THE WALL STREET JOURNAL: CFTC Charges 15 With Manipulating Gas Mkt: “The U.S. Commodity Futures Trading Commission filed complaints Tuesday against 15 natural gas traders at seven companies, alleging widespread efforts to manipulate gas markets”: “In some cases, high-ranking trading officials at the companies, including Mirant Corp. and Royal Dutch/Shell Group unit Coral Energy, knew about or took part in the schemes” (ShellNews.net) 2 Feb 05
By Jon Kamp
Of DOW JONES NEWSWIRES
(Updates with comments from traders, attorneys, companies and publisher.)
CHICAGO -- The U.S. Commodity Futures Trading Commission filed complaints Tuesday against 15 natural gas traders at seven companies, alleging widespread efforts to manipulate gas markets.
At various times during a near three-year period from 2000 through 2002, the traders intentionally reported inaccurate data and volumes to publishers that produce price indexes, the CFTC alleged in five complaints filed in four U.S. district courts.
Those indexes are used to value billions of dollars in natural gas contracts and derivatives. The CFTC's latest complaints mark a significant turn from a broad investigation of energy companies to traders themselves.
The agency included transcripts of e-mails and recorded phone conversations to outline what it described as highly detailed manipulation efforts. In some cases, high-ranking trading officials at the companies, including Mirant Corp. (MIR) and Royal Dutch/Shell Group (RD,SC) unit Coral Energy, knew about or took part in the schemes, the agency said. And in one case, traders at two different energy companies conspired with each other to create and submit false data reports, the CFTC alleged.
Before Tuesday, the agency had investigated about 55 energy companies and settled with about two dozen for either false data reporting, attempted market manipulation or intentionally making offsetting trades to boost volume. The agency has also levied charges against and settled with four individuals, and its total efforts have netted nearly $300 million in fines.
Gregory Mocek, the CFTC's director of enforcement, has said that the agency is wrapping up its company probes, but will continue to pursue individual traders. Tuesday's filings, mostly involving companies that already settled with the CFTC over false data or alleged manipulation attempts, indicated the new direction.
Mocek declined to say whether complaints against more traders are forthcoming, but said personnel at all energy companies investigated are subject to further investigation.
Traders from CMS Energy Corp. (CMS) unit CMS Field Services; Duke Energy Corp. (DUK) unit Duke Energy Trading and Marketing LLC; Black Hills Corp. (BKH) unit Enserco Energy Inc.; private firm Concord Energy LLC; and Cinergy Corp. (CIN) were named by the CFTC. All of the above companies, except Concord, have settled with the CFTC in recent years for a combined $91 million.
The CFTC seeks civil penalties of $110,000 to $120,000 for each violation of its Commodity Exchange Act.
Focus On Traders From Western U.S.
The CFTC's complaints brought particular focus on traders and high-ranking trading officials in the western U.S.
According to the agency, Christopher McDonald, then chief commercial officer and director of Mirant's western U.S. trading desk, conspired in 2000 and possibly 2001 with Mirant trader Paul Atha to submit fake price reports. And they coordinated their efforts, the CFTC said, with Michael Whalen, a former Mirant trader that had moved to Cinergy.
New Cinergy employee Whalen agreed in July 2000 to help McDonald lower the "Permian" delivery point index created by Inside FERC, a publication of McGraw-Hill Cos. (MHP) unit Platts, the CFTC said. Though he didn't have price reporting responsibility, and unbeknownst to anyone at Cinergy, Whalen agreed to report the same false data as McDonald and to report Mirant as the counterparty, the CFTC said.
According to phone conversation transcripts in the CFTC's complaint, Whalen asked if McDonald wanted to fax him the information they were going to write down "so it's more believable." McDonald later remarked that some data "might be fishy," and they coordinated their information when an Inside FERC employee questioned data, the CFTC said.
According to the agency, the practice was discussed at high levels at Mirant. In late 2000 or early 2001, McDonald told top executives for the company's Northeast, West and East trading regions and the general counsel office that trader reporting misconduct was occurring on the West desk, the CFTC alleged.
The Mirant traders are no longer with the company, and Whalen was fired, spokesmen for Mirant and Cinergy said. Like many other energy companies, Cinergy and Mirant now have risk managers review and submit trading data to publishers, taking traders out of the chain.
An attorney for McDonald declined comment Tuesday because he had not seen the complaint and Atha, reached at home, also declined comment. Chris Flood, an attorney representing both Atha and former Coral trader Courtney Cubbison Moore, who has also been charged, said they did nothing wrong, and that the CFTC's filings give them the chance to "expose these complaints as being bogus."
Efforts to reach Whalen and his attorney were unsuccessful.
The CFTC filed a complaint against five traders and an analyst at Coral's West Trading Desk for false reporting from at least October 2001 through June 2002. The traders include Denette Johnson, then head of Coral's West desk, Moore, John Tracy, Robert Harp and Anthony Dizona. The analyst charged was Kelly Dyer.
