JPMorgan Dismissed from Amaranth Futures Suit, 2nd Circuit Rules

The case focuses on the role of an FCM in accommodating a trader that is alleged to have engaged in manipulation by acquiring unusually large positions in natural gas futures and swaps, and by "slamming the close"; i.e., by selling long futures during the settlement period in order to benefit a larger short position in the related swaps. But the case also illustrates several fundamental points beyond that of aiding and abetting.

First, with respect to manipulation: Just because a trader acquires an unusually large position in a market does not mean that the trader is doing so for manipulative purposes. As the Second Circuit reasoned, although a trader may acquire a large position in order to "manipulate prices," a trader may also acquire a large position "in the belief that the price of the future will, for reasons other than the trader's own activity, move in a favorable direction." In other words, one cannot impute intent to manipulate simply by the size of a holding. In Amaranth's case, it realized large profits from the high spread between winter and summer natural gas prices that occurred after Hurricanes Katrina and Rita wreaked havoc on the Gulf Coast in 2005, the year before its alleged manipulation. Amaranth's acquisition of even larger positions the next year could simply have reflected optimism on its part that such gains would continue. As the court observed: "The positions Amaranth then acquired were consistent with a belief that the same price pattern would happen again in 2006. Thus, while these positions could have suggested manipulative intent, they equally suggested undue confidence that recent history would repeat itself."

Second, the role of position limits. During the course of its trading activity, Amaranth came up against and violated NYMEX position limits and accountability levels. When confronted by regulators, Amaranth responded by shifting its positions to corresponding swaps traded on ICE instruments - instruments that the court found to be "functionally identical for risk management purposes." The fact that Amaranth did this, and the fact that JPMorgan accommodated it, however, implied neither manipulation on the part of Amaranth nor aiding and abetting on the part of JPMorgan. As the court observed: "that a trader shifts contracts from NYMEX to ICE in order to maintain a large open position, standing alone, does not reveal why the trader seeks that large position."

Third, the role of the FCM. In order for the defendant to be held accountable for Amaranth's wrongdoing under an aiding and abetting charge, plaintiffs needed to show that JPMorgan knew Amaranth specifically intended to manipulate the price of NYMEX gas futures, and that JPMorgan intended to help and did help. But the amended complaint did not allege anything more than that JPMorgan provided "routine clearing firm services."

Fourth, the role of regulation. From a regulatory perspective, the ease with which Amaranth was able to transfer from futures to swaps to avoid position limits in 2006 has implications for the emerging trend in the energy market favoring futures over swaps (not to mention the overnight transfer of positions in the latter into swap-futures) in order to avoid the regulatory burdens of Dodd-Frank applicable to swaps. As the court here observed, although the natural gas swaps and NYMEX futures in Amaranth were "functionally identical," they also had an important difference in that the ECM did not face the same level of regulatory scrutiny as did NYMEX. Today, the same thing can be said, but in the opposite manner, with respect to energy swaps and futures as a result of Dodd-Frank.