Brian Hunter Agrees to Pay $750,000 Settlement to the CFTC and Accepts Registration Ban
Commentary by Bob Zwirb
The CFTC announced that it has entered into a consent order settling charges brought against Brian Hunter, former head trader at Amaranth Advisors LLC ("Amaranth"), for attempting to manipulate the price of natural gas futures contracts traded on the New York Mercantile Exchange ("NYMEX").
The federal court order, entered on September 15, 2014, requires that Hunter pay a $750,000 civil monetary penalty, and permanently bans him from trading all CFTC-regulated natural gas products during the daily closing period. Additionally, the order permanently prohibits Hunter from registering with the CFTC or claiming exemption from registration.
The consent order arises from a CFTC complaint filed on July 25, 2007, which alleged that Defendants Amaranth and Hunter attempted to manipulate the price of natural gas futures contracts traded on the NYMEX on February 24, 2006, and April 26, 2006. The CFTC previously settled all charges against Amaranth by consent order entered on August 12, 2009, which ordered, among other things, that Amaranth pay a civil monetary penalty of $7.5 million (see CFTC Press Release 5692-09, August 12, 2009). See Commodity Futures Trading Commission v. Amaranth Advisors, LILAC., et al., 07-cv-6682 (S.D.N.Y.); see also CFTC Press Release 5359-07, July 25, 2007.
See: Consent Order for Civil Monetary Penalty and Other Equitable Relief against Defendant Brian Hunter.
See also: CFTC Press Release.
Related news: Cadwalader C&F Memo: FERC Enforcement Director Calls for Legislative Fix to Address Hunter Decision (January 27, 2014); FERC Loses Hunter Case (with Pantano Comment) (March 25, 2013); The Hunter-Amaranth-FERC Redo, Part 2 (Robert Zwirb Article in Energy Metro Desk) (February 25, 2013).
Commentary
After seven years and many twists and turns, the government has finally gotten its man. Brian Hunter, the center of an interagency tug-of-war between FERC and the CFTC, escaped from a $30 million penalty that had been imposed by the former because that agency erroneously asserted it had jurisdiction. However, it took five years and a decision by the D.C. Circuit Court of Appeals to establish that point, a resolution that we had expected in light of the CFTC's exclusive jurisdiction over futures markets. See Hunter v. FERC, 711 F3d. 155, 158 (D.C. Cir. 2013).
Moreover, Hunter always wanted to face the CFTC rather than FERC because it would be much more difficult to establish manipulation or attempted manipulation under CFTC's pre-Dodd-Frank statute than under FERC's. That proposition is demonstrated by the terms of the settlement here. Although the facts involving Hunter's market-moving activity in the natural gas futures and swaps markets were not favorable to him, the law was not all that favorable for the CFTC, which had a long history of not being able to establish manipulation in court under its old formula. As a result, the parties settled, with Hunter agreeing to a nominal penalty – nominal in comparison to the $30 million that FERC had ordered him to pay and what the CFTC might have obtained had it won in court. The partial trading ban is probably more consequential to Mr. Hunter, but it is surprising that a more severe nonmonetary sanction is not part of the settlement.
Given the large stakes here, it's not clear who the winner is. Overall, it appears that Hunter did very well. Recall that when FERC initiated action against him, it sought more than $278 million in penalties. By settling with the CFTC, he will pay less than a million. That is not a bad outcome for someone responsible for more than $5 billion in trading losses. As for the CFTC, it appears that it was unwilling to go the distance under even an attempted manipulation theory – something that is considerably easier to prove than manipulation. Moreover, under the settlement, Hunter is neither agreeing to nor denying the substantive allegations. Indeed, those allegations are nowhere to be found in the consent order – it only provides the remedy – which is probably the most striking aspect of this resolution.
After all is said and done, Hunter was the beneficiary of time and location: time, because he was charged under the CFTC's pre-Dodd-Frank standard for manipulation, which requires proof of intent; location, because his activities took place on CFTC, rather than FERC-regulated, markets. The CFTC could not bring charges under its new "manipulation" (really fraud) standard, which reads exactly likes FERC's, and which tilts the odds substantially toward the government in cases like this.