FERC Issues Order Denying Hunter Rehearing Request On Alleged Market Manipulation

On November 18, 2011, the Federal Energy Regulatory Commission (FERC) denied former Amaranth Advisors LLC trader Brian Hunter's (Hunter) rehearing request of FERC's Order Affirming Initial Decision and Ordering Payment of Civil Penalty issued on April 21, 2011.1 In the Affirming Order, FERC found that the record supported the administrative law judge's (ALJ) determination that "Hunter's trading practices [in the natural gas futures market during the settlement periods] on expiration days were fraudulent or deceptive, undertaken with the requisite scienter, and carried out in connection with FERC-jurisdictional natural gas transactions" in violation of FERC's Anti-Manipulation Rule and directed Hunter to pay a $30 million civil penalty.2 Hunter has sixty days to appeal FERC's decision to the U.S. Court of Appeals. A court decision regarding such an appeal would provide needed guidance to market participants regarding FERC's interpretation of its authority under the Anti-Manipulation Rule and related precedent.

Rejecting all of Hunter's arguments and reaffirming its previous decisions, the FERC's Rehearing Order provides additional insight regarding FERC's view of its broad authority under the Anti- Manipulation Rule and what constitutes manipulative intent, artificial price and recklessness. For example, FERC reaffirms its:

rejection of the premise that open market trading cannot constitute manipulation in the absence of some other deceptive conduct. view that demonstration of an artificial price would be a sufficient, but not a necessary, basis for finding manipulation and that manipulative trading of natural gas futures contracts can satisfy the "in connection with" FERC-jurisdictional transactions nexus requirement. determinations regarding recklessness, the burden of proof, and violation and penalty calculations. I. Background

The Rehearing Order arises out of an enforcement action initiated in 2007 that alleged that Amaranth and two of its traders manipulated the natural gas futures market, which directly impacted the price of FERC-jurisdictional natural gas transactions.3 The alleged manipulative scheme involved the sale of large amounts of natural gas futures contracts (NG Futures Contracts) during the New York Mercantile Exchange (NYMEX) settlement periods in February, March, and April 2006. According to the Rehearing Order, Hunter accumulated such NG Futures Contracts and subsequently sold the contracts during the final 30 minutes of trading (the settlement period) on the expiration days, to benefit certain large swap positions that increased in value as the settlement prices declined.4

In August 2009, Amaranth and trader Matthew Donohoe settled with FERC and the U.S. Commodity Futures Trading Commission (CFTC) for $7.5 million, but Hunter did not participate in the settlement. On January 22, 2010, a FERC ALJ issued an initial decision concluding that Hunter violated FERC's Anti-Manipulation Rule by intentionally manipulating the settlement price of certain natural gas futures contracts in order to lower the NYMEX settlement price and thus benefit Hunter's swap positions.5

2. Rehearing Order

   1. Subject Matter Jurisdiction

      Relying on its previous orders in this proceeding, FERC rejects Hunter's prior arguments, raised again here by Hunter to preserve them for appeal, that section 4A of the natural gas act (NGA) (1) does not authorize FERC to police manipulation occurring in the futures market, (2) does not permit enforcement actions against natural persons, and (3) vests the federal district courts with exclusive jurisdiction to adjudicate alleged violations.6

   2. The Elements of FERC's Anti-Manipulation Rule

      FERC responded to Hunter's contentions that (1) so-called "open market" manipulation requires some showing of deceptive conduct, apart from trading with manipulative intent, (2)...