All of the charged individuals were also employed by Shell Trading Gas & Power Co., the CFTC said.
Along with false information reporting, the agency said that Dyer would mark "good" or "bad" on a spreadsheet of trades to denote how, once matched up against an index, they would affect Coral's revenues. Traders used this information "overwhelmingly" to "positively affect Coral's revenues," the CFTC said. Johnson, as head of trading for the West desk, controlled and was aware of these activities, the CFTC said.
Three of the Coral traders still work for the company, spokesman Mark Singer said. Citing company policy, he declined to provide additional information. Coral has also put more risk-office controls on price dissemination.
Messages were left at home for Johnson, Moore, Harp and Dizona. A listing for John Tracy in Murrieta, Calif., where the CFTC said he resides, could not be found. Efforts to reach Dyer and Dyer's attorney were unsuccessful, and attorneys for Harp and Tracy could not be reached.
Johnson's attorney, Robert Sussman, called the complaint "ridiculous" and said the facts would prove Johnson had done nothing wrong.
Practice Continued At New Firm
A Platts spokesman declined to comment directly on whether the inaccurate data may have affected index prices.
Two traders and the top official at Black Hills unit Enserco engaged in false reporting from May 2000 through October 2002, the CFTC alleged. They then formed their own firm, Concord Energy, and one of them continued the practice, the CFTC said. The agency filed charges against Concord itself, and against traders Matthew Reed and Darrell Danyluk. The agency also filed against Shawn McLaughlin, who was Enserco's top official when the wrongdoing occurred, the CFTC said.
While at Enserco, Reed traded in regions from the U.S. Southwest to northern California, and Danyluk, based in Calgary, traded for the Northwest U.S. and Canada. The two reported false trades with McLaughlin's "knowledge and consent," the CFTC said. They also reported fake deals for each other's regions in a strategy they called "double dipping," the agency said.
When Reed was out of the office, McLaughlin would help organize the false data, the CFTC said. In a December 2000 phone conversation, McLaughlin and Danyluk joked about a "hidden agenda" regarding publication Gas Daily, according to a transcript in the CFTC's complaint.
The traders made "significant reports of fictitious volume," the CFTC said. All three also earned multi-million dollar bonuses based on the profitability of their trading during the period in question, the agency said.
Efforts to contact Reed were unsuccessful. Danyluk could not be reached at home or on his mobile phone, and McLaughlin could not be reached at home. An attorney for Concord declined comment Tuesday.
"Let's Make Up Some Numbers"
The CFTC brought a complaint against Duke Energy Trading and Marketing trader Michael Whitney for alleged violations committed between the summer of 2001 and 2002. On a "regular basis" he submitted reports with false information to index publishers, including deals with altered prices and deflated or inflated volumes, the CFTC alleged.
In July 2002, Whitney submitted information to publisher Enerdata Ltd. "in an attempt to manipulate the price of natural gas at the Emerson Hub," according to the CFTC's complaint. The Emerson hub is a major point on the Trans-Canada pipeline that supplies the upper Midwest U.S.
When questioned about his information by Enerdata, Whitney "falsely maintained that his report was accurate," the CFTC said. He also tried to blame the misinformation on the counterparty for the deal, a trader with a DETM affiliate in Calgary, then called the trader to make sure they were "on the same page," the CFTC alleged.
A similar situation occurred when Whitney was questioned by another publisher, the agency said.
Whitney is no longer at Duke, and the company has added more controls to the release of price information, a spokesman said. Efforts to contact Whitney and his attorney were unsuccessful.
The CFTC also charged high-ranking traders Jeffrey A. Bradley and Robert L. Martin at CMS Field Services. Bradley, manager of marketing, submitted information regarding hundreds of inaccurate deals to publishers, the CFTC said.
And on at least one occasion, Bradley and Martin, the company's director of gas supply, agreed to submit false information regarding the Northern Natural Gas TOK pipeline point, the CFTC said. According to a transcript in the agency's complaint, after determining Martin was busy and hadn't yet "changed" his pricing, Bradley authorized Martin to turn in fake information.
"Well, let's make up some numbers and turn them in, then," Bradley said, according to the CFTC.
CMS stopped reporting prices in 2002 and sold its trading subsidiary in 2003 to Cantera Natural Gas. An official at new Cantera owner Penn Virginia Resource Partners, a unit of Penn Virginia Corp. (PVA), wasn't available for immediate comment.
Efforts to reach Bradley and Martin at home were unsuccessful.
-By Jon Kamp; Dow Jones Newswires; 312-750-4129; jon.kamp@dowjones.com
(Mark Golden in San Francisco, Kristen McNamara, Spencer Jakab and Matthew Dalton in New York contributed to this report).