U.S. market regulators on Wednesday charged failed hedge fund Amaranth Advisors and its former head trader, Brian Hunter, with trying to manipulate natural gas futures prices.
The Commodity Futures Trading Commission also said Amaranth tried to cover up activities by lying to the New York Mercantile Exchange. The agency is seeking monetary penalties, but not jail time, for the wrongdoing.
Amaranth racked up $6.4 billion in losses from bad natural gas contracts before it folded last year, after moving most of its contract positions from the regulated NYMEX to Atlanta-based IntercontinentalExchange where the CFTC has policing powers but no authority to regulate.
The CFTC's action comes after Hunter sued this week to block the Federal Energy Regulatory Commission from taking enforcement action against him.
Hunter claims the CFTC, not FERC, has jurisdiction over the NYMEX where much of Amaranth's questionable trading took place. He left Amaranth last year to start a Calgary-based hedge fund called Solengo Capital. A FERC lawsuit would make it difficult for Solengo to attract investors, Hunter said.
FERC will announce its lawsuit against Hunter and Amaranth on Thursday, according to a source familiar with the case.
With Hunter's new hedge fund trying to line up investors, CFTC enforcement director Gregory Mocek would not say whether the government would seek to confiscate funds in Hunter's Solengo Capital to pay fines related to the Amaranth case.
The CFTC said Hunter earned over $100 million in 2005.
Hunter's lawyers said they will "combat aggressively" the CFTC charges, saying he did not conduct manipulative trading.
Attorney Michael Kim said the accusations from the CFTC and FERC are aimed at making Hunter "a scapegoat to bear the public outrage over ever-increasing energy prices."
"We will not stand idly by as the regulators use Brian for political cover. Their action is meritless and we will prove it," Kim said.
Geoffrey Aronow, a former CFTC enforcement director and current counsel to Amaranth, said there is no evidence the fund tried to manipulate the markets. He said the CFTC was "forced to act" to protect its jurisdiction from FERC.
The CFTC said Amaranth and Hunter tried to manipulate gas futures contracts on the NYMEX on February 24 and April 26, 2006, which were the last days of trading for the exchange's March 2006 and May 2006 gas contracts, respectively.
The CFTC alleges that for each of the expiring days, Amaranth acquired more than 3,000 NYMEX gas futures contracts in advance of the 2 to 2:30 p.m. closing price range and then sold most of those contracts during the closing session.
The CFTC said Amaranth intended to lower the prices of the NYMEX gas futures contracts to benefit the hedge fund's gas swaps contracts held on the IntercontinentalExchange (ICE) and elsewhere.
The settlement price of the ICE swaps is based on the NYMEX gas futures settlement price determined by trading done during the closing on the contract's expiring trading day.
According to computer messages in the CFTC complaint, Hunter told other traders to "make sure we have lots of futures to sell" at the close of NYMEX's expiring gas contract and that he wanted the NYMEX gas contract to "get smashed."
When NYMEX inquired about Amaranth's April 26 trading, the hedge fund and Hunter made false statements to the exchange "to cover up defendants' attempted manipulation," the CFTC said.
NYMEX said in a statement that Amaranth "frustrated" its ability to obtain the relevant trading information and the exchange will continue to cooperate with regulators.
"This case demonstrates the Commission's ongoing vigilance to punish those who attempt to compromise the integrity of the futures markets," said CFTC Acting Chairman Walter Lukken.