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IN RE NATURAL GAS COMMODITY LITIGATION

September 24, 2004.

IN RE: NATURAL GAS COMMODITY LITIGATION.


The opinion of the court was delivered by: VICTOR MARRERO, District Judge

DECISION AND ORDER

In these consolidated actions, Plaintiffs, traders of natural gas futures contracts on the New York Mercantile Exchange ("NYMEX"), bring claims under the Commodity Exchange Act against a group of energy companies ("Defendants") alleging manipulation of the natural gas futures market. Plaintiffs claim that by falsely reporting data on trades of natural gas in the physical market, the defendant companies were able to manipulate the price of natural gas futures contracts for their own benefit and to the detriment of Plaintiffs.

Defendants have filed a joint motion to dismiss the several complaints, and several Defendants and corporate pairs of Defendants have separately filed a total of nine additional motions to dismiss the complaints as against them should the Court deny the joint motion to dismiss.

  The main complaint in this action contains 175 paragraphs and is 48 pages long, plus exhibits. Pervading much of Defendants' motions are variants of the theme, so common in motions to dismiss, that the complaint amounts to nothing more than lots of sound and fury, signifying nothing. With exceptions discussed below, most of the Defendants argue that the complaints fail to state a claim against them and provide insufficient notice of the Plaintiffs' claims. Defendants also argue that the CEA's statute of limitations bars Plaintiffs' claims.

  The Court is, for the most part, not persuaded that these Defendants are ingenues making their first appearance at the debutante ball. In fact, if certain federal government proceedings describing the scheme of misconduct asserted in this case bear any measure of truth, many of the thirty Defendants here may have compromised their claim to Snow-White innocence long ago. A large number of Defendants have reached settlements with the Commodities Futures Trading Commission ("CFTC") for millions of dollars each to resolve charges grounded on the same claims of false reporting of trade data alleged here. As explained below, Plaintiffs here essentially endeavor to connect Defendants' alleged false reporting of trade data in the physical gas market to manipulation of the natural gas futures market. In light of the liberal notice pleading standard governing federal litigation, and the recently concluded investigations by the CFTC and the Federal Energy Regulatory Commission ("FERC") into the same underlying conduct by Defendants as alleged in this case — proceedings that resulted in over $100 million in fines already paid by them — the Court for the most part cannot ignore common sense and accept Defendants' intimations of surprise that Plaintiffs' complaint in this action is the first thing they have heard about these allegations and that it does not furnish enough notice of what these claims could possibly relate to. Furthermore, Plaintiffs have not yet availed themselves of their opportunity to amend their complaints. Accordingly, for the reasons discussed below, the Court denies in part and grants in part, without prejudice, the motions of the various Defendants to dismiss the complaints in this litigation.

  I. FACTS AND PROCEEDINGS*fn1

  The Complaints allege that Defendants, a group of companies that market and trade natural gas in the physical and futures markets,*fn2 acted together to unlawfully manipulate the prices of natural gas futures and option contracts traded on the NYMEX between January 1, 2000 and December 31, 2002 (the "Class Period"). Plaintiffs claim that they suffered losses when they bought and sold NYMEX natural gas futures contracts during the class period — losses they attribute to actions of Defendants.

  A. COMMODITIES FUTURES MARKETS

  Briefly stated, a futures contract is an agreement to buy or sell a commodity and deliver that item at a certain date in the future.*fn3 All aspects of the contract, such as the quantity, quality, and delivery date, are standardized except for the price. The price is determined by traders in the commodity who negotiate at a commodities exchange. The party selling the commodity, and thus the party obligated to deliver the commodity on the delivery date, is called the "short" and is said to hold a "short position" on a futures contract. The buyer, who is obligated to accept delivery of the commodity, is the "long" and holds a "long position" on a futures contract.

  Futures contracts serve as a form of insurance for producers and processors of commodities against potential price alterations. As a simple example, an orange grower may acquire a short position in oranges to protect himself against a decline in orange prices in the event of a bumper crop, while a juice producer may acquire a long position to guard against a price increase in oranges should foul weather destroy the season's orange crop. Futures contracts also enable speculators to profit from anticipated changes in the price of a commodity.

