IN RE: AMARANTH NATURAL GAS COMMODITIES LITIGATION
No. 12-2075-cv
United States Court of Appeals FOR THE SECOND CIRCUIT
August Term 2012 (Argued: February 15, 2013 Decided: September 23, 2013)
ROBERTO E. CALLE GRACEY, on behalf of himself and all others similarly situated, JOHN F. SPECIAL, GREGORY H. SMITH, on behalf of himself and all others similarly situated, ALAN MARTIN, individually and on behalf of all other persons similarly situated, Plaintiffs-Appellants, -v.- J.P. MORGAN CHASE & CO., J.P. MORGAN CHASE BANK, INC., J.P. MORGAN FUTURES, INC., Defendants-Appellees, AMARANTH ADVISORS, LLC, AMARANTH ADVISORS CALGARY ULC, AMARANTH CAPITAL PARTNERS LLC, AMARANTH PARTNERS LLC, NICHOLAS M. MAOUNIS, ALX ENERGY INCORPORATED, JAMES DELUCIA, GOTHAM ENERGY BROKERS INC., AMARANTH MANAGEMENT LP, AMARANTH INTERNATIONAL ADVISORS L.L.C., AMARANTH LLC, AMARANTH GROUP INC., AMARANTH INTERNATIONAL LIMITED, JAMES DELUCIA, L.P., BRIAN HUNTER, TFS ENERGY FUTURES LLC, MATTHEW DONOHOE, Defendants. Before: SACK, HALL, and LIVINGSTON, Circuit Judges.
CHRISTOPHER LOVELL (Gary S. Jacobson, Amanda N. Miller, Lovell Stewart Halebian Jacobson LLP, New York, NY, Peter D. St. Phillip Jr., and Vincent Briganti, Lowey Dannenberg Cohen & Hart, P.C., White Plains, NY, on the brief), Lovell Stewart Halebian Jacobson LLP, New York, NY, for Plaintiffs-Appellants.
ERIC S. GOLDSTEIN (Daniel J. Toal, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants-Appellees.
DEBRA ANN LIVINGSTON, Circuit Judge:
In the fall of 2006, Amaranth Advisors LLC (“Amaranth“), a hedge fund that had heavily invested in natural gas futures, collapsed. A Senate investigation would later conclude that Amaranth, in the months leading up to its demise, had taken positions in natural gas futures and swaps so massive that its trading directly affected domestic natural gas prices and price volatility. See Staff Report of S. Permanent Subcomm. on Investigations, Comm. on Homeland Security and Governmental Affairs, 110th Cong., Excessive Speculation in the Natural Gas Market 6 (2007) (“Senate Report“). Plaintiffs-Appellants, traders who had bought or sold natural gas futures during these same months, filed a
Plaintiffs-Appellants argue on appeal that the district court did not apply the correct standard for evaluating the sufficiency of their amended complaint and likewise failed to recognize the amended complaint‘s well-pleaded allegations that J.P. Futures aided and abetted Amaranth‘s manipulation within the meaning of Section 22 of the CEA,
1. Commodity Futures Trading
The CEA prohibits manipulation of the price of any commodity or commodity future. See
A. NYMEX Natural Gas Futures
NYMEX is a futures and options exchange based in New York City. N.Y. Mercantile Exch. v. IntercontinentalExchange, Inc., 497 F.3d 109, 110 (2d Cir. 2007). We have previously described the basic features of commodity futures trading:
A commodities futures contract is an executory cоntract for the sale of a commodity executed at a specific point in time with delivery of the commodity postponed to a future date. Every commodities futures contract has a seller and a buyer. The seller, called a “short,” agrees for a price, fixed at the time of contract, to deliver a specified quantity and grade of an identified commodity at a date in the future. The buyer, or “long,” agrees to accept delivery at that future date at the price fixed in the contract. It is the rare case when buyers and sellers settle their obligations under futures contracts by actually delivering the commodity. Rather, they routinely take a short or long position in order to speculate on the future price of the commodity. Then, sometime before delivery is due, they offset or liquidate their positions by entering the market again and purchasing an equal number of opposite contracts, i.e., a short buys long, a long buys short. In this way their obligations under the original liquidating contracts offset each other. The difference in price between the original contract and the offsetting contract determines the amount of money made or lost.
