Oil price manipulation seldom prosecuted under Obama

Fri Apr 20, 2012 2:14pm EDT

* Obama seeks higher civil, criminal penalties on oil, gas

* Only one actual manipulation case brought since 2009

* Cases seen by lawyers as hard to prove

By Jeremy Pelofsky

WASHINGTON, April 20 (Reuters) - President Barack Obama's administration has brought only one new case alleging energy market price manipulation since he took office in 2009, despite more tough talk about it this week amid soaring prices at the gasoline pump.

If that seems like a lackluster enforcement record for a president eager to look assertive on oversight of oil and natural gas markets in an election year, it may be for good reason.

Experts said there is little evidence of widespread manipulation in these markets and, in any case, lawyers with experience in the field said such cases are difficult to prove.

The administration on Thursday announced a $14 million settlement with Dutch trading firm Optiver in an oil market manipulation case, but that case had initially been brought in 2008 under the administration of President George W. Bush.

With energy markets in turmoil, the market-regulating U.S. Commodity Futures Trading Commission under Bush from 2006 to 2008 brought more than a dozen energy market price manipulation cases, according to a review by Reuters.

Asked by Reuters for recent cases alleging energy market price manipulation, officials from the CFTC, the Federal Trade Commission and the U.S. Justice Department turned up only one case that has been brought under Obama.

The White House did not respond to a request for comment. The FTC received specific new authority over manipulation of the energy market in November 2009. The Justice Department said it does not keep a detailed tally of its criminal cases.

The average U.S. gasoline price per gallon was nearly $4 in early April, up about 25 cents from a year earlier, a jump that ensures plenty of rhetoric from Democrats and Republicans for months to come with the Nov. 6 elections approaching.

"It's a very popular political issue ... it's always invoked to blame complicated pricing issues on speculators," said Glen Donath, a partner at Katten Muchin Rosenman LLP in Washington.

"It also feels good to point to an easy fix under the criminal laws, but the reality is they're very hard to prosecute," said Donath, who has worked on such cases previously and prior to that was a federal prosecutor.

A SINGLE CASE

Almost a year ago, the CFTC alleged that two oil traders and their firms -- James Dyer of Oklahoma's Parnon Energy and Nicholas Wildgoose of Europe-based Arcadia Energy -- amassed and sold off a substantial position in physical crude oil to manipulate futures prices. The traders and their firms have rejected the allegations and asked that the case be dismissed.

The judge in the case, William Pauley of Manhattan federal court, heard arguments in December over a motion by the defendants to dismiss the case and they are awaiting his ruling.

In 2009, the Obama administration settled a case that had been brought under Bush involving collapsed hedge fund Amaranth Advisors, for attempting to manipulate natural gas markets. The firm paid a $7.5 million fine.

The CFTC on Thursday settled allegations that the high-frequency trading firm Optiver Holding BV, two of its subsidiaries and three traders engaged in manipulation and attempted manipulation for crude oil, heating oil and gasoline.

As is typical in many such settlements, Optiver did not admit or deny the allegations.

CFTC Chairman Gary Gensler, peppered by reporters at a CFTC meeting on Wednesday about why the agency has not done more on such cases, said that he only had six people for energy oversight team. "This agency is so under-resourced," he said.

On Tuesday, Obama said: "We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit."

He proposed that Congress increase criminal and civil price manipulation penalties for individuals and firms to $10 million from $1 million, and that in civil cases the defendant could be forced to pay up to three times the losses to victims.

Additionally, under Obama's proposal, penalties would be assessed for each day of a violation, rather than per violation.

Mitt Romney, the expected Republican challenger in the presidential election, has argued that Obama's proposals would lead to higher taxes and more costly energy regulation.

LIMITED OPTIONS

Obama has spoken out periodically trying to show he understands Americans' concerns about rising gasoline prices. One drastic step he could take is to release oil from the Strategic Petroleum Reserve, but such a move could open him up to criticism that he was only doing it to win the election.

He also pushed this week for more funds for the agencies to pursue manipulation cases, but sharp fiscal policy divisions in Congress make it difficult to get approval for more funding.

The lack of cases under Obama comes despite new powers approved in 2010's Dodd-Frank banking and market reforms, which expanded the definition of market manipulation.

"There have not been many, if any, CFTC cases establishing manipulation of the crude oil futures market or the natural gas futures market," said Mark Young, a former CFTC assistant general counsel from 1977 to 1982.

He said the CFTC and trading exchanges have been vigilant and effective in safeguarding against trading manipulation.

"Given the absence of alleged futures price manipulation generally, it is hard to see how increased penalties would deter much misconduct," said Young, now a partner at the law firm Skadden, Arps, Slate, Meagher & Flom LLP in Washington.

The CFTC has noted that its overall enforcement actions, not just in the oil and gas market, were up 74 percent in the fiscal year that ended Sept. 30, 2011. The FTC refused to reveal the size of its investigation team but said it had no recent cases.

BURDEN OF PROOF

Donath, the former federal prosecutor, said a key to manipulation cases is proving the difference between speculation and manipulation, as well as proving that a trader had the power to move the price of the commodity. They are high thresholds to meet.

During the Bush administration, the Justice Department charged several BP traders with conspiring in 2004 to manipulate and corner the propane market, but a federal judge a year later dismissed the indictment against the traders.

BP entered a deferred prosecution agreement in 2007 and paid $303 million in restitution and fines.

Obama last year also created a working group made up of several federal agencies, including the FTC, Justice Department and CFTC to improve their collaborative efforts to root out any manipulation in the energy markets.

While members of those agencies have had a few meetings, little has been heard or seen from it, though a report by the FTC is expected soon.