On April 21, 2011, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) Commission affirmed the Initial Decision of Administrative Law Judge Carmen Cintron (the “Initial Decision”) determining that Brian Hunter violated the anti-manipulation rule in the first fully-litigated proceeding under FERC’s enhanced enforcement authority under § 4A of the Natural Gas Act. The rule prohibits manipulation in connection with transactions under the jurisdiction of FERC (see January 28, 2010 edition of the WER). The Commission also ordered a $30 million dollar civil penalty.
This case involved alleged manipulation of transactions by Hunter, who was then the lead natural gas trader for Amaranth, a hedge fund. Hunter allegedly traded in natural gas futures contracts in order to produce artificial settlement prices and gain a profit on related financial instruments. Hunter gathered large quantities of these futures contracts and sold them off during settlement periods on expiration days during three months in 2006. In the Initial Decision, Judge Cintron found that Hunter intentionally manipulated the settlement prices of natural gas futures contracts on NYMEX in order to benefit swap and option positions in other trading platforms. The relationship between financial and physical natural gas markets allowed this manipulation to affect the price of FERC-jurisdictional physical natural gas transactions.
In its April 21, 2011 Order, the Commission affirmed Judge Cintron’s findings that the elements of a manipulation claim were satisfied: (1) use of a fraudulent scheme, (2) with scienter, (3) in connection with a FERC-jurisdictional transaction. In order to reach the scienter requirement, Judge Cintron found that Hunter: (1) knew the NYMEX settlement period could be manipulated, (2) had a financial motive to engage in manipulation; and (3) employed a significantly different trading strategy during the months at-issue than in previous months. The Commission gave deference to Judge Cintron’s determination that the explanations Hunter provided for his trading strategies were not “candid or credible,” and FERC noted that Judge Cintron’s determination was made based upon witness testimony and record evidence, like contemporaneous instant messages “documenting Hunter’s mindset.” The Commission also affirmed that Hunter’s manipulation occurred “in connection” with jurisdictional transactions. Finally, the Commission found that the Anti-Manipulation Rule will apply where there is a “nexus” between the manipulative conduct and the jurisdictional transaction.
In assessing a civil penalty, the Commission noted that Hunter had not previously violated the Commission’s rules; however, he had not self-reported the violation, nor had he been cooperative with Enforcement Staff causing Judge Cintron to conclude that he did not merit a reduction of his penalty. The Commission found a close relationship between the natural gas futures market and the physical market, and thus, Hunter’s manipulation caused an impact on the physical natural gas market. The Commission concluded that a $30 million dollar penalty was “appropriate and sufficient” to discourage Hunter and others from performing market manipulation.