United States: J.P. Morgan Did Not "Aid And Abet" Amaranth’s Manipulation – Second Circuit Articulates And Applies The Standard For Aiding And Abetting Liability Under The Commodity Exchange Act

In evaluating claims against J.P. Morgan1 in its role as Amaranth Advisors LLC‟s ("Amaranth") futures commission merchant ("FCM") and clearing broker, the Second Circuit followed Learned Hand‟s 1938 articulation "that aiding and abetting requires the defendant to in some sort associate himself with the venture, that he participate in it as in something that he wishes to bring about, that he seek by his action to make it succeed.‟"2 In evaluating allegations of two manipulative schemes – Amaranth‟s buildup of large NYMEX positions and "slamming the close" – the Second Circuit affirmed that allegations of J.P. Morgan‟s support for Amaranth‟s manipulation fell short of such aiding and abetting liability.

Introduction

On September 23, 2013, the Second Circuit affirmed the Southern District of New York‟s dismissal of claims by traders who purchased and sold NYMEX natural gas futures contracts in 2006.3 The traders claimed that J.P. Morgan aided and abetted Amaranth‟s manipulation of natural gas futures by providing Amaranth with services through J.P. Futures in its capacity as an FCM and clearing broker for Amaranth. The District Court dismissed the traders‟ claim. The Second Circuit upheld the dismissal on grounds that the allegations that J.P. Morgan knew Amaranth intended to manipulate the price of natural gas futures and intended to assist Amaranth in that regard fail to constitute an aiding and abetting claim under the Commodity Exchange Act ("CEA").

For the first time, the Second Circuit evaluated "aiding and abetting" liability under the CEA. Consistent with its precedents in the securities and criminal contexts, as well as that of other circuits, the Second Circuit stated that aiding and abetting liability under the CEA requires that a defendant must know that a party intends to engage in manipulation and must intend to assist the party in that regard. In applying the standard, the Second Circuit noted that a plaintiff must allege "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."4 The Second Circuit held that a clearing firm‟s provision of routine clearing services and its knowledge that certain trading activity is "highly suggestive" of manipulation are insufficient to support an aiding and abetting claim under the CEA.

Background

Amaranth was a hedge fund that collapsed in late 2006. Amaranth, according to the Second Circuit, engaged in two manipulative trading strategies during that same year. First, Amaranth acquired large "calendar spread" positions in NYMEX natural gas futures contracts for different months. In so doing, Amaranth was betting that the spread between the price of natural gas in the summer and winter would increase, while using the large size of its position kept the spread between the summer and winter natural gas futures contracts artificially wide.5

Second, Amaranth engaged in a strategy known as "slamming the close." Amaranth would acquire a large long position in natural gas futures on NYMEX, simultaneously acquire a large short position in corresponding swaps on the Intercontinental Exchange ("ICE"), and sell most of its natural gas futures during the last thirty minutes of trading on the last trading day for that futures contract (i.e., the "settlement period"). The sell-off would drive down the settlement price for the NYMEX futures contract and thereby benefit Amaranth‟s short position in corresponding swaps on ICE and other NYMEX natural gas futures. As Amaranth‟s FCM and clearing broker, J.P. Futures processed and settled Amaranth‟s natural gas trades on NYMEX and ICE during this time period.

Plaintiffs alleged that J.P. Morgan, via J.P. Futures, aided and abetted Amaranth‟s manipulative trading in violation of Section 22(a)(1) of the CEA. The District Court held that Plaintiffs failed to state a claim against J.P. Morgan because their claim failed to support the allegation that J.P. Futures acted overtly in furtherance of any manipulation and failed to show that J.P. Futures‟ actions extended beyond those routinely provided by clearing firms.6

Second Circuit Decision

The Second Circuit addressed whether Appellants‟ complaint states a claim against J.P. Morgan for aiding and abetting Amaranth‟s manipulative trading under the CEA7.

Aiding and Abetting Standard

The Second Circuit adopted the standard articulated in United States v. Peoni for evaluating aiding and abetting allegations of CEA violations.8 Under Peoni, the standard for aiding and abetting is 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].‟"9 Such standard "requires the defendant to in some sort associate himself with the venture, that he participate in it as in something that he wishes to bring about, that he seek by his action to make it succeed.‟"10 The Second Circuit clarified that inherent in such standard is the relationship between a defendant‟s knowledge, intent, and action. Thus, in aiding and abetting claims under the CEA, allegations regarding a defendant‟s knowledge, intent, and action must be evaluated in light of the entire complaint.11

Decision

Under applicable law,12 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 [Amaranth‟s manipulation]."13 The Second Circuit found that Appellants‟ "allegations of such knowledge and intent . . . fail to state a claim for aiding and abetting manipulation under the CEA."14