  Buyers and sellers of commodity futures do not deal directly with each other, but instead interact with a commodities exchange, which serves as a clearing house. Because all futures contracts are standardized except for the price, a party holding one position in a futures contract may cancel its obligation by acquiring an equal and opposite position in the same contract. Any difference between the price of the initial contract and the price of the offsetting contract is the profit or loss on the contract. This is the ordinary practice. Very few futures obligations result in actual physical delivery of a commodity.

  The NYMEX trades futures contracts for, among other things, the delivery of natural gas at the Henry Hub for the present calendar month (the "spot month") and for each of the next 72 consecutive months. The Henry Hub is a Louisiana facility where several gas pipelines converge and from where gas can be directed to many regions of the country.*fn4

  Natural gas is physically traded though "over the counter" or "physical" markets at over 100 places across the country. The prices of gas trades in the physical market are collected by energy industry publications, who receive the price information from energy companies and then calculate and publish the daily and weekly absolute range, common range, and midpoint of the common range of physical gas trades for the prior day and week.

  The price paid for physical delivery of gas by one party to another on a given day at Henry Hub (the "Spot Price") often affects the price of futures contracts for natural gas. Speaking generally, traders of commodity futures examine the spot price and spot price trends when determining what actions to take in the futures market.

  B. THE ALLEGATIONS IN THE COMPLAINT

  1. Price Manipulation

  Plaintiffs allege that during the Class Period, Defendants "manipulated the price and volume information of their natural gas trades to trade publishers." (CCAC ¶ 59.) Plaintiffs claim that Defendants intentionally submitted false price and volume information on spot trades to several of the gas industry publications that collect that information with the goal of artificially skewing the published reports on natural gas trades in the physical market, and thereby artificially altering the futures market for natural gas, which is determined at least in part by those published reports. In the words of the CCAC, the Defendants "planned and executed a scheme designed to cause price instability and increase volatility in spot prices and thereby manipulate the price of natural gas futures and options traded on the NYMEX to artificial levels." (CCAC ¶ 12.)

  The FERC and the CFTC each investigated allegations of natural gas price manipulation since early 2000. Over the course of several months after the FERC published its preliminary findings in August 2002, several entities that are defendants in this litigation — Dynegy, West Coast Power, El Paso Merchant, AEP, Williams, and CMS — publicly admitted that some of their employees had reported false and inaccurate information on gas trades to certain energy publications.

  The FERC released its final report in March 2003 and found significant manipulation of the natural gas market in the form of efforts by gas companies to alter the published price indices of natural gas through false reporting of trade data. See FERC, Final Report on Price Manipulation in Western Markets: Fact Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000 (March 2003) (the "FERC Final Report"), available at http://www.ferc.gov/industries/electric/indus-act/wem/pa02-2.asp.

  The CFTC has entered into settlement agreements with at least sixteen entities*fn5 which are Defendants in this litigation as a result of its investigation into allegations of manipulation of natural gas markets, and has collected a total of at least $180 million in civil penalties from those entities. The federal government has also brought successful criminal prosecutions against now-former employees of several of those entities.

  The CCAC alleges that "[d]uring the Class Period, Defendants submitted false natural gas trading information, including artificial natural gas price and volume information, to numerous industry publications and reporting firms that publish natural gas spot price indices." (CCAC ¶ 66.) Next, Plaintiffs assert that "Defendants, as major participants in the physical natural gas market, had the ability through their reporting of physical natural gas transactions to influence the price of NYMEX natural gas futures." (CCAC ¶ 67.) Defendants "intended to manipulate NYMEX natural gas futures prices during the Class Period through their manipulation of the published indices." (CCAC ¶ 69.) Plaintiffs claim that they and others similarly situated "were damaged because NYMEX natural gas futures prices were not determined by market forces, but instead by the Defendants' illicit manipulative activities and improperly-wielded market power." (CCAC ¶ 74.)

