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IN RE NATURAL GAS COMMODITY LITIGATION

November 14, 2005.

In Re NATURAL GAS COMMODITY LITIGATION.


The opinion of the court was delivered by: ANDREW PECK, Magistrate Judge

OPINION AND ORDER

Plaintiffs have moved to compel the production of documents from non-parties McGraw-Hill Companies and Intelligence Press, Inc. (collectively, "the Publications") pursuant to Fed.R.Civ.P. 45. (Dkt. No. 310: Pls. Notice of Motion.) For the reasons set forth below, plaintiffs' motion is GRANTED in part and DENIED in part.

FACTS

  The Underlying Action

  The facts pertaining to the underlying action have been set forth in Judge Marrero's opinions denying defendants' motion to dismiss and granting plaintiffs' motion to certify the class. In re Natural Gas Commodity Litig. ("Natural Gas I"), 337 F. Supp. 2d 498 (S.D.N.Y. 2004); In re Natural Gas Commodities Litig. ("Natural Gas II"), 03 Civ. 6186, ___ F.R.D. ___, 2005 WL 2414449 (S.D.N.Y. Sept. 30, 2005). Only the facts necessary to this motion are discussed below.

  Plaintiffs allege that the defendants manipulated the prices of natural gas futures and option contracts by falsely reporting trade data — price and volume — to the Publications. (See, e.g., Dkt. No. 98: Consolidated Class Action Complaint ("CCAC") ¶¶ 59-62, 66; Dkt. No. 311: Pls. Br. at 10.) See also Natural Gas II, 2005 WL 2414449 at *1; Natural Gas I, 337 F. Supp. 2d at 501-02. This false information, allegedly, led to erroneous price indices reported by the Publications and relied upon by traders, thereby skewing the futures market. (See, e.g., CCAC ¶¶ 67-72; Pls. Br. at 10-11.) See also Natural Gas II, 2005 WL 2414449 at *1; Natural Gas I, 337 F. Supp. 2d at 503. The false trades were purportedly made between January 1, 2000 and December 31, 2002 (The "Class Period"). Natural Gas I, 337 F. Supp. 2d at 501. The NYMEX (N.Y. Mercantile Exchange) futures contracts are for delivery at the Henry hub only. Id. at 502. (See also Dkt. No. 335: Kovner Aff. Ex. L: Harris Class Cert. Aff. ¶ 8; 11/9/05 Oral Arg. Tr. at 33-34, 80.)

  The Publications

  Platts

  Platts is a division of McGraw-Hill and is "the world's largest and most reliable source of news and information about the energy industry," publishing over 50 newsletters and magazines on the energy industry. (Dkt. No. 217: 1st Foster Aff. ¶ 2.) Two particular Platts publications, Inside FERC's Gas Market Report ("Inside FERC"), with indices published monthly, and Gas Daily, published daily, cover the natural gas industry. (Id. ¶ 3; Dkt. No. 333: 3d Foster Aff. ¶ 3.) They both publish price indices covering "numerous pricing points across the United States" using information obtained "by Platts reporters from actual buyers and sellers in the marketplace." (1st Foster Aff. ¶ 4.) Platts does not rely on other publicly available price surveys, but rather conducts its assessments and prepares its indices solely on the information gained through original reporting. (Id.) A sample Gas Daily is Exhibit B to the 1st Foster Aff.; a sample Inside FERC is Exhibit A to the 1st Foster Aff. During 2000-2002, Inside FERC published a price range for "approximately 70 monthly pricing points," adding up to thousands of transactions considered per month; Gas Daily used approximately 102-116 pricing points. (3d Foster Aff. ¶ 4; see 1st Foster Aff. ¶ 5.) During the Class Period, most energy companies submitted monthly price reports to Platts via email, although some sent reports via fax or telephone. (3d Foster Aff. ¶ 6.) For Inside FERC, all trade data reported by the energy companies were made during "bid week" — a five-day period at the end of each month. (Id.) Those trades reported by the companies "provided transaction-specific data, including price, volume, hub, and, in some cases, counter-party." (Id.) Contrariwise, for the daily trade reports to Gas Daily, the energy companies were not required to submit transaction-specific data, but rather were only "asked for: a low price, a high price, a weighted average and a total volume" for the daily trades. (3d Foster Aff. ¶ 7.) According to Platts, "Gas Daily would not have the specific transaction data that would enable plaintiffs to identify this as an example of a false trade report by the [energy] company." (Id.)