In so finding, the Second Circuit addressed Appellants‟ two theories of manipulation. As discussed above, Appellants alleged that Amaranth manipulated the price of NYMEX natural gas futures by acquiring large open positions and slamming the close.15 The Second Circuit found that Appellants‟ first theory alleges "a very weak inference" that J.P. Futures knew of or intended to assist Amaranth‟s manipulative intent because, "while J.P. Futures may have known about Amaranth‟s large positions in natural gas futures and swaps, such large positions do not necessarily imply manipulation."16 The Court explained that the acquisition of large open positions may indicate a trader‟s belief that futures prices will move in a favorable direction for reasons other than manipulation (i.e., speculation). The Second Circuit found that Appellants‟ second theory "does not allege that J.P. Futures did anything more to assist Amaranth in these trades than to provide routine clearing firm services."17 The Court conceded that the "slamming the close" trades strongly suggest manipulation. However, it explained that "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

Furthermore, in response to Appellants‟ argument that J.P. Futures also performed "non-routine" tasks to assist Amaranth‟s manipulation,19 the Second Circuit dismissed such argument on grounds that J.P. Futures performed such tasks in connection with trading activity not suggestive of manipulation (i.e., Amaranth‟s large open positions, rather than its slamming the close trades). The Second Circuit also found that FCMs such as J.P. Futures are not required to monitor clients‟ trading to prevent manipulation, nor would such an assertion of manipulation constitute a viable theory in support of an aiding and abetting allegation under the CEA.

Conclusion

As stated above, this case affirms the standard that the Second Circuit will use in evaluating aiding and abetting claims under the CEA. In this regard, the Second Circuit clarified that a clearing firm‟s provision of routine clearing services and its knowledge that certain trading activity is "highly suggestive" of manipulation are insufficient to support an aiding and abetting claim under the CEA.

Footnotes

1 The "J.P. Morgan" defendants are J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, Inc., and J.P. Morgan Futures, Inc. ("J.P. Futures").

2 In re Amaranth Natural Gas Commodities Litig., No. 12-2075-cv, at 26 (2nd Cir. 2013) ("Amaranth") (citing United States v. Peoni, 100 F.2d 401, 402 (2nd Cir. 1938) ("Peoni")).

3 See generally Amaranth.

4 Id. at 27.

5 However, by September 2006, the price of natural gas did not continue to rise and Amaranth‟s summer/winter price spreads began falling. Amaranth at 15. Amaranth struggled to meet its rising margin requirements and eventually sold its natural gas portfolio and liquidated its remaining assets. Id. at 15-16.

6 See Amaranth at 21 (citing In re Amaranth Natural Gas Commodities Litig., 612 F. Supp. 2d 376, 392-93 (S.D.N.Y. 2009) ("Amaranth II")). The District Court "concluded that the amended complaint sufficiently stated a claim against Amaranth for manipulation based on its acquisition of large open positions." Amaranth at 20 (referencing Amaranth II, 612 F. Supp. 2d 376). In December 2011, the parties reached a settlement for $77.1 million regarding claims against Amaranth and floor broker defendants. Amaranth at 21.

7 See Amaranth at 3 (declining to address whether the District Court applied the correct standard for evaluating the sufficiency of the complaint).

8 See generally Peoni, 100 F.2d 401.

9 Amaranth at 25 (citing Peoni, 100 F.2d at 402).

10 Amaranth at 26 (citing Peoni, 100 F.2d at 402).

11 Amaranth at 29.

12 The Second Circuit stated that commodities manipulation contains four elements: (1) an ability to influence market prices, (2) an artificial price, (3) an artificial price caused by defendant, and (4) specific intent to cause an artificial price. See Amaranth at 4 and 29. Further, manipulation requires intent to cause an artificial price and aiding and abetting requires knowledge of the primary violation and intent to assist such violation. See id. at 29.

13 Amaranth at 29 (emphasis added).

14 Id. at 30.

15 The Second Circuit also noted that Appellants made several allegations related to their two theories of manipulation. Specifically, Appellants alleged that J.P. Futures knew of Amaranth‟s manipulation because J.P. Futures had information regarding Amaranth‟s daily trading and open positions. Such information, in turn, alerted J.P Futures that Amaranth violated the NYMEX position limits or accountability levels. Appellants further alleged that J.P. Futures performed certain overt acts to assist Amaranth‟s manipulation and assisted Amaranth because J.P. Futures received large commissions, fees, and interest from Amaranth‟s trading and margin deposits. See Amaranth at 30; see also id. at 31-33 (dismissing these related allegations).

16 Amaranth at 31.

17 Id. at 33.

18 Id. at 34.

19 These tasks included "helping to transfer positions from NYMEX to ICE, extending credit limits, and bypassing internal position limits." See Amaranth at 35; see also id. at 30.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions