Commodity Futures Trading v. Amaranth Advisors
| Decision Date | 21 May 2008 |
| Docket Number | No. 07 Civ. 6682 (DC).,07 Civ. 6682 (DC). |
| Citation | 554 F.Supp.2d 523 |
| Parties | U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. AMARANTH ADVISORS, L.L.C., Amaranth Advisors (Calgary) ULC, and Brian Hunter, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Winston & Strawn LLP, by David E. Mollon, Esq., Steven M. Schwartz, Esq., Lauren B. Lepore, Esq., New York, NY, for Defendants Amaranth Advisors, L.L.C. and Amaranth Advisors (Calgary) ULC.
Kobre & Kim LLP, by Michael S. Kim, Esq., Leif T. Simonson, Esq., New York, NY, for Defendant Brian Hunter.
The U.S. Commodity Futures Trading Commission (the "CFTC") brings this action against defendants Amaranth Advisers, L.L.C. ("Amaranth Advisors"), Amaranth Advisors (Calgary) ULC ("Amaranth Calgary"; together, "Amaranth"), and Brian Hunter under the Commodity Exchange Act (the "CEA"), 7 U.S.C. § 1 et seq. The CFTC alleges that defendants attempted to manipulate the price of natural gas futures contracts by deliberately waiting to sell a substantial number of those contracts in the final minutes before the close of trading. Amaranth also purportedly attempted to "cover up" the alleged manipulative scheme by submitting false statements to the New York Mercantile Exchange ("NYMEX").
Defendants move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). They argue, among other things, that the CFTC is seeking to "transform legitimate speculative trading" into a violation of the CEA. They also contend that they did not conduct the trades in question with the intent to manipulate prices. In addition, Hunter—a Canadian citizen, residing in Canada, and working for a Canadian company when he made the trades at issue in this case— moves to dismiss for lack of personal jurisdiction.
For the reasons that follow, defendants' motions to dismiss are denied.
As alleged in the complaint, the facts are as follows:
1. The Parties
The CFTC is an independent federal regulatory agency charged with administering and enforcing the CEA. (Compl. 119).
Amaranth Advisors was a hedge fund, incorporated in Delaware, with its principal place of business in Greenwich, Connecticut until its collapse in September 2006. (Id. ¶ 10). See U.S. Commodity Futures Trading Comm'n v. Amaranth Advisors, L.L.C, 523 F.Supp.2d 328 (S.D.N.Y.2007). It had owned 99 percent of Amaranth Calgary, a Nova Scotia company based in Calgary, Canada. (Compl. ¶¶ 11, 12).
Hunter was in charge of the natural gas trading at Amaranth. (Id. ¶¶ 20, 22). In October 2005, he became the president of Amaranth Calgary and transferred from Greenwich to Calgary. (Id. ¶¶ 14, 20). While at Amaranth Calgary, Hunter continued to supervise natural gas traders working at the Greenwich office. (Id.). Hunter was in Calgary when he executed the trades on NYMEX that are at issue in the instant case. (See id. ¶¶ 8, 14, 20; see also Hunter Mem. at 3).
2. Commodity Futures Markets
Defendants traded natural gas futures contracts, which are standardized agreements "to purchase or sell a commodity for delivery in the future" at a pre-determined price. (Id. ¶ 16). The buyer, who is obligated to accept delivery of the commodity, is called the "long" and is said to hold a "long position" on a futures contract.1 The party selling the commodity, and thus the party obligated to deliver the commodity on the delivery date, is the "short" and holds a "short position" on the futures contract. Because all futures contracts are standardized except for the price, a party holding one position on a futures contract may cancel its obligation by acquiring an equal and opposite position in a corresponding contract. Any difference between the price of the initial contract and the offsetting contract is the profit or loss on the contract.
Amaranth was not capable of delivering or accepting the delivery of physical natural gas, so it needed to have a "flat position" at the close of trading for a given contract (id. ¶ 19), meaning that it needed to offset any short or long position prior to the expiration of a contract or roll its position over to the following month (Amaranth Mem. at 4).
Futures contracts are bought and sold on futures or commodity exchanges, such as NYMEX. (Compl. ¶ 18). NYMEX trades futures contracts for, among other things, the delivery of natural gas at the Henry Hub in Louisiana for the present calendar month and for each of the next 72 consecutive months. (Id. ¶ 17). Contracts expire on the third to last business day of the month prior to which delivery must be made on open contracts (the "expiration day"). (Amaranth Mem. at 4). For instance, for the March 2006 natural gas futures, the expiration day was February 24, 2006. Any net contract positions left open at expiration must be settled through physical delivery. (Id.). Pursuant to NYMEX rules, the settlement price for natural gas futures is based on on expiration day. (Compl. 1125).