  Platts' reporters and editors analyzed the data, using "their experience, judgment and analytical tools to identify and question outlying data" which, depending on Platts' judgment after confirmatory calls to the source, may be excluded from the aggregate price index. (1st Foster Aff. ¶ 6.) The actual underlying data is not published, but rather serves as the basis for the published indices (id. ¶ 4) which are an amalgamation of quantitative analysis and editorial judgment (id. ¶ 6; see also 3d Foster Aff. ¶ 13).*fn1 Consequently, according to Platts, "the transaction data used to calculate any given index does not necessarily match the data reported by the energy company traders, and there is no one document or set of documents that reveal, on their face, `the data used' in the creation of the indices." (3d Foster Aff. ¶ 14.)

  Before Platts acquired Gas Daily in September 2001, "the publication routinely discarded the information submitted by the energy company traders"; once Platts took over, it told Gas Daily reporters of its preference for retaining the submissions, but at least until "well into 2002" reporters continued to discard the daily trade submissions. (3d Foster Aff. ¶ 8.) Gas Daily has "accessible electronic records of the type sought only from November 4, 2002 forward." (3d Foster Aff. ¶ 9; see also 2d Foster Aff. ¶ 8.)

  Platts' sources, the traders, provided their information on the understanding that their identity would be kept confidential and the price information would not be attributed to a particular company or trader. (1st Foster Aff. ¶ 7.) According to Platts, confidentiality is a crucial means through which Platts maintains its reliability as a transparent and comprehensive news source. (1st Foster Aff. ¶¶ 7-8; 2d Foster Aff. ¶ 2; 3d Foster Aff. ¶ 10.) "Both Inside FERC and Gas Daily had (and still have) many sources for their indices who are not party to the instant litigation." (3d Foster Aff. ¶ 5.) Also according to Platts, a number of natural gas sources stopped providing their trading information to Platts out of fear for a loss of confidentiality, after Platts received subpoenas seeking trade data. (3d Foster Aff. ¶ 10.)

  Platts has "spent countless hours" responding to subpoenas it has received from private litigants and government agencies. (3d Foster Aff. ¶ 11; see also 2d Foster Aff. ¶ 4; 1st Foster Aff. ¶¶ 10-11; Dkt. No. 335: Kovner Aff. ¶ 4.) "To date, Platts personnel, including [the Global Editorial Director for Platts, Larry Foster] and . . . the Chief Editor of Inside FERC, have expended more than 1,000 hours in gathering and reviewing documents called for by these many subpoenas." (3d Foster Aff. ¶ 11; see 11/9/05 Oral Arg. Tr. a 50.)

  Intelligence Press

  Intelligence Press is a "small news publishing company," with a "total staff of only thirteen full-time employees," that specializes in reporting on the natural gas industry. (Dkt. No. 218: Steis Aff. ¶¶ 2, 9; Dkt. No. 316: Steis Supp. Aff. ¶ 7.) Intelligence Press "conducts confidential surveys of natural gas prices paid in the spot wholesale market" and, based on the information it receives from individual traders, publishes aggregate price indices. (Steis Aff. ¶ 2.) It looks at the high and low trades and the averages of all trades reported at approximately 90 to 100 trading points nationwide. (Id.) The indices are published daily and then aggregated for weekly publication. (Id.) "Monthly surveys of 30-day transactions are conducted during the last five business days of the month for the ensuing month and are published [by Intelligence Press] as `Bidweek' surveys." (Id.)

  Intelligence Press' affidavits state that the published indices encompass not only numerical data but editorial decisions such as which transactions should be assigned to which pricing points and which outlying transactions are unreliable and consequently excluded. (Steis Aff. ¶ 10; see also Steis Supp. Aff. ¶ 8.) Nevertheless, Intelligence Press' published methodology states that it uses a specific formula (using the "volumetric weighted average method") to calculate published prices. (Dkt. No. 315: Siegel Aff. Ex. 1 ("Price Methodology") at 3-4 & Ex. 2 ("Price Survey Methodology") at 4.) Intelligence Press' published methodology does not indicate that any editorial process is involved in producing the indices other than the exclusion of "outliers" (typically prices that "fall more than two . . . standard deviations outside the sample mean") from the price calculations. (Siegel Aff. Ex. 1 at 3 & Ex. 2 at 4.)

