exculpates all four defendants. The court agreed.

In determining that the exclusion under section 2(g) absolved the defendants under the Act, the court held: (1) defendants' acts constituted agreements, contracts, or transactions because "there is no allegation that defendants falsely reported transactions which did not actually occur or failed to report transaction that did occur"; (2) each agreement, contract or transaction was individually negotiated by the parties; and (3) Chalkboard is plainly not a trading facility since it "enabled parties to 'negotiate the terms of and enter into bilateral transactions.'" Radley, No. 08-411 at 13 (citing 7 U.S.C. § 1a(34) (2008)).

After determining that the Act did not apply to the defendants because of the exclusion under section 2(g), the court went on to examine the merits of the governments' manipulation claims under the Act. Though the court's analysis on these points could be construed as dicta, the analysis undercuts the government's market manipulation authorities in several respects. Notably, the opinion finds the term "manipulation" unconstitutionally vague, concluding that when confronted with the facts in the indictment, a "person of ordinary intelligence would not be able to determine that they constitute price manipulation under the CEA." Id. at 14. Specifically, the court observed that the government's showing under the second prong of its manipulation claim, which requires that an artificial price existed or that defendants attempted to create an artificial price, lacked "support in the law and the marketplace" because, under the government's construction, "any activity in a market by parties other than producers or consumers would not be a legitimate force of supply and demand." Id. at 16.

In addition, the court also found that the government failed to show that the defendants "cornered" the market in violation of the Act. Noting that the term "corner" is not defined by the CFTC, the court observed that two elements are required under prevailing common law: (1) a long position in a commodity; and (2) a simultaneous holding of nearly the entire physical supply of wheat. The court found that the "physical supply [prong] is absent in this case", concluding that the "contractual right to future control of a commodity is simply not the same as present control over the physical supply." Id. at 23.

Given the scope of the court's findings regarding: (1) the significance of the Act's section 2(g) exclusion for over-the-counter commodities agreements, contracts, and transactions, and (2) the constitutional infirmities found by the court regarding the application of the term "manipulation" as used in the Act, it is likely that an appeal will be taken by the government. Until such an appeal is addressed, this opinion raises significant issues regarding the ability of the government to bring actions under section 13 of the Act for commodities trading violations. 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 . . . [u]ntil 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]. . . ." Id. at 26.