Strobl v. N.Y. Mercantile Exch., 768 F.2d 22, 24 (2d Cir. 1985).
NYMEX is a designated contract market, or “DCM.” As a DCM, NYMEX may offer options and futures trading for any type of commodity, but is subject to extensive oversight from the Commodity Futures Trading Commission (“CFTC“). See
All trades on NYMEX must go through the exchange‘s clearinghouse. To finalize, or “clear,” a trade, traders must transact with a NYMEX clearing member—a firm approved as a member of the clearinghouse. The seller‘s clearing firm will sell the contract to the clearinghouse, which then sells the contract to the buyer‘s clearing firm. Through this act of simultaneously buying and selling the contract, the clearinghouse guarantees both sides of the trade and ensures that neither buyer nor seller is exposed to any counterparty credit risk. The clearing firms, in turn, guarantee their clients’ performance to the clearinghouse.
In addition to clearing members, traders on NYMEX also interact with futures commissions merchants, or “FCMs.” “An FCM is the commodity market‘s equivalent of a securities brokerage house, soliciting and accepting orders for futures contracts and accepting funds or extending credit in connection therewith.” First Am. Discount Corp. v. CFTC, 222 F.3d 1008, 1110 (D.C. Cir. 2000); see also
ICE is an electronic commodity exchange based in Atlanta, Georgia. At the time of the events alleged in the amended complaint, ICE offered trading in natural gas swaps.3 Swaps, unlike futures contracts, do not contemplate delivery of the underlying commodity. Rather, in a typical commodity swap, the buyer agrees to pay the seller a fixed amount of money and the seller agrees to pay the buyer the price of an underlying commodity at the time the swap expires. For ICE‘s Natural Gas Henry Hub Swap, this “floating value” paid by the seller was the final settlement value of the NYMEX natural gas future for the corresponding month. Hence, if the final settlement value of the NYMEX natural gas future was above whatever price the buyer paid for the swap, the buyer would profit; if it was below, the seller would.
Since the settlement price of an ICE Henry Hub natural gas swap was pegged to the final settlement price of the corresponding NYMEX natural gas future, the two instruments were functionally identical for risk management purposes. Indeed, arbitrageurs ensured that their prices moved in virtual lockstep with one another. Whether a trader decided to transact in ICE swaps
An important difference between the two instruments, however, was that ICE did not face the same level of regulatory oversight as did NYMEX. At the time of the events alleged in the amended complaint, ICE qualified as an “exempt commercial market,” or “ECM,” under the CEA.4 While this status limited both the type of instruments ICE could offer for trading and the parties that could trade them, it also exempted ICE from most of the regulatory obligations placed upon NYMEX. See
2. Factual Background
The following facts are taken from the amended complaint, the allegations of which we accept as true, as well as from other materials referenced in the amended complaint. See, e.g., ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490, 496 (2d Cir. 2013).
A. Amaranth
Amaranth was a multi-strategy hedge fund based in Greenwich, Connecticut. Founded in 2000, Amaranth initially pursued an investment strategy that did not particularly focus on energy trading. This changed over the next half-decade, however, and by 2005 energy trading consumed over thirty percent of Amaranth‘s capital. Amaranth profited from this focus on energy when, in late 2005, Hurricanes Katrina and Rita disrupted domestic natural gas distribution. The resultant spike in prices produced returns on Amaranth‘s invеstments so large that energy trading would ultimately account for 98% of the
Amaranth continued to focus on energy trading in 2006. Among other things, it began to acquire large “spread” positions in NYMEX natural gas futures.6 Specifically, Amaranth acquired “calendar” spreads between natural gas futures for different months. Since many homes and businesses use it for indoor heating, natural gas has a highly seasonal price that rises in the colder winter months and falls in the warmer summer months. By taking large spread positions, Amaranth was betting that the difference between these winter and summer prices would increase.