  The CCAC provides more detailed allegations of fraudulent reporting against 18 of the defendant entities. Much of that detail is borrowed from the FERC Final Report. For example, Plaintiffs allege that out of 3600 trades that AEP and AEP Energy traders reported to one industry publisher between November 2000 and October 2002, 2800 were false, misleading, or knowingly inaccurate. (CCAC ¶ 85.) Similarly borrowing from the FERC Final Report, the CCAC asserts that Duke Energy Trading and Marketing reported fraudulent trading information in that "8 percent of the reported monthly trades were inaccurate in terms of price, volume or both, and 22 percent of reported daily trades were inaccurate in terms of price, volume or both." (CCAC ¶ 103.) 2. Wash Trading

  The CCAC also alleges that ten of the Defendants (the "Wash Trading Defendants")*fn6 manipulated gas futures prices by engaging in illegal wash trades in the physical market. The FERC Final Report defines wash trades a "a prearranged pair of trades of the same good between the same parties, involving no economic risk and no net change in beneficial ownership." See FERC Final Report at VII-1. Wash trading can create a false impression of greater trading activity and thus greater liquidity for a given item. See id. Wash trading can also affect the average trading price for an item. See id. The FERC Final Report indicated that CMS Energy, Dynegy, Williams and Reliant had already publicly admitted to engaging in wash trades.

  The CCAC asserts that between November 1999 and at least December 2001, Enron Online ("EOL"), operated by Enron Corporation, was the leading Internet-based trading platform for physical energy and energy derivatives. (CCAC ¶ 128.) Unlike a traditional stock or commodities exchange such as NYMEX, which uses a many-to-many format to match buyers and sellers, EOL uses a one-to-many format in which Enron or an Enron affiliate is on one side of every transaction. Over EOL, Enron's own traders would list a bid price at which Enron would purchase natural gas and an offer price at which Enron would sell. At certain times, called "choice markets," Enron's traders would list the same figure as their bid price and offer price. These choice markets enabled gas companies to engage in wash trades. See FERC Final Report at VII-1 — VII-2.

  The CCAC cites the FERC Final Report as stating that during choice market periods for natural gas trading between January 2000 and November 2001, Entergy-Koch Trading engaged in 61 wash trades, or 16.1 percent of the total wash trades completed during choice markets in that time period; Cook Inlet Energy Supply LLC completed 22 wash trades or 5.8 percent; MidAmerican Energy Company completed 21 wash trades or 5.6 percent; and Mieco completed 19 wash trades or 5 percent. (CCAC ¶ 135.)

  The CCAC alleges that "[t]hrough EOL, the Wash Trading Defendants had unprecedented influence over the natural gas market. Through their use of Choice Markets on EOL, the Wash Trading Defendants exploited the EOL system and had unprecedented influence to manipulate natural gas spot prices by taking advantage of the fact that Enron was the counterparty to every wash trade." (CCAC ¶ 136.) 3. Churning

  Next, the CCAC makes an allegation of "churning" against defendant Reliant Energy Services, Inc. ("Reliant"). The CCAC states that since June 2000, Reliant "abused its dominant position in the natural gas spot market by employing commodities trading strategies for buying physical spot natural gas designed to manipulate natural gas spot prices and NYMEX natural gas futures contracts." (CCAC ¶ 140.) The CCAC relies on the FERC Final Report, which found that "Reliant's rapid-fire sale and purchase of gas in amounts far in excess of its needs raised the price of gas on EOL significantly." (CCAC ¶ 143, FERC Final Report at II-58.) In a chart, the CCAC identifies 24 days on which Reliant engaged in churning in the natural gas market and cites the amount of gas purchased and sold, Reliant's net purchase, the percentage of Reliant's total transactional volume of natural gas traded on that day attributable to churning, and the percentage of all EOL trading on that day attributable to Reliant's activities. (CCAC ¶ 151.)

  4. Fraudulent Concealment

  On November 20, 2002, the Lieutenant Governor of California filed suit on behalf of California consumers against several entities that are defendants in this action for the same activities alleged in the CCAC. Plaintiffs here assert that that lawsuit provided "the first public reports of any government action relating to Defendants' unlawful conduct." (CCAC ¶ 162.) Plaintiffs filed the original Class Action Complaint in this action on August 18, 2003. Plaintiffs argue that because Defendants "employed acts and techniques that were calculated to wrongfully conceal the existence of such illegal conduct, Plaintiffs and the Class could not have discovered the existence of this unlawful conduct any earlier than its public disclosure in November 2002." (CCAC ¶ 163.)

