In re Amaranth Natural Gas Commodities Litigation
| Decision Date | 06 October 2008 |
| Docket Number | No. 07 Civ. 6377 (SAS).,07 Civ. 6377 (SAS). |
| Citation | 587 F.Supp.2d 513 |
| Parties | In re AMARANTH NATURAL GAS COMMODITIES LITIGATION. |
| Court | U.S. District Court — Southern District of New York |
Bernard Persky, Esq., Gregory Scott Asciolla, Esq., Labaton Sucharow, LLP, Christopher Lovell, Esq., Ian Trevor Stoll, Esq., Lovell Stewart Halebian LLP, New York, NY, Vincent Briganti, Esq., Geoffrey Milbank Horn, Esq., Lowey Dannenberg Cohen & Hart, P.C., White Plains, NY, Robert M. Rothman, Esq., Samuel Howard Rudman, Esq., Coughlin, Stoia, Geller, Rudman & Robbins, LLP, Melville, NY, Louis Fox Burke, Esq., Christopher J. Gray, Esq., New York, NY, for Plaintiffs.
David Emilio Mollon, Esq., Steven Michael Schwartz, Esq., Winston & Strawn LLP, New York, NY, Kristen Victoria Grisius, Esq., Stephen J. Senderowitz, Esq., Winston & Strawn LLP, Chicago, IL, for Defendant Amaranth Advisors, LLC.
Andrew Levine, Esq., Richard Scott Goldstein, Esq., Heller Ehrman, LLP, New York, NY, Thomas Samuel Kimbrell, Esq., Heller Ehrman LLP, Geoffrey Aronow, Esq., Bingham McCutchen, LLP, Washington, DC, for Defendant Nicholas M. Maounis.
Steven R. Goldberg, Esq., New York, NY, for Defendant ALX Energy, Inc.
Michael Sangyun Kim, Esq., Kobre & Kim LLP, New York, NY, for Defendant Brian Hunter.
Amelia Temple Redwood Starr, Esq., Dharma Betancourt Frederick, Esq., Sheldon Leo Pollock, III, Esq., Davis Polk & Wardwell, New York, NY, for Defendant Amaranth LLC.
Adam Selim Hakki, Esq., Shearman & Sterling LLP, New York, NY, for Defendant Amaranth International Ltd.
Karl Geercken, Esq., Alan Mark Kanzer, Esq., Amber C. Wessels, Esq., Craig Carpenito, Esq., Alston & Bird, LLP, New York, NY, for Defendant TFS Energy Futures LLC.
Brijesh Pradyuman Dave, Esq., Joshua Adam Levine, Esq., Mark J. Stein, Esq., Simpson Thacher & Bartlett LLP, New York, NY, for Defendant Matthew Donohoe.
Daniel John Toal, Esq., Eric S. Goldstein, Esq., Marguerite Sophia Dougherty Esq., Mark Floyd Pomerantz, Esq., Jason Harold Wilson, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for the J.P. Morgan Defendants.
Another great evil arising from this desire to be thought rich; or rather, from the desire not to be thought poor, is the destructive thing which has been honored by the name of "speculation;" but which ought to be called gambling.
Plaintiffs have filed this putative class action on behalf of a class of all entities that purchased, sold, or held natural gas futures or options on futures contracts between February 16, 2006 and September 28, 2006 (the "Class Period") against the Amaranth family of companies, its brokers, its clearing house firm, and certain of their employees. Plaintiffs allege that during the Class Period, defendants manipulated the prices of New York Mercantile Exchange ("NYMEX") natural gas futures contracts in violation of sections 6(c), 6(d), and 9(a)(2) of the Commodity Exchange Act (the "CEA"). Defendants now move to dismiss the Complaint. For the reasons discussed below, the motion is granted in part and denied in part.
Hedge funds generally make use of complex structures that permit investors from within and without the United States to benefit from advantageous tax regimes without risking personal liability. The Amaranth fund is no exception. Investors invested directly into three "feeder" funds, Amaranth International Ltd. ("Amaranth International"), Amaranth Partners LLC, and Amaranth Capital Partners LLC (together with Amaranth International, the "Feeder Funds"). Foreign and tax-exempt investors invested in Amaranth International.3 Domestic tax-sensitive investors invested into Amaranth Partners LLC or Amaranth Capital Partners LLC.4
The Feeder Funds in turn invested their capital in Amaranth LLC (the "Master Fund"), a Cayman Islands corporation. The Master Fund was advised by Amaranth Advisors LLC.5 Advisors was owned in large part by Amaranth Management Limited Partnership ("AMLP"), a Delaware holding entity. Amaranth Group, Inc. ("AGI"), a Delaware corporation, was the general partner of AMLP.6 Brian Hunter and Matthew Donohoe, natural gas traders and defendants in this action, were employed by AGI, as was Chief Executive Officer Nicholas Maounis.7 Defendants established Amaranth Advisors (Calgary) ULC (with Amaranth Advisors LLC, "Amaranth Advisors"), a Canadian company and subsidiary of Amaranth Advisors LLC, to permit Hunter to move his trading operations to Canada.8 Defendants allege that although the Amaranth entities were legally distinct, they "were in practice a tightly knit association-in-fact, which operated as a single entity under the direction of Defendant Maounis."9 For convenience, I refer to the collection of Amaranth entities as "Amaranth."
