On Apr. 26, 2012, the judge in the CFTC’s latest oil-manipulation lawsuit, CFTC v. Parnon Energy Inc.,denied the defendants’ motion to dismiss the complaint. The CFTC’s complaint alleges that the defendants, a California-based energy firm (Parnon Energy), two of its European affiliates (Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) SA), and two traders, attempted to manipulate and succeeded in manipulating NYMEX crude oil futures over a four-month period in 2008. It alleges that the defendants earned in excess of $50 million by engaging in the following manipulative scheme: (1) purchasing excessive amounts of physical WTI crude oil to drive up futures prices, (2) concurrently establishing a long position in calendar spread contracts, (3) offsetting their long position in spread contracts once prices for the prompt month futures contract had sufficiently inflated, (4) establishing a large short position in calendar spread contracts at the inflated prices, (5) selling off the physical oil to deflate prices, and (6) offsetting their short spread contracts position at the deflated prices.
In their motion to dismiss, the defendants argued that the CFTC lacked jurisdiction over attempts to manipulate calendar spreads and over the defendants’ purchases of physical oil, and that the CFTC had failed to allege a claim for commodities manipulation under the federal pleading standards. The court disagreed on all fronts in a 29-page opinion, holding among other things that the CFTC need not satisfy the heightened pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure because its claims did not sound in fraud. On the crucial issue of price artificiality, the defendants argued that futures prices could not have been artificially high on the days in question because, according to the available price data, prices were actually higher on the preceding days. The court disagreed that this evidence refuted the CFTC’s claims of artificial prices. It held that while price comparisons are relevant to the determination of whether prices were artificial, the CFTC’s allegations – taken as true at this stage in the case – suggested that the defendants’ conduct had interfered with basic forces of supply and demand in the oil futures market.
The case is pending before Judge William H. Pauley, III in the United States District Court for the Southern District of New York. The case is U.S. Commodity Futures Trading Comm’n v. Parnon Energy Inc., Case No. 1:11-cv-3543 (S.D.N.Y.).© 2013 Schiff Hardin LLP