Updated: August 2007

Big Week at FERC, CFTC

Tag Team Slamming, Notorious Perps Pummeled

In a coordinated two-front maneuver this week, the battle-hardened enforcement divisions of FERC and the CFTC unleashed a barrage of seemingly strong price manipulation charges against former mega-energy hedge fund Amaranth and its two main gas traders, Brian Hunter and Matthew Donahue. For an encore, both commissions also announced two sets of price manipulation charges against Dallas-based Energy Transfer Partners. In sum, both commissions hope to recover, disgorge or otherwise penalize these various perps for just shy of a zillion dollars.

It was an exciting week. Platts was credited with popping the lid off the FERC/Amaranth announcement, which was followed by the CFTC press conference on Wednesday (see related story), which was followed by FERC’s announced action against Energy Transfer Partners on Thursday and subsequent press briefing by FERC Chairman Joseph Kelliher, which was followed by the CFTC’s own announcement about similar charges against Energy Transfer Partners.

The Amaranth charges seem pretty clear-cut by both FERC and CFTC standards, but the ETP cases seem a bit more complex.

This latter bit gets juicy, too. Shortly after Chairman Kelliher announced the charges brought against ETP, a statement was issued by the company, under the signature of company chief administrative and compliance officer Jerry Jeff Langdon. Langdon, you might recall, is a former FERC commissioner. Langdon was been appointed as chief administrative officer of Energy Transfer Partners, effective three weeks ago. “We believe these charges are misguided,” said Langdon in a statement. Hmm… Interesting timing, Jerry. We reckon he must have had time to read all the facts, no?
Folks inside the Beltway believe these two cases could potentially drag on for decades. Well, the ETP case seems to have that potential, but the Amaranth deal seems altogether different. Quite a few sources we spoke to this week described it as a slam dunk against the ghosts of Amaranth and its former lead gas trader(s). One regulator we spoke on condition of anonymity suggested that trader Brian Hunter’s Canadian citizenship is more or less meaningless in this case. Assets can be simply frozen for Canadians as well as US citizens, thanks to all sorts of international agreements. “He doesn’t need to be extradited,” a source said. “The (US) government can bar him from trading in US markets and freeze his assets.” Whether or not he sees jail time if found guilty as charged is somewhat moot, a source said. “He’s done.” Yikes.

Lots of paper and details are available at both commission sites and we recommend you have a look (www.ferc.gov and www.cftc.gov). Summaries, releases, dockets, filings, it’s all in there.

FERC’s earliest missive to the Brian Hunter camp last Friday, a show-cause order that somewhat mirrored the CFTC’s action against Hunter and Amaranth this week, was met with the appropriate level of defiance and cheek by Hunter’s lawyer, Michael Kim of the law firm Kobre & Kim LLP. Hunter’s lawyer described FERC’s action as “baseless,” and said “the FERC is operating outside of its jurisdiction and their allegations have no merit.” Further, “Brian Hunter did not undertake any manipulative trading and we will prove it.” In one of the many legal replies by Kim, a request for a temporary restraining order and preliminary injunction against FERC, the counsel wrote that, “FERC’s imminent enforcement action is a lawless and impermissible encroachment on the exclusive statutory jurisdiction of the CFTC, and is beyond the scope of FERC’s statutory authority, which authority is limited to regulation of wholesale energy markets.” Honestly. But the real kicker – the cheek – of this guy as to why FERC should essentially back off: because Hunter is in the midst of starting a new fund, Solengo Capital Advisors. “The private investment funds that will be advised by Solengo are making the necessary preparations to actively solicit investments that are crucial to their successful launch as commodity derivatives investment funds; and “the willingness of potential investors to commit capital to these funds is dependent upon Solengo and its principals continuing to maintain an unblemished regulatory record.” Really. Kim says that the incorporation process in Alberta and in the Cayman Islands for Solengo will be a bit dicey were FERC to actually issue the show-cause order. Too late.

We missed the FERC press conference on Thursday, but managed to catch up with Chairman Kelliher later in the day.

Seems all the world has been making lots of noise about the unusually well coordinated string of announcements this week. We asked the chairman what he made of that.

