United States District Court, S.D. New York
ALAN HARRY, LEVANTE CAPITAL, LLC, PUBLIC UTILITY DISTRICT NO. 1 OF CLARK COUNTY, WASHINGTON D/B/A CLARK PUBLIC UTILITIES, and C&C TRADING, LLC, on behalf of themselves and all others similarly situated, Plaintiffs,
TOTAL GAS & POWER NORTH AMERICA, INC., TOTAL, S.A., TOTAL GAS & POWER LIMITED, and JOHN DOES 1-50, Defendants.
OPINION AND ORDER
G. Koeltl, United States District Judge.
a putative class action under the Commodity Exchange Act and
the Sherman and Clayton Acts alleging manipulation of prices
for physical and financial natural gas contracts. Alan Harry,
Levante Capital, LLC, Public Utilities District No. 1 of
Clark County, Washington (d/b/a Clark Public Utilities), and
C&C Trading, LLC (the “plaintiffs”) engaged
in transactions in the physical and financial natural gas
markets, including on the New York Mercantile Exchange
(“NYMEX”) and the Intercontinental Exchange
(“ICE”). The plaintiffs allege that Total Gas
& Power North America, Inc. (“TGPNA”), Total,
S.A. (“Total”), and Total Gas & Power Limited
(“TGPL”) (the “defendants”)
manipulated the price of physical natural gas at four
regional hubs in the southwestern United States between 2009
and 2012. They further allege that such manipulation caused
economic harm to the plaintiffs' physical and financial
natural gas contracts -- which contracts were tied to natural
gas prices at a separate hub, the Henry Hub in Louisiana --
on the theory that manipulation at the regional hubs
inevitably impacts prices at the Henry Hub.
defendants now move to dismiss the consolidated amended
complaint (“CAC”) for lack of Article III
standing and failure to state a claim under Federal Rule of
Civil Procedure 12(b)(6). Total and TGPL (“the foreign
defendants”) also move to dismiss the CAC under Rule
12(b)(2) for lack of personal jurisdiction. This Court has
subject matter jurisdiction pursuant to 7 U.S.C. § 25,
15 U.S.C. § 2, 15 U.S.C. § 15, and 28 U.S.C.
§§ 1331 and 1337.
reasons explained below, the motions to dismiss for failure
to state a claim are granted.
deciding a motion to dismiss pursuant to Rule 12(b)(6), the
allegations in the complaint are accepted as true, and all
reasonable inferences must be drawn in the plaintiff's
favor. McCarthy v. Dun & Bradstreet Corp., 482
F.3d 184, 191 (2d Cir. 2007). The Court's function on a
motion to dismiss is “not to weigh the evidence that
might be presented at a trial but merely to determine whether
the complaint itself is legally sufficient.”
Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.
1985). A complaint should not be dismissed if the plaintiff
has stated “enough facts to state a claim to relief
that is plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 57 (2007). “A claim has
facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While
factual allegations should be construed in the light most
favorable to the plaintiff, “the tenet that a court
must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions.”
Id.; see also In re Lions Gate Entm't Corp.
Sec. Litig., 165 F.Supp.3d 1, 5-6 (S.D.N.Y. 2016).
presented with a motion to dismiss pursuant to Rule 12(b)(6),
the Court may consider documents that are referenced in the
complaint, documents that the plaintiff relied on in bringing
suit and that are either in the plaintiff's possession or
that the plaintiff knew of when bringing suit, or matters of
which judicial notice may be taken. See Chambers v. Time
Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see
also Plumbers & Pipefitters Nat'l Pension Fund v.
Orthofix Int'l N.V., 89 F.Supp.3d 602, 607-08
following facts alleged in the CAC are accepted as true for
purposes of the defendants' motions to dismiss.
North American natural gas market consists of a physical
market and a financial market. On the physical market, actual
natural gas is produced, stored, bought, sold, and consumed.
See CAC ¶ 37. On the financial market,
intangible financial products derived from physical natural
gas are traded over-the-counter or on public markets. See
id. Part of the physical natural gas market consists of
“on the spot” sales in which a buyer agrees to
pay a negotiated price for natural gas to be delivered by the
seller at a specified delivery point the following day.