  Intelligence Press' published price indices "are widely used in the industry in contracts that set the prices to be paid for natural gas." (Steis Aff. ¶ 2.) According to Intelligence Press, in order to obtain the "proprietary information" of trade prices from energy companies, Intelligence Press pledges confidentiality — of the source and the information — which is the key to building the source base it has built over the years. (Steis Aff. ¶ 5.) Moreover, Intelligence Press asserts that its spreadsheets are confidential and the information therein proprietary. (Steis Supp. Aff. ¶ 11.) Intelligence Press' published methodology "pledges" confidentiality to its sources: "Intelligence Press will not reveal the source of any price information, nor will we reveal the parties involved in any transaction to any outside organization. . . . Anonymity of the survey participants will always be preserved." (Siegel Aff. Ex. 1 at 1 & Ex. 2 at 2.)

  According to Intelligence Press, "there are potentially more than 800 spreadsheets that would be responsive" to plaintiffs' current subpoena. (Steis Supp. Aff. ¶ 3.) Intelligence Press did not regularly preserve its spreadsheets. (Id. ¶ 5.) Intelligence Press believes that they "would have to search for old spreadsheets . . . stored on multiple and antiquated individual computers used by individual Intelligence Press employees at the time." (Id.; see also Steis Aff. ¶ 8.) For the daily published indices, Intelligence Press' general practice was to create a "temp" file to make all editorial changes and calculations. (Steis Supp. Aff. ¶ 9.) This file would be separate from the daily spreadsheets filled with the trade data. (Id.; see also 11/9/05 Oral Arg. Tr. at 56.) Each day's "temp" file overrode that of the previous day. (Steis Supp. Aff. ¶ 9.) For the monthly indices, the editors generally saved "multiple drafts" as they went through the editorial process but did not make a final version reflecting the published indices and sometimes may not have even documented their editorial changes. (Id. ¶¶ 8, 10.)

  In order to comply with the subpoena, Intelligence Press anticipates that it would "likely take many hundreds of hours or more" to locate the old spreadsheets, and even then, the search would not likely locate more than half of the spreadsheets used. (Id. ¶ 5.) Redacting the names of non-defendants alone could take one hour per spreadsheet. (Id. ¶ 6.) Intelligence Press believes that even with a massive search, it would only locate "perhaps about 5% of the total [spreadsheets] Plaintiffs seek." (Id.)

  The First Round of Subpoenas

  Plaintiffs served their original subpoenas duces tecum on the Publications on November 8, 2004 (Dkt. No. 230: Persky Aff. ¶ 6 & Ex. B; Dkt. No. 335: Kovner Aff. Ex. I) and revised subpoenas on December 7, 2004 (Persky Aff. ¶ 7 & Ex. C).*fn2 On December 8, 2004, not to be left out, certain defendants served a subpoena duces tecum on McGraw-Hill (but not Intelligence Press). (See Kovner Aff. ¶ 19 & Ex. J; see also 11/9/05 Oral Arg. Tr. at 58.) Defendants' subpoena was similar to plaintiffs' subpoenas in terms of the information sought, but broader in scope. (See Kovner Aff. ¶ 19 & Ex. J at 4: "Documents to be Produced"; see also 11/9/05 Oral Arg. Tr. at 69-72.)

  On November 22, 2004, the Publications filed a motion to quash plaintiffs' original subpoenas, asserting that: the documents and information sought were protected by the qualified journalist's privilege (Dkt. No. 215: Platts Br. at 7-17; Dkt. No. 219: Intelligence Press Br.); the subpoenas were unduly burdensome pursuant to Fed.R.Civ.P. Rule 45(c)(3)(A) (Platts Br. at 17-19; see Intelligence Press Br.); and plaintiffs could not show substantial need warranting revelation of confidential information and trade secrets under Rule 45(c)(3)(B) (Platts Br. at 19; see Intelligence Press Br.). On January 7, 2005, the Publications filed a motion to quash Defendants' subpoena, asserting similar grounds as they had in their motion to quash plaintiffs' subpoena. (Dkt. No. 238: Platts Br.) This Court's Prior Decision to Quash the 2004 Subpoenas Without Prejudice

