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U.S. Commodity Futures Trading Commission v. Amaranth Advisors

November 1, 2007


The opinion of the court was delivered by: Chin, D.J.


On July 25, 2007, the Commodity Futures Trading Commission (the "CFTC") brought this action against Amaranth Advisers, LLC and others (collectively, "Amaranth"), alleging price manipulation with respect to natural gas futures contracts and seeking injunctive relief and civil penalties. The very next day, July 26, 2007, the Federal Energy Regulatory Commission ("FERC") commenced an administrative enforcement proceeding against Amaranth, based essentially on the same transactions, for civil penalties and the disgorgement of profits. Hence, Amaranth is being pursued by two federal regulatory agencies in two separate proceedings in two different jurisdictions, based on the same alleged conduct.

Amaranth moves for a preliminary injunction to enjoin FERC -- which is not a party to the instant lawsuit -- from proceeding with its administrative action pending the outcome of this case. Amaranth contends that because this suit was filed by the CFTC, which has primary, if not exclusive, jurisdiction over the natural gas futures contracts market, the FERC administrative proceeding should be stayed to avoid inconsistent outcomes and to relieve Amaranth of the burden of defending itself in two different proceedings. Although I agree that it would be prudent for FERC to defer to this lawsuit, for the reasons that follow, I decline to order FERC to stay its administrative action. Amaranth's motion for a preliminary injunction is denied.


A. Facts

1. Federal Regulation of Natural Gas

Natural gas is sold in two different types of markets. In the financial markets, buyers and sellers trade standardized contracts for the delivery of natural gas on a future date at a prearranged price. These "futures contracts" are bought and sold on futures or commodity exchanges, such as the New York Mercantile Exchange ("NYMEX"). Natural gas itself is purchased, sold, and transferred in the physical market. According to a Senate report published in June 2007, although the trading of natural gas futures contracts "rarely result[s] in the physical delivery of natural gas," the price of natural gas in the financial markets is "linked to the price of natural gas in the physical market." Staff Rep. of S. Permanent Subcomm. on Investigations, Comm. on Homeland Sec. and Governmental Affairs, 110th Cong., Excessive Speculation in the Natural Gas Market 27 (2007) (FERC Ex. 2).

Two federal agencies regulate the trading of natural gas. The CFTC is responsible for overseeing commodity futures markets, including the natural gas futures market, under the Commodity Exchange Act, 7 U.S.C. § 1 et seq. (the "CEA"). FERC regulates the interstate transmission of electricity, natural gas, and oil pursuant to the Natural Gas Act, 15 U.S.C. § 717 et seq. (the "NGA").

In 2005, Congress enacted the Energy Policy Act, Pub. L. No. 109-58, 119 Stat. 594 (codified as amended in scattered sections of U.S.C.) ("EPAct 2005"), which "broadened FERC's authority over natural gas commodity markets to include, among other things, more authority to police natural gas markets, punish manipulation, and impose greater penalties for other types of violations." U.S. Gov't Accountability Office, Report to the Permanent Subcomm. on Investigations, Comm. on Homeland Security and Governmental Affairs, Roles of Federal and State Regulators in Overseeing Prices, GAO-06-968, at 2 (Sept. 2006) (citing EPAct 2005) (FERC Ex. 5). Recognizing that their jurisdictions may overlap, Congress required the CFTC and FERC to enter into a memorandum of understanding ("MOU"), "relating to information sharing, which shall include, among other things, provisions ensuring that information requests to markets within the respective jurisdiction of each agency are properly coordinated to minimize duplicative information requests." 15 U.S.C. § 717t-2(c)(1).

On October 12, 2005, the CFTC and FERC entered into a MOU, which acknowledged FERC's exclusive jurisdiction over the transportation and certain interstate sales of natural gas, and the CFTC's exclusive jurisdiction over accounts, agreements, and transactions involving futures contracts. At the same time, recognizing that their oversight and enforcement activities might overlap, the agencies agreed to "coordinate on a regular basis oversight, investigative, and enforcement activities of mutual interest" by sharing information. (MOU at 3) (FERC Ex. 3).

Also pursuant to EPAct 2005, FERC promulgated Rule 1c.1, known as the Anti-Manipulation Rule. The Rule prohibits "any entity, directly or indirectly, in connection with the purchase or sale of natural gas," from engaging in deception or fraud. 18 C.F.R. § 1c.1 (2007).

2. Amaranth

Defendants were hedge fund investment advisors who traded in the natural gas futures markets until approximately September 2006. (Def. Mem. 5). Brian Hunter, also a defendant, was a natural gas trader and portfolio manager at Amaranth between June 2004 and September 2006. (FERC Mem. 5). Defendants traded in the natural gas futures market, but did not buy or sell physical natural gas.

In April 2006, FERC observed anomalies in the prices of natural gas futures contracts on NYMEX, which prompted FERC and the CFTC to conduct non-public investigations of Amaranth. (FERC Mem. 11). The two agencies coordinated their investigations pursuant to the MOU. (See FERC Ex. 10).

B. Prior Proceedings

1. This Lawsuit

After a year-long investigation, the CFTC commenced this action on July 25, 2007, alleging that Amaranth and Hunter attempted to manipulate the prices of natural gas futures contracts for March 2006 and May 2006 during the last half hour that those contracts traded on NYMEX. (CFTC Mem. 1). The CFTC's complaint also alleged that Amaranth violated section 9(a)(4) of the CEA by making false statements to NYMEX regarding the May 2006 trades in question. (Id.). The CFTC seeks to enjoin defendants from trading commodity interests and from engaging in business ...

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