Amaranth started to build up short positions for the March 2006, April 2006, and November 2006 NYMEX natural gas futures, while at the same time acquiring a long position for the January 2007 future. The sizes of these positions were exceptional. Most traders consider control of only a few hundred contracts to be a substantial position; a position of 10,000 NYMEX natural gas futures contracts, meanwhile, will produce $1,000,000 in profit or loss for every cent of price change. Amaranth, however, soon acquired positions of over 40,000
While Amaranth was building its spread positions during the first half of 2006, it also engaged in several unusual transactions, referred to by Plaintiffs-Appellants in their amended complaint as “slamming the close” trades. These trades all followed the same pattern: in the weeks leading up to a NYMEX future‘s expiration, Amaranth would simultaneously acquire a long position in the future and a short position in the corresponding swap on ICE. Then, during the last half hour of trading on the final trading day—the finаl settlement period—Amaranth would sell most or all of its long position, thus lowering the future‘s final settlement price. This would then lower the final settlement price of the corresponding ICE swap, allowing Amaranth to profit from its short position in that swap.
Amaranth engaged in these “slamming the close” trades for the March 2006, April 2006, and May 2006 NYMEX natural gas futures. For example, on the March 2006 future‘s final trading day, Amaranth acquired a long position in the future of over 3,000 contracts. It then sold off this position during the future‘s final settlement period, lowering the future‘s final price by $0.29 and
In conducting these trades, Amaranth violated NYMEX position limits and accountability levels, which prompted investigations from both NYMEX and the CFTC. NYMEX also sought to limit Amaranth‘s trading for the June 2006 future, even contacting J.P. Futures, Amaranth‘s clearing broker, in May to remind it that Amaranth needed to remain below applicable position limits. Amaranth failed to heed these warnings, and on June 1 it appeared on a list of traders exceeding applicable accountability levels. Nevertheless, NYMEX‘s initial response to Amaranth‘s having again exceeded accountability levels was to recommend their temporary increase. Then in early August, NYMEX informed Amaranth that it should reduce its positions in the September 2006 natural gas future. Amaranth responded by shifting its positions in September and October natural gas futures to the corresponding swaps on ICE. It subsequently increased the size of those positions.
By September 2006, however, the market for natural gas moved in ways that disrupted Amaranth‘s positions. As the winter months approached, it became clearer that the price of natural gas would not rise considerably; the winter/summer price spreads in which Amaranth had invested consequently began to fall. Amaranth, faced with ballooning margin requirements, struggled to find the capital or credit necessary to continue buying large positions that could prop up prices. On the brink of collapse, the fund entered into negotiations with several investment banks to sell off its natural gas positions. These negotiations fell through, and on September 20, 2006, Amaranth sold most of its
On July 25, 2007, the CFTC filed a complaint against Amaranth and its head energy trader, Brian Hunter, alleging that they “intentionally and unlawfully attempted to manipulate the price of natural gas futures contracts on the New York Mercantile Exchange (‘NYMEX‘) on February 24 and April 26, 2006 . . . and that Amaranth Advisors L.L.C. made material misrepresentations to NYMEX in violation of Section 9(a)(4) of the [CEA].” CFTC v. Amaranth Advisors L.L.C., No. 07-cv-6682, 2009 WL 3270829, at *1 (S.D.N.Y. Aug. 12, 2009). The defendants settled with the CFTC for a civil penalty of $7.5 million. Id. at *3. On July 26, 2007, the Federal Energy Regulatory Commission (“FERC“) commenced an administrative proceeding against Amaranth for civil penalties and disgorgement of profits. See CFTC v. Amaranth Advisors, LLC, 523 F. Supp. 2d 328, 331 (S.D.N.Y. 2007). Amaranth likewise settled for a civil penalty of $7.5 million.7
B. J.P. Futures
Throughout the class period, J.P. Futures served as Amaranth‘s FCM and clearing firm. This meant, among other things, that J.P. Futures processed and
As Amaranth‘s clearing broker, J.P. Futures “marked to market” Amaranth‘s positions on a daily basis in order to determine if Amaranth needed to deposit additional margin. This, along with J.P. Futures‘s other roles as a clearing broker, meant that it knew of Amaranth‘s positions and trading activity. As the clearing broker, J.P. Futures also knew when Amaranth violated NYMEX position limits or exceeded NYMEX accountability levels. Indeed, NYMEX contacted J.P. Futures directly in May 2006 to warn it about Amaranth‘s position in the June 2006 NYMEX natural gas future. Additionally, J.P. Futures knew of the positions Amaranth took in cоnnection with its “slamming the close” trades. It similarly knew about the NYMEX and CFTC investigations into Amaranth‘s trading.