  On January 14, 2005, after hearing oral argument on the motions, this Court granted the Publications' motions to quash plaintiffs' and defendants' subpoenas, without prejudice to the parties later serving new subpoenas. (Dkt. No. 312: Briskin Aff. Ex. 15: 1/14/05 Peck Conf. Tr. at 4-10, 13-17.) This Court ruled that in light of the qualified reporter's privilege, plaintiffs and defendants had to seek the information from "other available sources," including, at a minimum, seeking to obtain information "through discovery from the defendants and nonparties" that would serve to narrow any possible future production requests to the Publications. (Id. at 4-5, 14, 16-17.) The Court opined that:
[B]ecause of the qualified press privilege it seems to [this Court] that if you get the false trade dates and locations th[e]n the amount of the information that you are going to need from the publications will be considerably less and may obviate their confidential source problems as well.
(Id. at 5.)

  Plaintiffs' Subsequent Discovery From Defendants

  Plaintiffs' discovery of defendants has revealed that none of the defendants have a complete set of "reported trades" (i.e., what their traders reported to the Publications, as opposed to actual transactions) for the Class Period. (See, e.g., 11/9/05 Oral Arg. Tr. at 3-5; Dkt. No. 311: Pls. Br. at 2, 15-21; Dkt. No. 312: Briskin Aff. Exs. 5, 8, 9, 12, 13, 19, 20.)*fn3 Indeed, at oral argument, defense counsel conceded that the defendants did not have anywhere near a complete set of reported trade information. (11/9/05 Oral Arg. Tr. at 4-5; see also id. at 35: the Publications' counsel conceded that the Publications "accept that it is not complete.")

  Plaintiffs' Expert Michael Harris

  Plaintiffs' expert, Dr. Michael Harris, a senior economist with EconOne Research Inc. in Los Angeles, has explained that, in order to compile a damage analysis, he will create a set of "but-for" indices comprised of price indices "that would have been reported by the trade publications but-for the actions of the Defendants." (Dkt. No. 312: Briskin Aff. Ex. 2: Harris Aff. ¶¶ 1, 4.) As Dr. Harris explained, "[t]he most straightforward way to derive the but-for indices is to use the data relied on by the trade publications and `recalculate' or `reconstruct' the index by purging the false data submitted by the Defendants." (Harris Aff. ¶ 4.) This analysis, according to Dr. Harris, requires both the information produced by defendants and the data from the trade publications. (Id.) While plaintiffs may be able to obtain from the defendants some (but not all — see n. 3 above) of the information supplied to the Publications, only the publications know which trades were actually used — after elimination of outliers and anomalies and editorial decisions — to comprise the reported index. (Harris Aff. ¶ 5.) It is this reported trade data actually used by the Publications that plaintiffs seek. (Id. ¶¶ 5-6.)

  In terms of actually reconstructing the indices, Dr. Harris opines that the Publications' production of the spreadsheets containing the reported trades data would be useful because the archival dates attached to those spreadsheets would be able to be matched up to the date an index was published. (Dkt. No. 319: Briskin Reply Aff. Ex. 23: Harris Reply Aff. ¶¶ 4-5.) The spreadsheets "contain the underlying data from which the indices were constructed." (Harris Reply Aff. ¶ 4.) Thus, the spreadsheets can be used to identify the defendants' missing trade reports. (Id. ¶ 6.) According to Dr. Harris, Intelligence Press' concern that editorial changes were not reflected in the underlying data, "unless `editorial changes' involved arbitrarily adding data that does not exist, the use of temp files is not a problem" since Intelligence Press' published methodologies refer to editorial decisions only in the context of outliers, which could be pinpointed given the underlying data. (Id. ¶ 4.) Additionally, Dr. Harris reiterates that defendants have not produced a complete set of reported trade reports, either because no paper record was made or no paper record was preserved. (Harris Aff. ¶ 7; see also 11/9/05 Oral Arg. Tr. at 4-5, where defendants' counsel conceded as much.) Thus, obtaining the reported trade data used by ...


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