On July 26, 2007, the Federal Energy Regulatory Commission ("FERC") issued an order to show cause against a hedge fund and several of its traders, seeking penalties of nearly $300 million, as well as disgorgement of profits, in connection with alleged manipulation of the futures markets that in turn allegedly manipulated the physical natural gas market regulated by the FERC. In re Amaranth Advisors L.L.C., IN07-26-000.

Section 4A of the Natural Gas Act, added by the Energy Policy Act of 2005, authorized the FERC to promulgate a rule to make it unlawful for any entity, directly or indirectly, to use a manipulative device in connection with the purchase or sale of natural gas. In early 2006 the FERC adopted Rule 1c.1 to implement that authority. When the rule was adopted, the FERC explained that it covered any transaction that is intended to affect, or which recklessly affects, a transaction under its jurisdiction. In the Order to Show Cause, the FERC asserted that the respondents had engaged in manipulation of the Natural Gas Futures Contract on the New York Mercantile Exchange ("NYMEX"), which in turn manipulated prices in transactions in physical natural gas under the FERC's jurisdiction. This was because, as the FERC explained, many market participants in the physical natural gas markets use the NYMEX futures contract as a benchmark for natural gas pricing.

On July 25, 2007, the day before the FERC's order was issued, the Commodity Futures Trading Commission ("CFTC") sued some of the same parties in federal court charging manipulation of the price of natural gas futures contracts on NYMEX in violation of the Commodity Exchange Act. CFTC v. Amaranth Advisors, L.L.C., No. 07 Civ 6682 (S.D.N.Y.). While at least one of the respondents has already challenged the FERC's jurisdiction in this matter by filing a suit in federal court — asserting that the CFTC has exclusive jurisdiction over manipulation in the futures markets — the FERC's action underscores the FERC's broad perception of its authority to reach "any entity," including participants in the financial markets.

The prospect that the FERC would seek to exert enforcement authority over participants in the financial markets was addressed in depth in an article by our partner, Allan Horwich, published in the Energy Law Journal (Vol. 27, No. 2, 2006), "Warnings to the Unwary: Multi-Jurisdictional Federal Enforcement of Manipulation and Deception in the Energy Markets after the Energy Policy Act of 2005" http://www.schiffhardin.com/publications/energy_jan29_07/horwich.pdf. Mr. Horwich, and another partner in the Firm's Energy Group, Barry Hyman, have spoken to a number of professional groups regarding the significant expansion of the FERC's enforcement powers. A Firm client represented by our partner, Barbara Heffernan, also recently settled a matter arising out of an Office of Enforcement investigation under the FERC's expanded enforcement authority.

Those who trade in the financial markets with a potential effect on markets directly regulated by the FERC must be mindful of potential exposure to enforcement action by the FERC, which can assess penalties of $1 million per violation per day, as it seeks to do in Amaranth.

For more information, please contact a member of the Schiff Hardin Energy Group or a member of the Securities and Futures Market Regulation Group.