On February 12, 2009, in an unusual move, FERC rejected a settlement between the Commission’s Office of Enforcement Litigation Staff (“Staff”), the defunct hedge fund Amaranth Advisors LLC (“Amaranth”) and two of Amaranth’s traders, Brian Hunter and Matthew Donohoe. The parties submitted the settlement, which was not made public, to the Commission for approval on November 24, 2008.

In rejecting the settlement, FERC said it was “not in the public interest” and made clear that the fines proposed in the settlement were insufficient. The Commission “estimated that Amaranth profited far in excess of the proposed settlement amount as a direct result of alleged manipulation of [New York Mercantile Exchange Natural Gas] Futures Contract prices that recklessly affected the price of physical natural gas subject to Commission jurisdiction.”

In July 2007, FERC issued a Show Cause Order directing Amaranth to explain how its trading practices over three days in early 2006 had not violated the Commissions rules against market manipulation. Over the three days, the hedge fund is alleged to have made as much as $168 million in profits by engaging in massive selling in short intervals in ways that benefited Amaranth’s gas derivative positions. Amaranth’s alleged violations were recorded through instant messages between traders.

The Show Cause Order suggested that Amaranth should be fined $291 million. Because the settlement itself is not public information, it is unclear what penalty Amaranth had agreed to pay. Amaranth defended its trading practices by stating the traders were conducting valid speculative trades. In a concurrent action, Amaranth has appealed FERC’s jurisdiction in the matter, arguing that the case is properly in the jurisdiction of the Commodity Futures Trading Commission (“CFTC”), a proposition supported by the CFTC.

FERC, in rejecting the settlement, set the proceeding for hearing before an Administrative Law Judge to determine if Amaranth and its traders violated the Commission’s anti-manipulation regulations.

The rejection of a settlement agreed to by its own staff marks a change from past practices at the Commission. Generally, FERC has preferred to settle most complex enforcement cases. However, this order is one of the first enforcement orders to have issued since Jon Wellinghoff was appointed Acting FERC Chairman. The settlement rejection may signal a more stringent or at least different enforcement regime under the Commission’s new Democratic leadership.

The opinion is available at www.ferc.gov under the docket number IN07-26-000.