NEW YORK/WASHINGTON The day after bringing its biggest case of oil market manipulation ever, a U.S. regulator warned those trying to rig the commodities markets that they will be hunted down.
"We're watching and we'll come and get you," warned Bart Chilton, a commissioner for the U.S. Commodity Futures Trading Commission.
Chilton's comments came after Arcadia, one of two firms sued on Tuesday for allegedly reaping $50 million by illegally manipulating oil markets in 2008, pledged to fight the CFTC.
"The CFTC is wrong on both the facts and the law," Colin Hurley, the Chief Financial Officer of Arcadia, said in an e-mailed statement.
The quick rebuttal set up a rare public show-down over trading practices in the opaque physical oil market. Many such past cases have been settled out of court, and regulators have struggled in the past to make manipulation charges stick.
The CFTC suit against London-based Arcadia and U.S. subsidiary Parnon Energy, as well as two well-known traders James Dyer and Nick Wildgoose, suggests a tougher approach from regulators under political pressure to crack down on market malfeasance.
Alleged manipulation of oil markets has become a charged political topic. The Obama administration has assured Americans it is trying to curb high U.S. gasoline prices and ensure they aren't being artificially driven up.
"This is only going to be the beginning of an array of cases that will be brought and I believe it's going to have a deterrent on market actors as we speak," said Michael Greenberger, a law professor at the University of Maryland and the CFTC's former director of trading and markets.
Arcadia and Parnon are both owned by secretive Norwegian billionaire John Fredriksen. Known as "Big Wolf" and more widely as "Big John" in the shipping industry, he owns the world's largest independent oil tanker firm, Frontline.
The CFTC suit alleges that Dyer and Wildgoose carried out an illegal squeeze in benchmark U.S. West Texas Intermediate (WTI) oil markets in early 2008 that led to $50 million in illicit profits.
The CFTC said the traders amassed large physical positions at a key U.S. trading hub in Cushing, Oklahoma to create the impression of tight supplies that would boost prompt oil prices.
Later, they dumped those barrels back onto the market, causing prices to fall and racking up profits from short positions they had accrued in futures markets, the suit said.
Parnon owns at least 3 million barrels of storage facilities at Cushing, the delivery point of the U.S. crude contract.
London-based Arcadia, whose headquarters sit opposite the iconic department store Harrods, is a major global oil trading firm, which typically markets about 800,000 barrels a day of crude and oil products around the world.
Hurley disputed the notion that Arcadia had a big enough position to influence the U.S. crude oil futures market, which had a notional daily turnover of $300 to $400 million in early 2008.
He said independent experts it had retained agreed that "the CFTC's allegations of misconduct were inconsistent with market conditions and with Arcadia's trading activity during the period."
Many civil actions around the derivatives markets have been settled before reaching trial, with firms often agreeing to pay fines without admitting wrongdoing. In this case, Arcadia said it did not expect a settlement to be possible.
"In short, our activity involved legitimate and lawful trades at market prices that were dictated by the fundamentals of supply and demand," Hurley, who also speaks for Parnon, said. "We look forward to proving this in court."
The CFTC launched a probe of crude oil markets in 2008 when prices surged to a record $147 a barrel, then crashed to nearly $30 a barrel by the end of the year.
Chilton would not say whether the latest case, brought in the Federal Southern District Court of New York, was a harbinger of more to come, but said the agency hasn't announced the end of its investigation into market manipulation in 2008.
"I hope this sends a resounding message to whoever may consider manipulating or attempting to manipulate the futures markets," said Chilton.
"Quite frankly, I wish we had gone more rapidly but investigations take time," said Chilton.
While this case came under its existing authority, the CFTC is gearing up to test its increased powers under the Dodd-Frank Act to prevent market manipulation and disruptive trading practices. Effective in July, the law could end decades of confusion and a failure to prosecute traders.
The CFTC had previously focused mostly on smaller retail foreign exchange fraud and Ponzi rackets because regulations made it hard to prove market manipulation, according to officials who follow the agency.
The CFTC will now only have to show a trader acted in a manner that had the potential to disrupt the market, making it easier to prove a case. Currently, the regulator has to show an intent to manipulate prices.
The CFTC also recently welcomed a new enforcement chief, David Meister, who has vowed to use his "bigger arsenal of weapons" to target more cutting-edge, high impact schemes.
(Additional reporting by Joshua Schneyer and Andrew Longstreth in New York City; Tim Gardner and Charles Abbott in Washington; Jonathan Saul and Simon Falush in London and Terje Solsvik in Oslo; Editing by Alden Bentley, Lisa Shumaker and Matthew Robinson)