(Adds CFTC's quotes in 5th paragraph and above 2nd subhead)
By Jonathan Stempel and Jonathan Leff
NEW YORK Aug 4 Global oil trading house Arcadia
and two well-known traders will pay $13 million and face an
unusual three-year limit on trading physical U.S. benchmark
crude to settle a landmark lawsuit over manipulating oil prices
The settlement, disclosed in a filing with the U.S. District
Court in Manhattan on Monday, concludes one of the Commodity
Futures Trading Commission's most ambitious crackdowns on gaming
crude oil markets, launched in the wake of the 2008 surge in oil
prices that sparked a political outcry.
In 2011, the CFTC alleged that Arcadia, a global oil trading
firm owned by Norwegian billionaire John Fredriksen, its U.S.
Parnon unit and oil traders James Dyer and Nick Wildgoose had
made some $50 million by squeezing the oil market, losing money
on physical trades in order to reap bigger profits on futures.
Without admitting or denying wrongdoing, Arcadia Petroleum
Ltd, Arcadia Energy SA, Parnon Energy Inc, Arcadia trader
Nicholas Wildgoose and Parnon trader James Dyer agreed to a
permanent injunction requiring three years of limited trading in
West Texas Intermediate crude, improved record-keeping and
oversight, and the hiring of an independent consultant.
"Through resolution of this litigation, the CFTC is holding
accountable market participants who sought to profit by
undermining the integrity of the U.S. crude oil markets," CFTC
Director of Enforcement Aitan Goelman said in a press release.
A settlement in principle had been reached in June after
nearly three months of mediation.
The lawsuit was filed in 2011 in the midst of an effort by
the Obama administration to assure Americans that rising
gasoline prices were not due to artificial manipulation. Arcadia
had denied the allegations and said it would fight them in
According to the CFTC, in early 2008 as oil prices were
approaching a then-record $100 a barrel, Dyer, of Brisbane,
Australia, and Wildgoose, of Rancho Santa Fe, California, built
up huge crude oil positions, creating an impression of tight
supply, only to soon dump their holdings and collect profits.
The settlement amount was "relatively low" for the CFTC,
given that it could have sought a maximum fine of three times
the ill-gotten gains, according to David Yeres, senior counsel
at law firm Clifford Chance and a former CFTC official who has
specialized in market abuse cases for the past 30 years.
However, the fact that the agreement included a limitation
on trading in cash energy markets - beyond the derivatives realm
overseen by the CFTC - was "extraordinary," he said.
Paul Adams, CEO of Parnon Holdings Inc., said in an email:
"We have no comment beyond the terms of the Order other than
that we are pleased to have resolved this matter with the CFTC."
None of the other defendants could be reached for comment.
With the exception of the email from the CEO of Parnon
Holdings, other emails seeking comment after business hours were
not immediately answered. A phone number on Parnon Holdings
Inc.'s website now routes to JP Energy, a company that bought
Parnon's oil storage and pipeline gathering system in 2012.
Timothy Carey, a partner at the law firm Winston & Strawn
who on behalf of the defendants signed the consent order
imposing the penalty and injunction, did not immediately respond
to a request for comment.
HARD TO WIN
Many legal experts had said the case was a hard one to win
from the start. Proving market manipulation is considered a high
hurdle for the CFTC, even after the agency gained more
regulatory muscle with tougher rules after the financial crisis.
However, the nature of the case made it a focal point for
oil traders across the spectrum since the allegations involved a
once common gambit: intentionally losing money in the physical
market for a commodity - largely unregulated - in order to reap
a much larger profit in a related derivatives trade.
The CFTC case alleges that the traders, both of whom
previously worked at BP Plc , amassed large physical
positions at the Cushing, Oklahoma, oil trading and storage hub
to create the impression of tight supplies that would boost
At one point that month, the traders owned 4.6 million
barrels of oil, about two-thirds of the 7 million expected to be
available at Cushing at the end of the month, the CFTC said.
Later they dumped those barrels back onto the market,
causing price spreads to crash and racking up profits from
positions they had accrued in futures markets, the suit said.
The CFTC said the traders had lost $15 million trading physical
West Texas Intermediate but made $50 million in WTI derivatives.
The CFTC said the traders aborted the trading strategy after
April 2008, when they learned of regulators' investigations.
Just months later, U.S. oil prices surged to a record $147 a
barrel, then crashed to nearly $30 a barrel by the end of the
Under Monday's settlement, the defendants are barred for
three years from holding "cash forward contracts" for crude oil
in excess of 3 million barrels for delivery at Cushing,
Oklahoma, past the expiration of the prompt futures contract.
Lawyers said the agency's pursuit of trading action beyond
the future markets demonstrated an effort to broaden its
authority. The Federal Energy Regulatory Commission, which
oversees power markets, has launched several similar cases in
recent years, focusing on so-called "loss-leader" trading.
The case was also a potential watershed for the CFTC, which
is slowly casting off its image as a small-time regulator
responsible for keeping agriculture and energy futures markets
in check to become a potential policeman for Wall Street,
helping supervise the $710 trillion global swaps market.
"The CFTC will continue to work to ensure the integrity of
the markets we are responsible for protecting from manipulation,
whether direct or indirect," said the agency's Goelman.
The lawsuit involved two names familiar to U.S. oil market
veterans, who recall Dyer and Wildgoose from their days as
high-flying traders at BP in the early 2000s, when the British
oil giant's trading practices were under scrutiny due to its
large ownership of oil tanks at Cushing, Oklahoma - the delivery
and settlement point for U.S. oil futures contracts.
BP was hit with a record $2.5 million fine by the New York
Mercantile Exchange in 2003 for alleged U.S. oil market
manipulation, which it paid without admitting any wrongdoing.
That case did not include any allegations of misconduct by Dyer
At one point, Parnon had owned at least 3 million barrels of
oil storage tanks in Cushing, while Arcadia traded nearly 1
million barrels per day (bpd) of crude and fuel worldwide.
Both Parnon and Arcadia are controlled by shipping magnate
Fredriksen, a former oil trader who built his Frontline
group into a global shipping powerhouse and bought Arcadia from
Japan's Mitsui & Co. Ltd in 2006.
Fredriksen, whose estimated $14.7 billion fortune places him
at No. 71 on the latest Forbes list, has said the lawsuit might
have been a bid by U.S. regulators to extract revenge for BP's
role in the 2010 Gulf of Mexico Oil spill.
(Reporting by Jonathan Stempel and Jonathan Leff; Additional
reporting by Douwe Miedema in Washington, D.C.; Editing by
Leslie Adler, Andrew Hay, Jan Paschal and Richard Pullin)