  5. Substantive Allegations

  Ultimately, the CCAC presents two claims for relief. In Count I, Plaintiffs allege that Defendants "manipulat[ed] the price of natural gas futures and options, and/or the price of the natural gas underlying those contracts," in violation of Sections 9(a) and 22(a) of the CEA, 7 U.S.C. §§ 13(a) and 25(a). (CCAC ¶ 167.) Plaintiffs also allege that Defendants engaged in wash sales in violation of Section 4c of the CEA, 7 U.S.C. § 6c. In Count II, Plaintiffs allege that Defendants aided and abetted each other, John Does 1-100, and other unnamed entities in their unlawful practices under the CEA, in violation of Section 22(a)(1) of the CEA, 7 U.S.C. § 25(a)(1).

  All Defendants now move to dismiss the complaints pursuant to the CEA and Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6) for failure to state a claim upon which relief can be granted and for failure to file their claims within the applicable statute of limitations. Several defendants have also filed individual motions to dismiss the complaint.

  II. STANDARD OF REVIEW

  When considering a motion to dismiss pursuant to Fed.R. Civ. P. 12(b) (6), the Court must accept as true all well-pleaded factual allegations in the complaint and draw all reasonable inferences in favor of the non-moving party. See Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63, 68 (2d Cir. 2000). The Court may grant a motion to dismiss under Rule 12(b) (6) only if "it appears beyond doubt that the plaintiffs can prove no set of facts in support of his claim which would entitle him to relief." Krimstock v. Kelly, 306 F.3d 40, 48 (2d Cir. 2002) (internal citations omitted).

  III. DISCUSSION

  In their joint motion, Defendants argue that Plaintiffs have failed to state a claim under any provision of the CEA cited in the CCAC, and that Plaintiffs filed the CCAC after the expiration of the statute of limitations. Defendants fault the 175-paragraph, 48-page CCAC for stating insufficient facts to support any violation of the CEA, and for failing to allege all the elements of a claim for manipulation or aiding and abetting. Defendants also assert that Plaintiffs were on notice of the claims at issue as early as June 2000, and alternatively that Plaintiffs have failed to allege fraudulent concealment with the requisite degree of specificity demanded by Fed.R. Civ. P. 9(b).

  A. THE MANIPULATION CLAIM

  Defendants argue that Plaintiffs' manipulation claim under Section 9(a) of the CEA, as presented in the CCAC, contains merely conclusory allegations and lacks sufficient factual support to withstand a motion to dismiss. Plaintiffs counter that they have described Defendants' conduct with adequate specificity to provide notice to Defendants of the claims against them.

  Federal Rule of Civil Procedure 8(a)(2) mandates that a complaint shall contain "a short and plain statement of the claim showing that the pleader is entitled to relief." In Swierkiewicz v. Sorema N.A., the Supreme Court emphasized that the purpose of Rule 8 is merely to provide a fair notice to a defendant of the plaintiff's claims, and that it is the role of the litigation tools of discovery and summary judgment to weed out unmeritorious suits. 534 U.S. 506, 512 (2002). The Court reiterated that the simplified, notice-pleading standard of Rule 8(a) applies to almost all civil actions. Id. at 513. Additionally, and arguably relevant here, the Court noted that "If a pleading fails to specify the allegations in a manner that provides sufficient notice, a defendant can move for a more definite statement under Rule 12(e)*fn7 before responding." Id. at 514.

  Defendants argue that the CCAC is so defective and lacking in specific facts that it fails even the liberal pleading standards of Rule 8(a). As noted above, the CCAC contains 175 paragraphs in 48 substantive pages (not including the signature block and exhibits). To be sure, length and specificity do not necessarily go hand in hand on the path to sufficient pleading. As one court has noted, "[a] complaint can be long-winded, even prolix, without pleading with particularity. Indeed, such a garrulous style is not an uncommon mask for an absence of detail." See Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997). That said, as a complaint approaches Proustian magnitude (in length, at least), it may become more difficult for a defendant to convince a court that the complaint fails to provide adequate notice of the claims at issue. Indeed, Defendants protestations may have been more apt and worthy of a more sympathetic reception from this Court had they challenged the complaint for violating Rule 8's requirements that a pleading "shall contain a short and plain statement of the claim" and that all pleadings "shall be simple, concise and direct," rather than arguing that the CCAC lacks sufficient information to provide notice of a claim. Fed.R. Civ. P. 8. (emphasis added).

  Defendants argue that the Court must dismiss the manipulation claim because the Complaints inadequately allege the elements of that claim under the CEA. This argument raises several issues, including what the elements of a manipulation claim are, whether a plaintiff must plead all of those ...


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