3. Procedural History
On July 12, 2007, Plaintiffs-Appellants filed a complaint on behalf of all traders who purchased and sold NYMEX natural gas futures contracts between February 16 and September 28, 2006.9 Named as defendants were the entities and individuals that formed Amaranth, the entities and individuals that served as Amaranth‘s floor brokers, and the entities forming J.P. Morgan. The complaint alleged, inter alia, that Amaranth had manipulated NYMEX natural gas futures prices in violation of Sections 6(c), 6(d), 9(a), and 22(a) of the CEA,
Defendants filed a motion to dismiss. In an October 6, 2008 opinion, the district court granted the motion in part and denied it in part. See In re Amaranth Natural Gas Commodities Litig. (“Amaranth I“), 587 F. Supp. 2d 513 (S.D.N.Y. 2008). The district court determined as an initial matter that Plaintiffs-Appellants’ allegations of manipulation were subject to the heightened pleading standards of
Plaintiffs-Appellants filed an amended complaint on November 26, 2008, bringing the same claims against Amaranth and J.P. Morgan but providing more detailed allegations about the two companies’ intent. In an April 27, 2009 opinion, the district court concluded that the amended complaint sufficiently stated a claim against Amaranth for manipulation based on its acquisition of large open positions, but still failed to state a claim against J.P. Futures for aiding and abetting manipulation under Section 22 of the CEA. See In re Amaranth Natural Gas Commodities Litig. (“Amaranth II“), 612 F. Supp. 2d 376 (S.D.N.Y. 2009). Evaluating the complaint under Rule 9(b), the district court
Plaintiffs-Appellants’ class action claims against Amaranth and the floor broker defendants were eventually certified, and in December 2011 the parties reached a settlement agreement dismissing the claims for $77.1 million. See In re Amaranth Natural Gas Commodities Litig., No. 07-cv-6377, 2012 WL 2149094, at *1 (S.D.N.Y. June 11, 2012). In April 2012, the district court entered final judgments dismissing all remaining claims against the remaining defendants, including J.P. Futures. Plaintiffs-Appellants filed a timely notice of appeal.
1. Standard of Review
We review de novo a district court‘s dismissal of a complaint for failure to state a claim. Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d 18, 22 (2d Cir. 2013). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the miscоnduct alleged.” Id. This standard requires that the complaint allege “more than a sheer possibility that a defendant has acted unlawfully” and more than “facts that are merely consistent with a defendant‘s liability.” Id. (internal quotation marks omitted). Applying this standard is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679.
The district court concluded below that Plaintiffs-Appellants’ amended complaint was subject to the heightened pleading standard of
2. Aiding and Abetting under the CEA
Section 22 of the CEA provides a private right of action against “[a]ny person (other than a registered entity or registered futures association) who
Accordingly, both the CFTC and courts have determined that the standard for aiding and abetting liability under the CEA is thе same as that for aiding and abetting under federal criminal law. The CFTC has held, drawing from Judge Learned Hand‘s classic formulation of criminal aiding and abetting liability in United States v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938), that “proof of a specific unlawful intent to further the underlying violation is necessary before one can be found liable for aiding and abetting a violation of the [CEA].” In re Richardson Secs., CFTC No. 78-10, 1981 WL 26081, at *5. The Seventh Circuit has likewise noted that “[t]he elements that a plaintiff must allege to state a claim for aiding and abetting under § 22 of the CEA are therefore the same elements that must be established to prove a violation of 18 U.S.C. § 2.” Damato v. Hermanson, 153 F.3d 464, 473 (7th Cir. 1998). The Seventh Circuit articulated these elements, consistent with its own case law on criminal aiding and abetting, as: “that [defendant] (1) had knowledge of the principal‘s . . . intent to commit a violation of the Act; (2) had the intent to further that violation; and (3) committed some act in furtherance of the principal‘s objective.” Id. The Third Circuit has endorsed the same definition. See Nicholas v. Saul Stone & Co., 224 F.3d 179, 189 (3d Cir. 2000).