“It was completely deliberate. It was intended to make plain that FERC and the CFTC do coordinate their enforcement actions and that there is no conflict between the agencies. In a lot of (our) investigations, there is seamless cooperation between the two agencies. We think this is important. (Look at) the cases we disclosed today, ETP manipulation of FERC-jurisdictional products in order to benefit positions they held in other physical products and financial products. And in the case of Amaranth, there was the manipulation of futures contracts, which are not FERC-jurisdictional, to benefit and effect other financial and physical positions. In the natural gas market, there might be a legal distinction between a financial and physical contracts, but the market doesn’t recognize that legal distinction,” Kelliher tells The Desk.

Sometimes traders don’t recognize laws at all, which is why we’re all so busy this week. Considering the supposed heft and therefore influence that Hunter’s gas book managed to swing around the market, and all the alleged carcasses of smaller funds strewn hither and yon across the market allegedly at Hunter’s hand, we were surprised to see that he was ultimately charged with what is one of the oldest tricks in the book – banging the close. A NYMEX source this week told us that “people try to do that every day…” It all seemed anticlimactic in a way.

We likened the Amaranth charges to Al Capone’s ultimately being brought down for tax fraud. With Hunter, we thought it was sort of like charging him for a moving violation, for grand theft auto.

“I don’t have a comment on the collapse of Amaranth because that’s not what we’re investigating,” Kelliher said. “We’re focused on their behavior in the market and what we think are manipulative practices. What’s important to note is that we are requiring disgorgement of profits in the amount of $59 million, and the total civil penalties if you include Hunter, Donahue and Amaranth are four times that amount. We think we’re sending a powerful signal that if you engage in manipulative behavior, you’ll not just have to surrender ill-gotten gains, you pay multiples on top of that.”

We noted the case number on this Amaranth investigation was IN07-26-000. This tells us that at a minimum, there are currently 26 cases under investigation. The CFTC tells us they have more than 100 ongoing investigations into market mischief right now. How close is FERC to that number?

“We don’t talk about how many investigations we have ongoing… We have a good number we’re involved in. Our investigations tend to be active, not inactive. I see the advantage of people thinking we have a lot more cases ongoing then we actually do, so I don’t see the value in mentioning the (actual) number,” he says.

The FERC Enforcement Division is a relatively new creation, but nonetheless, the unit managed to uncover some pretty weighty stuff against a company that’s been on everybody’s radar screen for a long time. We asked what the unit picked up along the way or learned from this investigation specifically about market behavior or the like. Kelliher tells us that while the division is newly formed, the expertise has always been there. “And it’s grown over time. In the case of Amaranth, we wouldn’t have noticed these trading practices last April if we didn’t have a lot of expertise to begin with.” We asked about who first recognized the mischief afoot. Did FERC learn about this from the initial NYMEX investigation or from the CFTC?

“In the case of Amaranth, we first noticed it (the dodgy Amaranth trading activities) independently and we began an informal staff investigation. Then we really from the very beginning started talking to the CFTC staff. We might have both independently noticed it (Amaranth mischief) extemporaneously, but we immediately started sharing information in both directions.”

We asked the chairman if at any point during the investigations he came to any new conclusions about market transparency. Particularly in regards to ICE, had he any new opinions on the matter? “I think I’ll defer to the CFTC on matters of market transparency or what sort of transparency is needed in commodity futures or financial markets. All I know is, with respect to ICE, we had access to all the information we needed from ICE to conduct our investigations.”

This has been consistent with ICE?

“Yes,” Kelliher said.

***

In the Energy Transfer Partners action, FERC is going for the jugular. Here we have a much deeper and longstanding investigation that took staff in a number of directions. How’d they come across it? Simple. One of ETP’s competitors gave FERC a tip. It was a sour-grapes sort of thing.

On Oct. 28, 2005, the company apparently made $40 million dollars trading in a single day – a point that wasn’t lost on one trading competitor. The call came in and an informal investigation was opened. The case actually ended up expanding back to December 2003. “Over time the investigation grew and the number of violations expanded. The period of time over which the violations occurred was increased. We started off looking at possible manipulation of Houston Ship Channel for one month. We ended up finding five separate categories of violations over a nine-month period. It’s a complicated story.”

Complicated indeed. And, as such, the penalties are pretty dear. Energy Transfer Partners is facing the revocation of their blanket natural gas sales certificate for one year, on top of disgorgement of millions in profits and other civil penalties. Ouch.
“It’s not the first time we’ve done it (yanking the company’s blanket sales certificate), but it’s a pretty significant action and it shows how seriously we take the manipulation violations,” Kelliher says. Who else has received similar treatment? For one, the Big E, Enron.

It’s a story to watch.