Id. ¶ 43. “Spot” prices reflect
daily supply and demand balances and are tied to individual
regional hubs -- that is, to the “specific points where
pipeline interconnections allow the transfer of gas from one
pipeline to another” -- with prices “varying with
the demand characteristics of the market, as well as the
region's access to different supply basins, pipelines and
storage facilities.” Id. ¶¶ 3, 39,
44. One of those hubs -- the Henry Hub, located in Louisiana
-- “has become the dominant benchmark point in the
physical natural gas market because of its strategic
location” and the “number of pipeline connections
to the East Coast and Midwest consumption centers”
located there. Id. ¶ 40.
publications, including Platts Gas Daily
(“Platts”), Natural Gas Intelligence
(“NGI”), and Natural Gas Week, “survey the
market for daily transaction prices” at each delivery
hub, which are used to “determine and publish a daily
index” made available prior to the next business day.
Id. ¶ 44. Physical natural gas transactions
call for delivery at a specified delivery hub and are based
on either “fixed prices” --which are negotiated
at the time of the transaction -- or “index prices,
” which are determined each month by trading
information reported to Platts and NGI. Id.
¶¶ 5-6. Monthly index prices are based on the
volume-weighted average price of all reported fixed price
physical natural gas transactions which occur during a
monthly settlement period -- the last five business days of
each month -- known as “bidweek.” Id.
¶ 6. In other words, fixed priced trades made during a
bidweek produce the monthly index price at a given hub.
there are monthly index settlement prices for physical
natural gas at each delivery hub, including the Henry Hub.
Those monthly index prices form the basis of and “are
factored directly into the price of natural gas financial
products, ” including, as relevant here, natural gas
futures contracts traded on the NYMEX. Id.
¶¶ 6, 49. A futures contract “is an agreement
for the purchase or sale of a particular commodity for
delivery on a fixed date in a future month.”
Id. ¶ 51. A futures contract both
“minimizes exposure to price risk by locking in a price
to pay, or receive” natural gas delivery, and also
enables traders to speculate on natural gas prices.
Id. ¶ 52. “The prices of physical and
futures natural gas contracts are inextricably linked”
such that, as expectations change regarding what the price of
natural gas will be at a particular hub on the fixed delivery
date, the value of the futures contract for delivery at that
hub will likewise change. Id. ¶ 50. Although
futures prices can exert influence on physical prices over
long horizons, short-term fluctuations in the physical
“spot” market at a particular hub can cause
futures contracts with upcoming delivery dates to
“fluctuate significantly and rapidly.”
center of this case is a specific kind of natural gas futures
contract -- a NYMEX natural gas futures contract. Each such
contract is a contract for 10, 000 million British thermal
units of natural gas to be delivered to the Henry Hub.
Id. ¶¶ 3, 57. Prices for NYMEX natural gas
futures contracts are “based on physical delivery of
natural gas at the Henry Hub, ” such that the price for
natural gas delivered to that hub forms the basis of the
“settlement price” of the futures contract.
Id. ¶¶ 57-59. “The differential
value between [physical] natural gas prices at one delivery
hub compared to the natural gas futures prices traded on the
[NYMEX] is known as ‘basis.'” Id.
¶ 3. In other words, natural gas futures contracts
traded on NYMEX derive their prices -- and, accordingly,
their value -- from the spot price of natural gas at the
Henry Hub, and Henry Hub prices have “become the
standard basis reference point” for natural gas prices
at other hubs throughout the United States and Canada.
Id. ¶ 3; see id. ¶ 39. The vast
majority of NYMEX natural gas futures contracts do not result
in the delivery of physical natural gas at the Henry Hub;
rather, they “are liquidated or cancelled by purchasing
or selling a covering futures position prior to the delivery
date.” Id. ¶ 56.
Hub prices are used as a standardized reference point within
the natural gas market because “Henry Hub is the most
liquid and active of the physical and futures markets.”
Id. ¶ 3. Thus, natural gas prices at other
regional hubs “are often quoted as a
‘differential' between prices at the Henry Hub and
[that] regional hub.” Id. Physical natural gas
at individual regional hubs “may trade either at prices
that are higher or lower than Henry Hub, depending on
regional market conditions and available transmission
capacity between hubs.” Id. ¶ 45. Because
trading volume at certain regional hubs is so much smaller
than at Henry Hub, it is relatively easier to “engage
in market manipulation” at those hubs, that is, to
influence physical natural gas prices at those hubs.
