* US says two firms carried out cross-market scheme
* CFTC says illegal trading netted more than $50 mln
* Traders named in suit worked together at BP in past
* Firms in suit owned by Cyprus billionaire Fredriksen
(Makes clear traders not named in 2003 BP fine in para 7)
By Joshua Schneyer and Timothy Gardner
NEW YORK/WASHINGTON, May 24 U.S. regulators
launched one of the biggest ever crackdowns on oil price
manipulation on Tuesday, suing two well-known traders and two
trading firms owned by Norwegian billionaire John Fredriksen
for allegedly making $50 million by squeezing markets in 2008.
The Commodity Futures Trading Commission (CFTC) said
traders James Dyer of Oklahoma's Parnon Energy, and Nick
Wildgoose of Europe-based Arcadia Energy, amassed large
physical positions at a key U.S. trading hub to create the
impression of tight supplies that would boost oil prices.
Later they dumped those barrels back onto the market,
causing prices to crash and racking up profits from short
positions they had accrued in futures markets, the suit said.
"Defendants conducted a manipulative cycle, driving the
price of WTI (crude) to artificial highs and then back down, to
make unlawful profits," the lawsuit filed in New York said.
While the civil suit comes after three years of heightened
scrutiny into oil price speculation by the CFTC, it also
arrives at a time when President Barack Obama is seeking to
reassure Americans he is trying to curb high U.S. gasoline
prices and ensure they aren't subject to manipulation.
The suit names two traders familiar to U.S. oil market
veterans, who recall Dyer and Wildgoose from their days as
high-flying traders at BP Plc (BP.N) 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 point for U.S. oil futures.
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
Both Parnon and Arcadia are controlled by shipping magnate
Fredriksen, who was born in Norway but is based in Cyprus, and
whose $10.7 billion fortune placed him at number 72 in the
latest Forbes list of the world's billionaires.
The lawsuit says that the CFTC may seek damages of as much
as triple the monetary gains derived from the illicit trading
violations, among other potential fines and injunctions. If the
CFTC won damages of $150 million it would match the
second-largest fine in the agency's history.
A CFTC spokesman declined comment on the specific damages
it would seek in the suit. In the past, the CFTC has had a hard
time winning manipulation cases, although U.S. financial
reforms last year gave it broader powers to get tough.
While the trading strategy itself focused mainly on oil
futures' price spreads, or time spreads, rather than outright
prices of crude, the alleged scheme occurred in a year when
global oil prices experienced their largest swings ever.
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.
Sought for comment, officials at Arcadia and Parnon did not
return phone calls. Wildgoose, Dyer and Fredriksen were not
Link to text of lawsuit: link.reuters.com/xac79r
Graphic on trading play: r.reuters.com/qac79r
Factbox on CFTC fines: [ID:nN24285840]
Using positions in physical markets -- and even making a
loss in physical trading -- to gain profits in derivative
markets is not an uncommon phenomenon in oil markets.
The CFTC explained that the traders' "repeated conduct lead
to at least a physical WTI trading loss of over $15 million.
However, the artificial spread prices that were created as a
result of Parnon/Arcadia's physical trading created profits of
over $50 million in their WTI Derivative positions."
In the early 2000s, oil market trading plays known as
"squeezes" were commonplace on both sides of the Atlantic, and
BP was known as one of the most aggressive traders, using its
control of important physical assets like the Forties pipeline
that transports Europe's benchmark Brent crude, and the tanks
that store crude at Cushing for leverage on paper positions.
And although the plays have rarely been successfully
prosecuted by regulators, they have diminished in U.S. markets
amid years of heightened scrutiny and high-profile
investigations since the collapse of Enron.
"It feels like a blast from the past," said a veteran U.S.
oil trader who requested anonymity.
A LOT OF MONEY TO BE MADE
In September 2007, according to CFTC suit, Dyer said in an
email to other Parnon/Arcadia traders that there was a
"shitload of money to be made" in creating the appearance that
available stocks of crude at Cushing, Oklahoma -- the NYMEX
futures delivery hub -- were low, a move that would cause
prompt oil prices to rise.
As traders bid up oil for immediate delivery on fears of a
shortage, Dyer and Wildgoose would then take a short position
in near-term futures contracts, by selling them and acquiring
oil contracts for delivery further in the future, CFTC said.
They would then gain profits by dumping large volumes of
physical supplies back onto the market, ending the perception
of a short-term "shortage," and causing oil futures spreads to
collapse as premiums for prompt crude vanished.
The trading duo named in the lawsuit executed a
manipulative strategy by amassing "a sufficient quantity of
physical WTI to be delivered the next month at Cushing to
dominate and control WTI supply even though they had no
commercial need for crude oil," the CFTC said.
The scheme worked in January and March 2008, but later
failed in April, CFTC said, as prices rose by almost $20 a
barrel toward $120 over the course of that month. Prices barely
paused from then until they hit an all-time high in July.
Parnon, headquartered in Oklahoma, owns at least 3 million
barrels of storage facilities at Cushing. London-based Arcadia
is a major global oil trading firm, which typically markets
about 800,000 barrels a day of crude and product around the
Both are controlled by Fredriksen's Farahead Holdings,
based in Cyprus. Fredriksen's energy empire, which also
includes top oil tanker operator Frontline, liquefied natural
gas company Golar and offshore driller Seadrill, has hired away
several traders who once worked at BP, including Parnon's
current CEO, Paul Adams.
Arcadia itself, years before Fredriksen bought it from
Japanese trading house Mitsui, was sued by U.S. refiner TOSCO
in 2000 for allegedly executing a "squeeze" on European Brent
crude with other conspirators, although it settled out of court
for an undisclosed sum, without admitting wrongdoing.
Volatility in commodity prices has renewed calls for the
CFTC to crack down on speculators in oil markets, with some
lawmakers calling on the commission to immediately impose
position limits. [ID:nN11248413]
CFTC first began stepping up its monitoring of U.S. oil
trading in early 2008.
According to the Commodity Exchange Act, manipulation or an
attempt to manipulate the price of physical commodities or
futures on exchanges like NYMEX are illegal, and distortions in
futures spreads that are deemed to have been caused by such
trading are also considered violations.
(Reporting by Ayesha Rascoe, Christopher Doering, Tom
Doggett in Washington, Jeffrey Kerr, David Sheppard and Joshua
Schneyer in New York and Robert Campbell in Mexico City;
editing by Jonathan Leff)