NEW YORK (CN) - Citing the risky nature of speculation, U.S. District Judge Shira Scheindlin allowed investors to proceed with claims that Amaranth abused its dominant market position to manipulate the price of natural gas futures on the New York Mercantile Exchange.
Scheindlin opened the ruling with a quote from British parliamentary reformist William Cobbett (1763-1835), who wrote: "Another great evil arising from this desire to be thought rich; or rather, from the desire not to be thought poor, is the destructive thing which has been honored by the name of 'speculation;' but which ought to be called gambling."
Amaranth and other companies heavily speculated in the futures market. From Feb. 16 to Sept. 28, 2006, Amaranth controlled 40 percent of the outstanding NYMEX natural gas futures that matured from October 2006 through October 2007. With more than 545,000 natural gas contracts, its trading comprised almost 70 percent of all trading in those contracts.
A group of companies that bought, sold or held natural gas futures during that time accused Amaranth of buying the contracts "in strategic ways to inflate prices." Whenever the company bought contracts in bulk, the price would spike in response to a perceived increase in demand.
But the plaintiffs also claimed that Amaranth leveraged its weight in the futures market to drive down the settlement price at the last minute, knowing it would take a hit from its long position in the futures market but would greatly profit from its short position in "swaps" traded on the IntercontinentalExchange (ICE). Swaps are similar to futures contracts, but are settled financially. In this case, Amaranth agreed to pay traders the price of natural gas on a future date, in exchange for a fixed amount of money on that date. If the price of natural gas rose above the fixed amount, Amaranth lost money. If the commodity price dipped below the fixed amount, Amaranth made money.
The plaintiffs said Amaranth drove the price down by selling its futures contracts on NYMEX mere minutes before the contracts settled.
Although this artificially depressed the settlement price of the futures, Amaranth reaped millions of dollars, because its short position in swaps was "substantially larger" than its long position in futures, the ruling states.
Amaranth, its brokers and floor traders moved for dismissal, but Judge Scheindlin only partially granted that request.
"While the sale of large numbers of futures is not inherently manipulative, allegations that a defendant repeatedly sold large numbers of futures just before the close of settlement periods are sufficient to allege commodities manipulation," the judge concluded.
Scheindlin also allowed the plaintiffs to pursue their claim that Amaranth manipulated the settlement prices. She rejected the defendants' argument that they never directly manipulated any contract or underlying commodity.
The judge noted that the complaint "alleges not only that defendants manipulated settlement prices, but also that that manipulation altered the prices of NYMEX natural gas futures."
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