We recently reaffirmed Peoni‘s continued validity in SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012), which found the standard helpful for determining aiding and abetting liability under the Securities Exchange Act.15 In reversing the district court‘s dismissal of an SEC complaint, we held that the “substantial assistance” prong of aiding and abetting under the Act was commensurate with Peoni. Id. at 212. That is, in order to allege substantial assistance, the SEC must plead, as Peoni instructs, that the defendant associated himself with a violation of the Act, participated in it as something that he wished to bring about, and sought by his actions to make the violation succeed. Id. As the panel explained, “Judge Hand‘s standard has thus survived the test of time, is clear, concise, and workable, and governs the determination of aider and abettor liability in securities fraud cases.” Id.
3. Analysis
Commodities manipulation requires “that (1) Defendants possessed an ability to influence market prices; (2) an artificial price existed; (3) Defendants caused the artificial prices; and (4) Defendants specifically intended to cause the artificial price.” Hershey, 610 F.3d at 247; see also DiPlacido v. CFTC, 364 F. App‘x 657, 661 (2d Cir. 2009). There is thus no manipulatiоn without intent to cause artificial prices. Accordingly (and because aiding and abetting requires knowledge of the primary violation and an intent to assist it), Plaintiffs-Appellants were required to allege that J.P. Futures knew that Amaranth specifically intended to manipulate the price of NYMEX natural gas futures and that J.P. Futures intended to help. Looking at the amended complaint as a
As stated earlier, Plaintiffs-Appellants allege that Amaranth manipulated the price of NYMEX natural gas futures in two ways: (1) the accumulation of large open positions that artificially propped up natural gas calendar spreads; and (2) its “slamming the close” trades. Plaintiffs-Appellants allege that J.P. Futures had knowledge of these manipulative schemes because it had information on Amaranth‘s daily trading activity and open positions on NYMEX and ICE. This information also meant that J.P. Futures knew when Amaranth was in violation of NYMEX position limits or accountability levels. Plaintiffs-Appellants further allege that J.P. Futures performed multiple overt acts to assist Amaranth in its manipulations, including the clearing of trades, the extension of credit, and assistance in moving positions from NYMEX to ICE. According to the amended complaint, J.P. Futures assisted Amaranth because of the large commissions J.P. Futures earned from the fund‘s trading, as well as fees and interest it earned on the fund‘s margin deposits.
With respect to Plaintiffs-Appellants’ first theory of manipulation—the building of large open positions—the amended complaint alleges, at most, a very weak inference that J.P. Futures actually knew of Amaranth‘s manipulative
This remains true even if a trader‘s positions violate applicable position limits and accountability levels. As the CEA explains, position limits and accountability levеls are intended not only to prevent manipulation, but also “to diminish, eliminate, or prevent excessive speculation,” “to ensure sufficient market liquidity for bona fide hedgers,” and “to ensure that the price discovery
The amended complaint‘s factual allegations illustrate these principles in action. By the start of the class period, Amaranth had realized large profits from the high spread between winter and summer natural gas prices that occurred after Hurricanes Katrina and Rita wreaked havoc on the Gulf Coast in 2005. The positions Amaranth then acquired were consistent with a belief that the same price pattern would happen again in 2006. Thus, while these positions could have suggested manipulative intent, they equally suggested undue confidence that recent history would repeat itself. This strains any inference that J.P. Futures actually knew—as opposed to, for example, that J.P. Futures
The allegations supporting Plaintiffs-Appellants’ second theory of manipulation—the “slamming the close” trades—present a closer issue. In contrast to the acquisition of large open positions, J.P. Futures has provided no obvious legitimate economic reason why Amaranth would wait until the final minutes of trading to sell large quantities of a particular future. This type of trading activity, while not dispositive of manipulation, does strongly suggest it. Indeed, the district court found that “the timing of the sales are suspicious in themselves.” Amaranth I, 587 F. Supp. 2d at 535.
