Commission Orders $30 Million Fine Against Ex-Amaranth Trader for Market-Manipulation

(April 23, 2011) — The Federal Energy Regulatory Commission (FERC), which oversees trading in gas and electricity, has fined ex-trader Brian Hunter $30 million for allegedly manipulating the natural-gas futures market, leading to the collapse of the hedge fund he worked for.

The case brings to light heightened efforts to investigate accusations of profiteering and manipulation in the oil and gas markets and comes as a warning to commodities traders, who have faced rising scrutiny as prices of raw materials have soared.

The US agency ordered the former Amaranth Advisors LLC trader to pay the $30 million civil penalty — the largest levied by the FERC since Congress expanded the regulator’s powers in 2005 — for violating the Commission’s anti-manipulation rules. The FERC alleged that Hunter manipulated the price of contracts on the New York Mercantile Exchange in 2006 while raising the value of financial derivatives, leading to $6 billion in losses.

Hunter, who rose in prominence at hedge fund Amaranth Advisors before it collapsed in 2006 after a series of bad bets on the future price of natural gas, has less than 30 days to pay the penalty to the United States Treasury, the FERC said in a statement.

The penalty stems from charges in 2007 against Connecticut-based Amaranth, Hunter, and fellow trader Matthew Donohoe. While Amaranth and Donohoe settled in 2009 for a combined $7.5 million, Hunter was uninvolved in that agreement and litigation against him continued. Last year, a FERC administrative law judge ruled that Hunter violated the anti-manipulation rule. In setting the penalty at $30 million, the FERC concluded in a statement that the amount is “appropriate and sufficient to discourage Hunter and others from engaging in market manipulation.” Meanwhile, the Commodity Futures Trading Commission (CFTC), which has jurisdiction over the financial derivatives used to bet on commodities, has a separate civil suit against Hunter.

Michael Kim, an attorney at Kobre & Kim LLP in New York who represents Hunter, responded to the fine in a e-mailed statement to Bloomberg: “The FERC has no jurisdiction according to Congress and the CFTC; therefore this means nothing.” Hunter responded to the fine saying that the FERC lacks jurisdiction over his trading activities because he is a Canadian citizen and that the FERC overstepped its authority by probing futures trades, the Wall Street Journal reported.

In response to the $30 million civil penalty against Hunter and heightened scrutiny over oil price manipulation, Eric Holder, US attorney general, said in a written statement released at the Justice Department: “We will be vigilant in monitoring the oil and gas markets for any wrongdoing so that consumers can be confident they are not paying higher prices as a result of illegal activity.”

The increased scrutiny over high gasoline prices and questions over fraud and abuse has also prompted the Justice Department to keep a closer eye on the energy industry, forming a new team — the “Oil and Gas Price Fraud Working Group” — to help ensure consumers are not victims of price manipulation.