Id. ¶ 42. The CAC alleges that market
deregulation and technological innovations have caused
regional physical natural gas markets to become
co-integrated, such that “price changes in regional
hubs impact prices at the Henry Hub.” Id.
addition to futures contracts, there are a number of other
financial products linked to natural gas, including options
contracts and swap contracts. See CAC ¶¶
61, 68. Options on futures contracts provide the purchaser
with the option (but not the obligation) to “purchase a
futures contract for a specified future month at a
predetermined strike price.” Id. ¶ 61.
Swap contracts obligate two parties to “swap”
different cash flow streams, each of which is determined by
reference to a different price or instrument. See
id. ¶¶ 68-71. These and other natural gas
derivatives are available to trade on NYMEX and on ICE, which
provides an electronic trading platform. See Id .
¶¶ 55-71. The CAC alleges that “price changes
in regional hubs impact prices at the Henry Hub, ” and,
as a result, affect the price of any financial derivative
instrument whose price is tied to the price of natural gas at
the Henry Hub. Id. ¶ 42.
Federal Energy Regulatory Commission (“FERC”) and
Commodity Futures Trading Commission (“CFTC”) --
the federal agencies that regulate the natural gas and
futures and options markets, respectively -- began
investigations into suspected manipulation by TGPNA of
natural gas monthly index settlement prices at four regional
delivery hubs in Texas, New Mexico, and California. CAC
¶¶ 72-73. In December 2015, TGPNA entered a $3.6
million settlement with the CFTC (“CFTC Order” or
“Order”). See id. ¶ 73; Decl. of
Rachel Mondl in Supp. of Mot., Ex. B (CFTC Order). The CFTC
Order sets out the regulators' findings, which TGPNA
neither admitted nor denied. CFTC Order p. 1. The Order
alleges that during bidweeks for September and October 2011,
and March and April 2012, TGPNA “attempted to
manipulate monthly index settlement prices of natural
gas” at four hubs, including El Paso Natural Gas Co.,
Permian Basin (“Permian”), El Paso San Juan Basin
(“San Juan”), Southern California Gas Co.
(“SoCal”), and West Texas, Waha
(“Waha”) (the “relevant hubs” or
“regional hubs”). CFTC Order p. 2.
Order alleges that TGPNA engaged in substantial fixed price
trading of physical natural gas during particular bidweeks at
the relevant hubs in an attempt to affect the monthly index
settlement prices in a way that would benefit TGPNA's
related financial or “paper” positions, namely,
their positions on certain swap contracts. CFTC Order p. 2.
In particular, the Order alleges that TGPNA made trades
during the September 2011 bidweek at SoCal and Permian that
were meant to manipulate monthly index settlement prices at
those hubs to benefit TGPNA's financial position on
certain derivatives contracts by “increasing the spread
between the monthly index settlement prices at SoCal and
Permian, ” that is, by increasing the difference in
prices between the two hubs. CFTC Order pp. 5-6. The Order
alleges that in October 2011, TGPNA made trades at San Juan
intended to manipulate the monthly index settlement price at
that hub in order to benefit TGPNA's short position
“by narrowing the spread between the NYMEX settlement
price and the monthly index price at San Juan.” CFTC
Order at 6. The Order also alleges that in March 2012, TGPNA
attempted to manipulate the monthly index settlement price at
SoCal in order to benefit TGPNA's related short position
by “narrowing the spread between the NYMEX settlement
price and the monthly index price at SoCal.” CFTC Order
at 6. Finally, during the April 2012 bidweek, TGPNA allegedly
attempted to manipulate the monthly index settlement prices
at SoCal and San Juan in order to benefit its related spread
positions at those locations by “increasing the spread
between the monthly index settlement price at SoCal and San
Juan.” CFTC Order p. 7. The Order concludes that TGPNA
“specifically intended to execute enough fixed-price
trades during [bidweek] to affect the monthly index
settlement prices of natural gas in the September 2011,
October 2011, March 2012, and April 2012 [bidweeks] at the
relevant hubs.” CFTC Order p. 8.
