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From Securities Regulation Daily, May 4, 2018

‘Conceivable’ injury enough for Article III standing but not commodities manipulation, antitrust claims

By Lene Powell, J.D.

Highlighting a subtle but crucial difference in pleading standards for constitutional standing versus substantive causes of action, the Second Circuit held that derivatives traders’ "colorable" but not "plausible" injury arising from alleged manipulation in the natural gas market gave subject matter jurisdiction, but did not support a claim under the Commodity Exchange Act or antitrust laws. Where the plaintiffs failed to establish more than that their injury was "conceivable," this was enough to grant Article III standing but fatal to their substantive causes of action (Harry v. Total Gas & Power North America, Inc., May 4, 2018, Pooler, R.).

"There are no citizens’ arrests for commodities fraud, and, in any case, the sheriffs in that particular town are already on the case," the court wrote. "Plaintiffs can only recover in a civil action if they can establish that they themselves have been harmed by Defendants’ activities."

Alleged market manipulation. Natural gas is distributed through a network of hubs of varying sizes, making its way to wholesalers, distributors, and end users. Trading takes place at hubs, with spot prices reported to trade publications and compiled into indexes. Natural gas derivative contracts are distinctly valued on the basis of the price of natural gas bought from a particular hub at a particular time. The price of gas at the largest hub—the Henry Hub—provides the basis for natural gas futures and options contracts listed on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE). Other derivative contracts are valued on the basis of prices at smaller regional hubs.

The plaintiffs, who are investors involved in trading natural gas derivatives on NYMEX and ICE, learned of enforcement actions by the CFTC and the Federal Energy Regulatory Commission (FERC) alleging price manipulation at four regional hubs by Total Gas & Power North America, and brought their own private manipulation and antitrust actions. However, the plaintiffs traded natural gas derivatives on NYMEX and ICE—different from the derivatives contracts at issue in the CFTC/FERC enforcement actions. The plaintiffs argued that the "shockwaves" from the defendants’ alleged manipulation at the regional hubs reverberated through to trading at the Henry Hub, which harmed them as they traded derivatives based on Henry Hub price indices. In support, the plaintiffs pointed to academic studies and expert analysis showing price integration between the hubs.

In its dismissal, the district court found that the plaintiffs had failed to plead facts giving rise to a plausible inference that the alleged manipulations had any effect on Henry Hub prices; that they had thus failed to establish either harm or intent; and therefore had failed to establish standing or a cause of action under the Commodity Exchange Act (CEA) or the Sherman and Clayton Acts.

Article III standing. Noting a lower pleading standard for constitutional standing than for substantive causes of action, the three-judge panel disagreed with the district court and ruled that the injury allegations did support Article III standing. Regarding plaintiffs’ injury argument—that prices at U.S. natural gas hubs are so interconnected that manipulation at one amounts to manipulation at all—the court did not find this plausible. Nevertheless, it found the argument "within the realm of possibility." For constitutional standing, this was enough.

No Commodity Exchange Act standing. It was not enough, however, for the CEA claim. Private actions under Section 22 require a showing of "actual injury." The plaintiffs did not allege that they suffered injury from direct contractual relationships with Total Gas, from manipulated third-party contracts, or from direct reliance on a manipulated financial rate. Instead, they alleged that Total Gas’s manipulation of fixed-price trades at local hubs caused artificial prices in natural gas contracts at Henry Hub, which, in turn, distorted prices in the derivatives based on Henry Hub prices in which the plaintiffs traded. This was just too attenuated for the court. A plaintiff seeking to make a plausible connection between distinct contract types traded on distinct exchanges without a formal rule-based price linkage would have to plead with greater detail, the court ruled.

"The ‘actual injury’ analysis looks very similar to the ‘injury in fact’ analysis used to determine constitutional standing," wrote the court. "However, because it is an element of a substantive cause of action, the pleading requirements differ. Injury must be plausible, not just colorable."

No antitrust standing. The injury allegations were also not enough to establish antitrust standing. Generally, only participants in the defendants’ market can suffer antitrust injury. The Supreme Court has carved an exception to the market participant requirement for parties whose injuries are "inextricably intertwined" with the injuries of market participants.

The plaintiffs argued that they adequately alleged that they were part of the same undifferentiated natural gas commodities and commodities derivatives market as the defendants, that they were harmed by artificial prices at Henry Hub and on NYMEX, and that the defendants’ manipulations required a connection between regional hubs, and as such, trading at Henry Hub was "inextricably intertwined" with their trading. Setting aside the other aspects, however, the court noted that the plaintiffs had not presented evidence of artificial prices at Henry Hub. Therefore, any further analysis was superfluous.

Dismissal affirmed. Consequently, the court affirmed the dismissal on the basis that plaintiffs had failed to state Commodity Exchange Act or antitrust claims.

The case is No. 17-1199-cv.

Attorneys: Michael B. Eisenkraft (Cohen Milstein Sellers & Toll PLLC) for Alan Harry. David J. Debold (Gibson Dunn & Crutcher LLP) for Total Gas & Power North America, Inc., Total S.A. and Total Gas & Power Ltd.

Companies: Total Gas & Power North America, Inc.; Total S.A.; Total Gas & Power Ltd.

MainStory: TopStory CommodityFutures Derivatives FraudManipulation Swaps ConnecticutNews NewYorkNews VermontNews

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