Hunter was the head natural gas trader at Amaranth and Donohoe was the execution trader. Essentially, Hunter determined the company's investment strategy and Donohoe implemented that strategy.10
Defendant ALX Energy, Inc., a New York corporation, was Amaranth's primary NYMEX natural gas floor broker. Amaranth was ALX's largest customer.11 Defendant James DeLucia was Chairman or Chief Executive Officer of ALX.12 Defendants TFS Energy Futures, LLC and Gotham Energy Brokers, Inc. were also floor brokers for Amaranth (with ALX and De-Lucia, the "Floor Brokers").13 Defendant LP. Morgan Futures, Inc. ("JPMFI") served as Amaranth's clearing broker. Its parent is defendant J.P. Morgan Chase & Co. ("JPMCC"). Finally, defendant J.P. Morgan Chase Bank, Inc. ("JPMCBI") is a depository of NYMEX.14
"NYMEX is the world's largest commodity exchange for the trading of futures contracts and options contracts in energy products, metals, and other commodities."15 Its operations are regulated by the Commodities Futures Trading Commission ("CFTC").
Contracts on the NYMEX relate to "crude oil, gasoline, heating oil, natural gas, electricity, propane, coal, uranium, environmental commodities, softs, gold, silver, copper, aluminum, platinum, and palladium."16 Hundreds of thousands of contracts are traded each day.
One type of contract traded on the NYMEX is a futures contract. A future is an agreement for the sale of a commodity on a specific date (the "delivery date"). Futures contracts for a given commodity are standardized; the only terms that vary are the delivery date and the price of the contract. Thus, "negotiations can readily proceed and the agreed prices can be speedily disseminated to other traders."17 The seller of a futures contract is said to have the "short" side because she hopes that the price of the commodity will drop before the delivery date. The buyer has the "long" side.18 The term "spread" generally refers to the difference in price between two otherwise-identical futures with different delivery dates.
Only a small percentage of futures transactions actually result in an exchange of money for a commodity.19 Most investors close out of their positions before the delivery dates. One way in which a trader can close a position is to enter into an offsetting contract. For example, a trader who holds a long position on one hundred tons of coal to be delivered on January 1, 2009, might enter into a separate short position on one hundred tons of coal to be delivered on that date. This avoids the possibility that someone might attempt to deliver one hundred tons of coal to the trader's door. If the trader's short position costs less than the long position, the trader has profited from the transaction.20
All futures transactions are executed through the NYMEX clearinghouse. Both parties to a transaction trade through a clearing member firm, a company that is a member of the clearinghouse.21 Thus, the parties do not transact directly—rather, the NYMEX clearinghouse sells to the buyer's clearing firm and simultaneously buys from the seller's clearing firm. In this way, neither party is exposed to credit risk from its counterparty.22 Rather, the clearing firm guarantees the client's payment to NYMEX, and NYMEX guarantees payment to the counterparty's firm.
Because of this protection, before an entity can enter into futures contracts on the NYMEX, it must deposit funds, called "margin," with a clearing firm to cover potential losses. A trader need not deposit the full amount of a potential loss on a futures contract, but only enough to cover the amount that the trader might foreseeably lose in one day. The required margin amount is adjusted each day to reflect the day's price changes. "This process, known as `marking-to-market' the customer's open position, determines whether a customer must post additional margin or, instead, receives payments on margin."23
For example, a trader might have purchased the long position in a contract for delivery of two hundred and fifty pounds of uranium on October 31, 2008. The contract calls for a payment of $100 on that date. The trader is required to deposit some amount of money, say, $10. If the price of the futures contract (i.e., the price that the market will currently agree to pay on October 31, 2008 for the right to receive two hundred and fifty pounds of uranium on that date) then falls to $95, the trader is facing a $5 loss. The clearing member firm might require the trader to make an additional deposit to insure against a further decline in the value of the contract. If the price were to fall to $90 before the trader makes additional deposits, the clearing firm might close out the trader's contract—that is, it would enter into a contract for the delivery of two hundred and fifty pounds of uranium on October 31, 2008, at the market price of $90, on behalf of the trader. The trader would thus have a contract to receive the uranium and a...
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