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Harry v. Total Gas & Power North America, Inc.

United States District Court, S.D. New York

March 25, 2017

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,
v.
TOTAL GAS & POWER NORTH AMERICA, INC., TOTAL, S.A., TOTAL GAS & POWER LIMITED, and JOHN DOES 1-50, Defendants.

          OPINION AND ORDER

          John G. Koeltl, United States District Judge.

         This is 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.

         All 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.

         For the reasons explained below, the motions to dismiss for failure to state a claim are granted.

         I.

         In 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).

         When 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 (S.D.N.Y. 2015).

         II.

         The following facts alleged in the CAC are accepted as true for purposes of the defendants' motions to dismiss.

         A.

         The 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.

         Several 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.

         Accordingly, 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.” Id.

         At the 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.

         Henry 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.

         In 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.

         B.

         The 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.

         The 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.

         The 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.

         2. As 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 was exposed.

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.

         The 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.

         The 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.[1] 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.[2] 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.

         C.

         The 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 ¶ 302.[3] 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 [38] specific bidweeks” identified in ...


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