Still, per Peoni and Apuzzo, we must consider J.P. Futures‘s alleged knowledge and intent regarding Amaranth‘s “slamming the close” trades in connection with J.P. Futurеs‘s alleged actions. The amended complaint does not allege that J.P. Futures did anything more to assist Amaranth in these trades than to provide routine clearing firm services. As previous decisions from this Circuit recognize, such allegations provide only weak evidence that J.P. Futures associated itself with Amaranth‘s manipulation and “participate[d] in it as in
Granted, Greenberg and Levitt did not involve commodities trading or the CEA. Their holdings need not control, however, for us to decide the present case. It suffices to conclude that in the circumstances presented here, the provision of routine clearing services, when combined only with allegations that the clearing firm knew of trading activity that was highly suggestive but not dispositive of manipulation, is not enough to state a claim for aiding and abetting under Section 22 of the CEA.18
In sum, with respect to Plaintiffs-Appellants’ first theory of manipulation, the amended complaint‘s allegations allow only a weak inference that J.P. Futures actually knew Amaranth was manipulating natural gas futures through the acquisition of large open positions. This, when considered in connection with the amended complaint‘s relatively weak allegations about J.P. Futures‘s assistance to Amaranth, fails to state a claim that J.P. Futures aided and
Though Plaintiffs-Appellants cite several decisions finding aiding and abetting liability under the CEA, none are contrary to our conclusion here. All these decisions involved defendants who had either greater knowledge of the principal wrongdoing or more active involvement in that wrongdoing. In Kohen v. Pacific Investment Management Co., 244 F.R.D. 469, 482 (N.D. Ill. 2007), for example, the defendant allegedly aided and abetted a “squeeze” on ten-year Treasury note futures by actually acquiring the dominant positions in those futures. The defendants in CFTC v. Johnson, 408 F. Supp. 2d 259, 268–69 (S.D. Tex. 2005), meanwhile, were liable under Section 22 because they had allegedly forwarded emails they knew to contain false and misleading information about natural gas transactions; see also In re Global Minerals & Metals Corp., CFTC No. 99-11, 1999 WL 440439 (June 30, 1999) (non-binding CFTC order confirming settlement offer of defendant that allegedly provided both trading facilities and trading advice to principal manipulator).
Case law does not suggest a different result. Crediting the facts alleged in the complaint as true, J.P. Futures‘s seemingly minimal involvement as an FCM distinguishes this case from Miller v. New York Produce Exchange, 550 F.2d 762, 767 (2d Cir. 1977), which involved a broker described by the court as playing “a dominant and knowing role” in its client‘s market manipulation. Plaintiffs-Appellants also cite various CFTC decisions, but these are distinguishable from the instant case because they all involved FCMs transmitting wash orders on behalf of clients. In re Piasio, CFTC No. 97-9, 2000 WL 1466069, at *3 (CFTC Sept. 29, 2000) aff‘d sub nom. Piasio v. CFTC, 54 F. App‘x 702 (2d Cir. 2002); In re LFG, L.L.C., CFTC No. 01-19, 2001 WL 940235, at *1 (CFTC Aug. 20, 2001); In re Mitsubishi Corp., CFTC No. 97-10, 1997 WL 345634, at *2–3 (CFTC Jun. 24, 1997); In re Three Eight Corp., CFTC No. 88-33,
CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the district court.
Notes
Any person who commits, or who willfully aids, abets, counsels, commands, induces, or procures the commission of, a violation of any of the provisions of this chapter, or any of the rules, regulations, or orders issued pursuant to this chapter, or who acts in combination or concert with any other person in any such violation, or who willfully causes an act to be done or omitted which if directly performed or omitted by him or another would be a violation of the provisions of this chapter or any of such rules, regulations, or orders may be held responsible for such violation as a principal.
Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.