Earlier this week, the CFTC filed suit against Brian Hunter and Amaranth Advisors charging the company and its chief energy trader with attempted market manipulation and making false statements to the NYMEX. The CFTC has issued a press release, the complaint, and a two-page summary of the complaint. Skip the summary, all of the fun stuff is in the complaint. But… but… having read through the complaint, count me less than impressed.
As summarized in the recent Senate subcommittee report on Amaranth’s natural gas trading in 2006, four elements are required to prove market manipulation under the U.S. Commodities Exchange Act:
(1) the accused had the ability to influence market prices;
(2) the accused specifically intended to influence market prices;
(3) artificial prices existed; and
(4) the accused caused the artificial prices.
In my comment on the Senate subcommittee report I was led to conclude: “Despite the report’s bulk, the evidence for various assertions seems thin.” And “the report often asserts …, but it offers the merest of anecdotes in support….”
At 43 pages including three appendices, the CFTC complaint has the virtue of being relatively brief and to the point. Still, what have they got? Some IM messages in which Hunter shares his hopes that his trading can drive down prices during the critical last thirty minutes of trading on the last day of trading for a contract on the NYMEX. Evidence that Amaranth instructed brokers to hold a large volume of trades until the last 8 minutes of a trading session, and evidence that by holding trading to the last minute Hunter hoped they could drive prices down sharply. Evidence that Amaranth held a large position in swaps at the IntercontinentalExchange that would benefit from a successful effort to drive down prices. And, well, that’s about it.
Ah, of course, they didn’t charge “market manipulation,” just attempting to manipulate the market. Clearly Hunter desired to drive the price down, and Amaranth was positioned to benefit from lower gas prices (for the particular months at issue, because they had calendar spread bets going, they would have benefits from price increases in other months). I guess that makes the CFTC case much easier, since of the four points needed to make a full blown charge of market manipulation stick, only one of them is needed to press a charge of attempted market manipulation – number (2) in the list above.
From the look of the CFTC’s suit, that is about all that they have: Instant messages between Hunter and colleagues stating the desire to move the price, and some heavy trading late on the last day of trading for a couple of NYMEX gas contracts. All in all, it seems a little weak.
One more thing amused me about the CFTC complaint. Among the “Facts” asserted in evidence is in paragraph 21, which reads:
21. Defendant Hunter’s compensation in 2005 was over $100 million.
How this bears on the allegation that Hunter and Amaranth intended to manipulate natural gas prices on two dates in 2006, and then lied about it, I don’t quite see. Unless, of course, the CFTC believes that all extremely well paid commodities traders are cheats.
It isn’t my intention to defend Hunter and Amaranth here. They were clearly lucky in 2005 and foolish in the extreme in 2006. They have paid for their foolishness, losing billions of dollars last year and destroying the company. They may well have committed fraud, as alleged by some Amaranth investors, when they strayed far, far, far from the company’s own stated investment guidelines and instead started taking what were in effect huge, risky gambles on the weather. If they committed fraud, then I hope that investors are able to capture back as much money as they lost. Maybe Hunter still has some of the 2005 money hanging around (do you figure he was smart enough not to invest it all in Amaranth? Probably not.)
NOTES: FERC has indicated that it will also charge Hunter, possibly today; Hunter has gone to court seeking to stop the FERC action, claiming the agency doesn’t have jurisdiction over futures trading.