Quick Facts
Overview
The U.S. Commodity Futures Trading Commission fined Amaranth Advisors L.L.C. and Amaranth Advisors (Calgary) ULC a total of $7.5 million in a consent order settling allegations of attempted manipulation of NYMEX natural gas futures prices on February 24 and April 26, 2006, in violation of Sections 6(c), 6(d), and 9(a)(2) of the Commodity Exchange Act, along with material misrepresentations to NYMEX under Section 9(a)(4).
Details of the Case
Amaranth Advisors L.L.C., a Delaware-based investment advisor managing over $6 billion in assets as of December 2005, and its 99%-owned subsidiary Amaranth Advisors (Calgary) ULC, provided advisory services on energy-related commodities. Through trader Brian Hunter, the firms engaged in schemes to manipulate settlement prices of NYMEX natural gas futures contracts on two expiry days in 2006.
On each occasion, the defendants reversed short futures positions to long holdings during the trading day, while maintaining large short swap positions on the Intercontinental Exchange (ICE) that benefited from lower settlement prices. In the closing range, they sold large volumes of futures to drive prices down.
Following the April incident, Amaranth Advisors L.L.C. provided false explanations to NYMEX during an investigation. The case, filed on July 25, 2007, in the Southern District of New York, resulted in a consent order without admission or denial of allegations beyond jurisdiction and venue.
WORKED EXAMPLES
- February 24, 2006 Position Reversal and Selling Strategy: Amaranth started the day short more than 1,700 March 2006 NYMEX natural gas futures and short approximately 12,000 futures-equivalent ICE swaps. Prior to the last half hour, they reversed to long over 3,000 futures. Hunter instructed via instant message to ensure "lots of futures to sell MoC [market on close]" and stated the contract needed "to get smashed on settle," defining "smashed" as prices falling "really, really quickly."
- April 26, 2006 Late-Order Execution: A few days before expiry, Amaranth reversed its short May 2006 NYMEX futures position to long over 3,000 contracts, while holding short more than 19,000 futures-equivalent May swaps. Hunter anticipated a large buyer from another hedge fund exerting upward pressure, which would harm the short swaps. Orders were placed with instructions to hold execution until the last eight minutes of the closing range. With eight minutes left, a 2,000-lot sell order was placed, so large and late that the broker could not execute it fully during the range. Hunter told employees he was waiting to sell over 3,000 contracts, knowing it would mute upward price pressure.
- NYMEX Investigation and Misrepresentations: On August 2, 2006, NYMEX sent a letter inquiring about Amaranth's April 26 trading, noting 99% of sales in the final four minutes and 78% in the final minute of the closing range, and requesting justification. Amaranth's August 15 response contained false and misleading statements about its trading manner.
Fines and Penalties
Civil Monetary Penalty: $7.5 million
Key Quotes
"make sure we have lots of futures to sell MoC [market on close] tomorrow;" (Defendant Hunter in an instant message on February 23, 2006)
"to get smashed on settle then day is done." (Defendant Hunter on February 24, 2006, referring to the desired price drop)
"The letter also made note of the heavy concentration of Amaranth’s trading of the May 2006 NYMEX Natural Gas futures contracts occurring in the final minutes prior to the termination of trading in the contract, and the fact that Amaranth sold 99% of its contracts in the final four minutes of the closing range and 78% of its contracts in the final minute of the closing range;" (NYMEX Compliance Department letter dated August 2, 2006)
Sources