FERC also conducted a lengthy investigation into TGPNA's
fixed price trading at the regional hubs, which culminated in
April 2016 in an Order to Show Cause and Notice of Proposed
Penalty (“Order to Show Cause”) and accompanying
Enforcement Staff Report and Recommendation (“FERC
R&R”). The FERC R&R alleges that TGPNA and two
individual employees working at the “West Desk”
violated Section 4A of the Natural Gas Act and the FERC
anti-manipulation rule, 18 C.F.R. § 1c.1, by devising
and engaging in “uneconomic trades of monthly physical
fixed price natural gas during bidweek at the [four relevant
hubs], and then report[ing] those trades to publications for
inclusion in monthly index prices” in order to affect
those index prices and “related positions whose value
was tied to those same indexes.” Mondl Decl. Ex. C
(Order to Show Cause) p.
alleged in the FERC R&R:
This scheme operated in two phases. First, before
and during bidweek, the West Desk accumulated large positions
of physical and financial natural gas products exposed to
monthly index prices [at the relevant hubs], giving it the
motivation and ability to manipulate prices. Second,
the West Desk traded a dominant market share of monthly
physical fixed price natural gas during bidweek [at those
hubs] to inflate or suppress the volume-weighted average
price and then reported these trades for inclusion in the
calculation of the published monthly index prices to which it
Mondl Decl. Ex. C, Appendix A (FERC R&R) pp. 1-2. In
other words, TGPNA allegedly traded fixed price physical
natural gas at the regional hubs in a strategic attempt to
affect the monthly index prices at those hubs in ways that
would increase the value of its derivative contracts, which
were tied at least in part to those index prices. The R&R
alleges that such attempted manipulation occurred on at least
38 occasions throughout multiple bidweeks across the four
relevant hubs between 2009 and 2012. FERC R&R p. 102.
Order to Show Cause seeks over $9 million in alleged unjust
profits and over $213, 000, 000 in civil penalties. FERC
R&R pp. 2-3, 102; Order to Show Cause p. 1. The FERC
proceedings remain pending.
great bulk of the substantive allegations made in the CAC are
lifted directly from those included in the CFTC Order and the
FERC R&R. See Mondl Decl. Ex. A (comparing the
three documents). But the CAC also includes allegations not
made by the CFTC or FERC, including that the defendants'
manipulation “was directed [not only] at the relevant
hubs, but also at Henry Hub.” CAC ¶ 251;
see CFTC Order p. 11. The CAC also includes
allegations that the plaintiffs maintain are supported by a
statistical analysis performed by a “Plaintiffs'
Consulting Expert.” CAC ¶ 7. The
plaintiffs' expert analyzed over 36 million NYMEX natural
gas futures transactions and calculated daily average prices
for transactions conducted between June 2009 and June 2012.
Id. ¶ 255. The expert compared those average
prices to spot price data made available by NGI for the Henry
Hub, as well as the San Juan, SoCal, and Permian hubs.
Id. ¶ 255. The CAC alleges that the pricing
patterns identified by the plaintiffs' expert are
“consistent with” manipulation that
“affected prices for Natural Gas spot and futures
prices” beyond those tied to the regional hubs.
Id. ¶ 297.
plaintiffs seek to represent a class of individuals who,
between June 1, 2009 and June 30, 2012 (“the Class
Period”), purchased and/or sold physical natural gas
contracts or derivative financial natural gas contracts
either over-the-counter or on an electronic platform or other
exchange at prices “made artificial” by the
defendants' alleged manipulation. CAC ¶
The CAC alleges that plaintiff Alan Harry “entered into
many hundreds of transactions in natural gas futures and
financial contracts throughout the Class Period, ”
including “natural gas futures, options and swaps on
NYMEX and ICE” during several bidweeks throughout the
Class Period. Id. ¶ 18. Levante Capital is
alleged to have made “more than one hundred
transactions in natural gas futures and financial contracts
during the Class Period, ” including “more than
one hundred transactions in NYMEX and ICE futures, options,
spreads and swaps.” Id. ¶ 20. Clark
Public Utilities allegedly made more than one hundred
over-the-counter transactions of “physical and
financial natural gas contracts during the Class
Period.” Id. ¶ 21. Finally, the CAC
alleges that plaintiff C&C Trading “made
transactions in natural gas financial products on U.S.
exchanges, ” including during at least one of the 38
bidweeks identified in the FERC R&R. Id. ¶
22. In sum, the CAC alleges that the named plaintiffs
collectively traded during “all of the  specific
bidweeks” identified in ...