Energy Legal Blog

Amaranth Court Explicates Elements of Attempted Price Manipulation under Commodity Exchange Act

In a May 21 opinion US District Court Judge Denny Chin denied defendants Amaranth Advisors' and natural gas trader Brian Hunter’s motion to dismiss the Commodity Futures Exchange Commission’s (CFTC) complaint against them alleging attempted price manipulation in violation of §13(a)(2) of the Commodity Exchange Act (CEA).  In so ruling, Judge Chin explicated the elements of attempted manipulation under the CEA — a charge that is increasingly being brought against natural gas and power traders, not only under the CEA, but also under provisions of the Natural Gas and Federal Power Acts.   

In its complaint, the CFTC alleged that the defendants attempted to manipulate the price of natural gas futures contracts traded on the New York Mercantile Exchange on February 24 and April 26, 2006 — the expiration dates for March and May futures contracts, respectively.  They did so, according to the CFTC, when Hunter instructed Amaranth traders to sell sizable long positions during the final 30 minutes (“closing range”) of the expiration date, a practice known as “marking the close.”  Defendants made these last-minute sales, the CFTC contends, to drive down the settlement price for the March and May NYMEX contracts and thereby increase Amaranth’s profits on large short positions that Amaranth concurrently held in natural gas swaps on the IntercontinentalExchange (ICE) commercial market.  ICE swaps settle at the NYMEX settlement price.  The CFTC also alleged that through the April 26 “marking the close” Amaranth also sought to counteract the price effect of a competitor’s long position in NYMEX natural gas futures contracts. 

Judge Chin denied the defendants’ motion to dismiss for failure to state a claim because the CFTC properly alleged (1) an intent to affect market prices, and (2) an overt act in furtherance of that intent.  For either attempted or completed manipulation, the intent element is the same and is typically inferred by actions or circumstances evincing a purpose to cause prices or price trends to depart from legitimate forces of supply and demand.  The CFTC properly pleaded intent through allegations that defendants Amaranth and Hunter engaged in “marking the close” sales in order to “smash” the March 2006 contracts and “experiment” with late sales to affect May prices.  The allegation that Amaranth was motivated to increase the profits on its short positions on ICE swaps, Judge Chin explained, made the inference of intent “even more plausible.”   Demonstration of fraudulent misrepresentation or an actual ability to cause an artificial price is not required, Judge Chin ruled.

Unlike the CEA, the Natural Gas (§4A) and Federal Power (§222) Acts (as amended in 2005) make actionable only completed manipulation, but not attempted manipulation.  That is why in its administrative proceeding against Amaranth and Hunter the FERC has alleged completed manipulation, which entails a more arduous burden of proof for the plaintiff.