J.P. Morgan Did Not 'Aid And Abet' Amaranth’s Manipulation – Second Circuit Articulates And Applies The Standard For Aiding And Abetting Liability Under The Commodity Exchange Act

In evaluating claims against J.P. Morgan1 in its role as Amaranth Advisors LLC‟s ("Amaranth") futures commission merchant ("FCM") and clearing broker, the Second Circuit followed Learned Hand‟s 1938 articulation "that aiding and abetting requires the defendant to in some sort associate himself with the venture, that he participate in it as in something that he wishes to bring about, that he seek by his action to make it succeed.‟"2 In evaluating allegations of two manipulative schemes - Amaranth‟s buildup of large NYMEX positions and "slamming the close" - the Second Circuit affirmed that allegations of J.P. Morgan‟s support for Amaranth‟s manipulation fell short of such aiding and abetting liability.

Introduction

On September 23, 2013, the Second Circuit affirmed the Southern District of New York‟s dismissal of claims by traders who purchased and sold NYMEX natural gas futures contracts in 2006.3 The traders claimed that J.P. Morgan aided and abetted Amaranth‟s manipulation of natural gas futures by providing Amaranth with services through J.P. Futures in its capacity as an FCM and clearing broker for Amaranth. The District Court dismissed the traders‟ claim. The Second Circuit upheld the dismissal on grounds that the allegations that J.P. Morgan knew Amaranth intended to manipulate the price of natural gas futures and intended to assist Amaranth in that regard fail to constitute an aiding and abetting claim under the Commodity Exchange Act ("CEA").

For the first time, the Second Circuit evaluated "aiding and abetting" liability under the CEA. Consistent with its precedents in the securities and criminal contexts, as well as that of other circuits, the Second Circuit stated that aiding and abetting liability under the CEA requires that a defendant must know that a party intends to engage in manipulation and must intend to assist the party in that regard. In applying the standard, the Second Circuit noted that a plaintiff must allege "that the defendant associated himself with a violation of the Act, participated in it as something that he wished to bring about, and sought by his actions to make the violation succeed."4 The Second Circuit held that a clearing firm‟s provision of routine clearing services and its knowledge that certain trading activity is "highly suggestive" of manipulation are insufficient to support an aiding and abetting claim under the CEA.

Background

Amaranth was a hedge fund that collapsed in late 2006. Amaranth...