Amaranth, Hunter Hit With Market Manipulation Charges

Jul 25 2007 | 12:03pm ET

Be careful what you wish for, Brian Hunter: Just a day after attorneys for the disgraced former Amaranth Advisors energy trader told a federal court in Washington, D.C. that one regulator was infringing upon the authority of another in its plan to bring civil charges against him, the other regulator charged Hunter with market manipulation and lying to investigators.

This morning, the Commodity Futures Trading Commission filed a civil enforcement action against Hunter and Amaranth Advisors, the once-high-flying Greenwich, Conn.-based hedge fund that lost some $6 billion on bad natural gas trades executed by Hunter, in New York federal court. The complaint alleges that Amaranth and Hunter conspired to manipulate natural gas futures prices, and then sought to cover up the scheme.

The CFTC alleges that Amaranth, on two occasions, sought to exploit the New York Mercantile Exchange’s system for settling prices on natural gas contracts, which is based on the volume-weighted averages of trades executed during the “closing range,” between 2:00 p.m. and 2:30 p.m. on the last day of trading for each contract. In both cases, Feb. 24, 2006, the expiry day for the March contract, and April 26, 2006, the expiry day for the May contract, Amaranth bought up more than 3,000 NYMEX natural gas contracts prior to the closing range, and then ordered them sold during the closing range in an effort to drive down prices. Those lower prices were desired, the CFTC alleges, because Amaranth simultaneously maintained huge short positions, primarily on the Intercontinental Exchange.

Further, according to the CFTC, when, in August, the NYMEX questioned Amaranth about the April trades, Amaranth’s response “contained a number of false and misleading statements, including statements regarding the manner in which Amaranth described its trading.”

“This case demonstrates the Commission’s ongoing vigilance to punish those who attempt to compromise the integrity of the futures markets,” Walter Lukken, acting chairman of the regulator, said. “The CFTC continues in its unwavering determination to ensure that the futures markets operate in an open and competitive manner free from price distortions.”

Hunter and his lawyers may now regret the vigorous defense of the CFTC’s right to bring such charges they put on in court yesterday and in court filings on Monday. During those proceedings, Hunter’s attorneys argued that the Federal Energy Regulatory Commission did not have the authority to bring civil charges against him, as it had said it intended to do. The CFTC and FERC collaborated on the Amaranth investigation.

“FERC is not [emphasis in original] statutorily authorized to regulate futures markets for energy commodities, which include natural gas futures contracts,” Hunter’s lawyers wrote in their complaint against FERC. “FERC’s assertion of jurisdiction to bring an enforcement action is an impermissible encroachment on the exclusive statutory jurisdiction of the CFTC, and is beyond the scope of FERC’s statutory authority to regulate wholesale energy markets.”

Hunter, who has since formed a new hedge fund, Solengo Capital Advisors, asked the court for a temporary injunction forbidding FERC from issuing an order to show cause and notice of proposed penalties.

In his personal declaration to the Washington court, Hunter writes, “If FERC files the unlawful action it contemplates against me, Solengo and I will suffer irreparable injury,” both by impugning his (already not-exactly-sterling) reputation and potentially preventing Solengo from registering as an investment advisor in Alberta and the Cayman Islands. “As the majority owner of Solengo, any losses suffered by Solengo, including the closing of the business, have a direct impact on me, in the form of forgone unquantifiable income from potential profit earned and fees assessed by Solengo and the loss of my new business.”

“The funds I have advanced to develop Solengo have been substantial,” he continues. “If Solengo is unable to operate due to the OSC [order to show cause], this substantial investment will be lost.”

Hunter does not indicate how CFTC charges would impact his business, but several nuggets from the CFTC complaints, along with Hunter’s losing the substantial investments of many an Amaranth client, cannot be especially helpful to the new shop. Solengo declined to comment on the CFTC action.

According to the complaint, Hunter told an Amaranth natural gas trader in an instant message on Feb. 23 to “make sure we have lots of futures to sell MoC [market on close] tomorrow.” During the expiry day, he allegedly told another Amaranth trader that he needed the March contract “to get smashed on settle then day is done.” He later testified that “smashed” means “the prices fell really, really quickly.” Just before the closing range—prior to which Amaranth’s NYMEX position had gone from more than 1,700 contracts short to more than 3,000 contracts long—Hunter told a trader at another firm that it was a “bit of an expiriment [sic] mainly.” And when all was said and done, he told another Amaranth trader that “today came together quite nicely.”

It must have, because according to the CFTC, two months later he was at it again. A few days before the April 26 expiry day, Amaranth reversed its month-long short position in the NYMEX contract, continuing to build a long position until the closing range, by which time it again was long in excess of 3,000 May contracts. Simultaneously, it had a 19,000 contract short position. But Hunter, the complaint alleges, feared another hedge fund was going to be a big buyer during the closing range, which might have hurt his short positions. Amaranth placed a sell order for 2,000 contracts with just eight minutes to go during the closing range, an order so large and so late that its broker could not completely execute it before the closing range ended. During the closing range, according to the complaint, Hunter told Amaranth employees that he was waiting to sell more than 3,000 natural gas contracts.

Unfortunately for Hunter and Amaranth, the NYMEX caught on the second time. The exchange’s compliance department sent the hedge fund a letter on Aug. 2, 2006, informing Amaranth that is was probing the April 26 activity. The letter noted the unusual nature of the trading: Ninety-nine percent of Amaranth’s contracts were sold in the final four minutes of the closing range, with a whopping 78% sold in the closing minute.

The CFTC goes on to accuse Amaranth of lying in its Aug. 15 response to the NYMEX.

Solengo, with offices in Calgary, Alberta, and Greenwich, was founded by Hunter and three other ex-Amaranthers. Its marketing material leaked to the press in March, leading to a full-court press by Solengo to keep the “confidential” brochure off the Web, including threatening phone calls (to this media outlet as well as others) and a lawsuit against the Wall Street gossip blog DealBreaker. The brochure, coming as it did from a firm owned by a guy who lost $6 billion in one fell swoop, featured the word “risk” no fewer than 23 times, according to blogger Greg Newton, who conscientiously counted them.

For its part, Amaranth is still winding down operations. Last month, the going-out-of-business firm responded to what at the time was the only lawsuit it faced, from investor San Diego County Employees Retirement Association, accusing the pension fund of sour grapes and warning other investors that lawsuits will both deplete what little is left in the Amaranth kitty and delay the firm’s efforts to return it to clients.


CFTC enforcement action
Brian Hunter's complaint against FERC
Brian Hunter's declaration



Solengo Can’t Keep 'Confidential' Brochure Off The Web
Solengo Plans To Keep Hunter On Short Leash
Amaranth Hits Back At Pension Adversary
Amaranth Hit For Naked Shorts

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