3. Swaps Markets
Defendants also traded over-the-counter ("OTC")2 natural gas swaps, which are different financial instruments from futures contracts and exchanged in commercial markets, such as the IntercontinentalExchange ("ICE"). (Id. ¶ 18). In general, swaps refer to the "the exchange of one asset or liability for a similar asset or liability." (CFTC Glossary). Commodity swaps, more specifically, are swaps "in which the payout to at least one counterparty is based on the price of a commodity or the level of a commodity index." (Id.). ICE, for instance, uses the NYMEX settlement price of natural gas futures to calculate the settlement price of natural gas swaps. (Compl. ¶ 29).
On the days when defendants purportedly attempted to manipulate the prices of natural gas futures, they held large short positions on natural gas swaps. (Id. ¶¶ 30, 41, 47).
4. The Alleged Manipulative Scheme
The NYMEX trades in question were made on February 24 and April 26, 2006.
On February 23, 2006, Hunter told an Amaranth natural gas trader, Matthew Donohoe, to "make sure we have lots of futures to sell MoC [market on close]3 tomorrow." (Id. ¶ 32). When trading commenced on February 24, the expiration day for the March 2006 natural gas futures, Amaranth had a short position in more than 1,700 contracts. (Id. ¶ 33). But by the start of the closing range, defendants had reversed their position to long in more than 3,000 contracts. (Id. ¶ 35).
At about 12:15 p.m. on February 24, Hunter sent an instant message to Amaranth trader Matthew Calhoun, stating that the March 2006 contracts needed "to get smashed4 on settle then day is done." . Less than half an hour before the closing range, Hunter disclosed his trading strategy to another trader, who expressed astonishment that Hunter had so many March 2006 contracts left to sell:
Hunter: We have 4000 to sell MoC
Hunter: shhhh
gloverb: come on
Hunter: y
gloverb: unless you are huge bearish
gloverb: position
gloverb: why the f would y[ou] do that
Hunter: all from options yest[e]rday
Hunter: so we[']ll see what the floor has
Hunter: bit of an exp[e]riment mainly
gloverb: what the f
gloverb: that is huge
(Id. ¶ 38). At about 2:11 p.m., Hunter sent another message to "gloverb," stating that he had "alot [sic] more to sell ... waiting until 2:20." (Id. ¶ 39).
On February 24, defendants sold more than 3,000 March 2006 contracts during the closing range. (Id. ¶ 41).
From April 21 to April 26, defendants began acquiring May 2006 contracts so that by the closing range on April 26, the expiration day for the May 2006 contracts, they held a long position in more than 3,000 May 2006 contracts. (Id. ¶¶ 45, 46).
At the beginning of the closing range on April 26, Hunter sent Calhoun an instant message, stating that he was "`wa[i]ting to sell.'" (Id. ¶ 53). Also early in the closing range, Hunter told an Amaranth risk manager that he had "`yet to sell,'" despite the presence of many buyers. (Id. ¶ 52). He was mainly referring to the hedge fund Centaurus Advisors LLC ("Centaurus"). (Id. ¶ 48). Hunter believed that Centaurus was planning to purchase a large number of May 2006 natural gas futures in the closing range, which "would tend to exert upward price pressures." (Id. ¶ 48, 54). In several instant messages, Hunter expressed concern that Centaurus's purchases would affect the settlement price:
Hunter: FYI Arnold [a trader at Centaurus] is getting scary short ...
Chasman: what u think arnold has?
Hunter we are rolling size into may
Hunter: and I am worrie[d] that [Arnold] has taken the other side of everything
(Id. ¶¶ 49-50). Hunter knew that selling his May 2006 contracts would "mute the effect of the buyers." (Id. ¶ 54).
Halfway into the closing range, defendants placed two different orders to sell their May 2006 contracts, but with instructions to hold the execution of the orders until the last eight minutes of the closing range. (Id. ¶ 55-58). At 2:22 p.m., with only eight minutes left before the close of trading, defendants placed a third order to sell 2,000 May 2006 contracts, which comprised two-thirds of the long position Amaranth had going into the closing range. (Id. ¶ 59). The last order was "so large, and came so late in `the closing range, that the broker was not able to execute the entire order," and only 1,675 of the contracts were sold before the close of trading. (Id. ¶¶ 60-61).
Defendants' trading strategy of purchasing a substantial number of...
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