NEW YORK Commodities regulators set a high bar for themselves in a blockbuster lawsuit accusing two traders and their firms of manipulating the crude oil markets.
Because so many factors can affect the market for crude oil, proving that someone actually manipulated the market is considered extremely difficult. Throughout its 37-year history, the Commodity Futures Trading Commission has only won one market manipulation case, said Jerry Markham, a former chief counsel for the CFTC's enforcement division.
"You have to show the existence of an artificial price and that you caused it," said Markham, now a professor at Florida International University in Miami. "That can be enormously complex."
The CFTC on Tuesday sued James Dyer of Oklahoma's Parnon Energy, and Nick Wildgoose, of Europe-based Arcadia Energy, in its biggest ever case of oil market manipulation.
The commission said the two amassed large positions of crude oil that they later dumped in an effort to make money in oil futures contracts. The purported scheme allowed the defendants to illegally pocket $50 million, according to the lawsuit, filed in New York federal court.
Manipulating a market, as well as attempting to manipulate a market, are both violations under the Commodity Exchange Act.
Most market manipulation cases settle before trial, but Colin Hurley, the chief financial officer of Arcadia, which is affiliated with Parnon, said in a statement it plans to fight the charges. He said the complaint is without merit and that Arcadia engaged in lawful trades at market prices "that were dictated by the fundamentals of supply and demand."
In similar cases in the past, the CFTC has often alleged attempted manipulation rather than actual manipulation.
In a high-profile 2007 case against Amaranth Advisors and trader Brian Hunter over natural gas markets, the CFTC said they engaged in attempted manipulation. Amaranth settled for $7.5 million in 2009 while Hunter is still fighting the case.
The CFTC's sole victory alleging actual manipulation involved electricity futures trader Anthony DiPlacido. In 2009, the U.S. Court of Appeals for the 2nd Circuit affirmed findings from an administrative law proceeding that DiPlacido manipulated settlement prices for electricity futures contracts.
Proving attempted manipulation is seen as easier for regulators since the CFTC does not have to show that a defendant actually manipulated a market or that other market participants were harmed because of a defendant's actions.
It simply has to demonstrate that a defendant intended to manipulate the market.
"You have a few smoking guns in terms of email or tapes and it's easy to infer intent," said Daniel Waldman of the law firm Arnold & Porter and a former general counsel at the CFTC.
Under the Dodd-Frank financial reform law, the CFTC received new powers that make it easier to prove manipulation. But those powers do not become effective until July.
"If they're alleging manipulation, that means that the data is pretty dramatic," said Michael Greenberger, a professor at the University of Maryland School of Law and a former director of the division of trading and markets at the CFTC.
The CFTC also is under pressure from Congress to show it is being aggressive in pursuing manipulation of the oil markets when consumers are paying high prices at the gas pump. If the CFTC only alleged attempted manipulation, it would not have been seen as a strong case.
"Most people find it problematic when you try to enforce laws against those who didn't actually hurt anyone," said Michael Kim, a defense attorney at Kobre & Kim, who represents former Amaranth trader Hunter.
The CFTC can also seek tougher penalties for manipulation as opposed to attempted manipulation.
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.
"My suspicion is that this is going to be the first of a lot of market manipulations cases," said Greenberger.
(Reporting by Andrew Longstreth; Editing by Alden Bentley)