(Adds CFTC’s quotes in 5th paragraph and above 2nd subhead)
By Jonathan Stempel and Jonathan Leff
NEW YORK, Aug 4 (Reuters) - 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 in 2008.
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 court.
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.
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 prices.
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 year.
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 or Wildgoose.
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)