The case involves a trader at the now-defunct Amaranth hedge fund who fought back after the Federal Energy Regulatory Commission (FERC) fined him $30 million for manipulating the energy market.
The trader, Brian Hunter, argues the fine was outside FERC’s authority, and has found an unusual ally in the Commodity Futures Trading Commission (CFTC), which is urging the court to undo the penalty. The CFTC argues it has the exclusive rights to monitor the exchanges that Hunter was found to have manipulated under the Commodity Exchange Act (CEA).
“In refereeing this jurisdictional turf war, we cannot defer to either agency’s attempt to reconcile its statute with the other agency’s statute,” Judge David Tatel wrote, referring to a previous court decision that requires judges to leave rule-making up to experts in the agencies.
FERC’s suit claims Hunter sold “a significant number of natural gas futures contracts” from February to April 2006, which consisted of 14 percent to 19 percent of the entire market volume.
“Given their volume and timing, Hunter’s sales reduced the settlement price for natural gas,” FERC told the court. “Hunter’s portfolio benefited from these sales because he had positioned his assets in the natural gas market to capitalize on a price decrease — that is, he shorted the price for natural gas.”
The CFTC claims to have “exclusive jurisdiction” over regulatory actions in the futures market, and filed suit against Hunter in 2007.
A day after the CFTC action, FERC filed a similar lawsuit under the Natural Gas Act, which prohibits market manipulation of natural gas. After a “lengthy” administrative process, FERC fined Hunter $30 million.
Giving FERC the ability to override the CFTC in this instance would essentially allow every agency to police commodities in their own interest — taking away a large chunk of responsibility from the financial regulator, Tatel wrote.
There is a high bar that the energy regulator must reach for the court to agree with its fine, the judge continued, adding, "FERC lacks jurisdiction to charge Hunter with manipulation of natural gas futures contracts."
In 2009, the hedge fund, Amaranth, settled with the CFTC on the market manipulation charges for a much smaller penalty of $7.5 million.
This post was updated at 4:40 p.m., to reflect that the court's decision to take action against FERC was final.