On January 22, 2010, FERC presiding Administrative Law Judge Carmen Cintron, issued an initial decision in its anti-manipulation case against Brian Hunter, finding that he engaged in fraudulent conduct and intended to lower the settlement price of natural gas futures contracts while he worked for Amaranth Advisors LLC (“Amaranth”) in violation of the Commission’s rule on anti-manipulation.

The case at issue before the Commission rises out of a Show Cause Order against Amaranth and two former Amaranth gas traders, including Hunter, for trading practices that took place over the course of three specific days in the beginning of 2006. Amaranth and one of the former gas traders reached a settlement on July 23, 2009 (see July 31, 2009 edition of the WER), which the Commission approved on August 12, 2009. As such, Hunter is the only remaining respondent in the case.

Hunter was the lead natural gas trader for Amaranth during the time in question in 2006. Commission Staff relied upon the expert testimony of Dr. Vincent Kaminski and his price impact model to show that Hunter’s trading caused price reduction in each of the time periods examined. Commission Staff presented evidence that during the months of February, March and April 2006, Hunter created artificial New York Mercantile Exchange (“NYMEX”) settlement prices by saturating the market with large amounts of futures and then selling at lower prices during “diminished liquidity.” Amaranth’s trades during the time period examined were significantly below market price.

Judge Cintron found that Hunter “intentionally manipulated the settlement price of the at-issue natural gas futures contracts.” Hunter acted knowingly in order to lower the NYMEX price so that his swap positions on other exchanges would improve. Additionally, Judge Cintron concluded that the evidence shows that Hunter knew that he could manipulate the natural gas futures market and that he devised “experiments” in which he needed to get the March futures to fall fast during the settlement period.

Judge Cintron also found that the NYMEX transactions are related to natural gas transactions since NYMEX natural gas futures contracts may become physical delivery requirements and the NYMEX settlement price affects physical basis contract prices. As such, Hunter is subject to the Commission’s anti-manipulation rule. Finally, Commission Staff stated that it would reserve its imposition of civil penalties. In assessing the penalty factors, Judge Cintron noted that “there is no question that market manipulation harms the market” and that the “manipulation that took place in this case diluted price discovery and affected hedging.”

Moving forward, Hunter can appeal the initial decision to the Commission through a brief on exceptions or the Commission can review the initial decision through its own motion.

A copy of the initial decision can be found on the Commission’s website, www.ferc.gov, under Docket No. IN07-26-004.