Federal energy regulators who fined a trader $30 million for allegedly manipulating natural gas markets acted outside of the scope of the commission's authority, a federal appeals court in Washington said today.
A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled unanimously against the Federal Energy Regulatory Commission in a turf dispute with the Commodity Futures Trading Commission over which agency has jurisdiction to police allegations of manipulation in natural gas futures contracts.
In the middle of the tiff: Brian Hunter, the lead natural gas trader at the hedge fund Amaranth who executed deals on contracts on the CFTC-regulated New York Mercantile Exchange. Certain trades in 2006, the appeals court said, caught the attention of federal regulators. Amaranth was a major player in the natural gas market before the company's collapse in 2006.
The CFTC brought a civil enforcement action against Hunter in 2007. The federal energy commission, the next day, filed an administrative case against Hunter. FERC ruled against Hunter and fined him $30 million. In the appeal in the D.C. Circuit, challenging the FERC action, the commodities commission intervened in support of Hunter, represented by Kobre & Kim name partner Michael Kim.
"The FERC unjustly vilified Mr. Hunter for years, but in fact it was the FERC which had acted outside the law," Kim said in an email. (A FERC representative declined to comment on the appellate court ruling.)
FERC's lawyers, including Robert Kennedy and Robert Solomon, the agency's solicitor, argued in the D.C. Circuit that the energy commission had an enforcement role. FERC's argument, as the appeals court put it today: "manipulation in one market that directly or indirectly affects the other market" means both agencies have a role to play.
Kennedy said in court papers that manipulation of natural gas futures contracts directly affected the price of natural gas transactions, which is under FERC jurisdiction. Congress, Kennedy said, in 2005 expanded the energy commission's authority following the California energy crisis of the early 2000s.
Mary Connelly, assistant general counsel at the CFTC, said in court papers that the energy commission "errs by treating this case as a commonplace example of two regulatory agencies sharing overlapping authority."
The appeals court, in an opinion written by Judge David Tatel, said FERC's "contention that the CFTC may exclusively regulate only day-to-day trading activities—not an overarching scheme like manipulation—finds no support" in the Commodity Exchange Act.
FERC, the appeals court said, "is free to prohibit manipulative trading in markets outside the CFTC's exclusive jurisdiction."
The Greenwich, Conn.-based Amaranth in August 2009 settled with the CFTC, over charges of attempted manipulation of natural gas futures contracts, for $7.5 million. Amaranth once had natural gas futures positions valued at more than $5 billion, the CFTC said in court papers.