October 10, 2013

J.P. Morgan Convinces Second Circuit That Natural Gas Investors’ Aiding And Abetting Claims Are Hot Air

The United States Court of Appeals for the Second Circuit has affirmed the dismissal of J.P. Morgan Chase & Co. and two of its subsidiaries, J.P. Morgan Chase Bank, Inc. and J.P. Morgan Futures, Inc., from In re: Amaranth Natural Gas Commodities Litigation, a suit brought by natural gas futures contracts purchasers that alleged J.P. Morgan aided and abetted the massive price manipulation scheme that led to the 2006 collapse of a multi-billion dollar hedge fund, Amaranth Advisors, LLC.

In the fall of 2006, Amaranth, a hedge fund that had heavily invested in natural gas futures, collapsed after losing more than $6 billion in just a few days.  A Senate investigation eventually found that Amaranth had taken positions in natural gas futures and swaps so massive that its trading directly affected domestic natural gas prices and price volatility.

Traders in natural gas futures contracts brought a price manipulation suit against Amaranth and parties that allegedly aided Amaranth, claiming that Amaranth violated the Commodities Exchange Act by exploiting its influence in order to increase prices on natural gas.  Plaintiffs have already settled with Amaranth for $77.1 million.

Plaintiffs’ claims that J.P. Morgan aided and abetted Amaranth’s price manipulation scheme through its services as Amaranth’s futures commission merchant and clearing broker, however, did not survive motions to dismiss for failure to state a claim.

The Second Circuit affirmed the district court’s decision that plaintiffs failed to state a claim that J.P. Morgan aided and abetted Amaranth’s scheme to manipulate the prices of natural gas futures contracts.  The Second Circuit held that due to the scienter requirement of a commodities manipulation claim, there can be “no manipulation without intent to cause artificial prices.”  The plaintiffs failed to allege that J.P. Morgan knew that Amaranth specifically intended to manipulate the price of natural gas futures, and that J.P. Morgan intended to help.

The appellate court also relied on the principle that a broker cannot be held liable for aiding and abetting when it merely performs the services that it contracted to provide.  The court stated that J.P. Morgan’s “seemingly minimal involvement” distinguished this case from authorities holding that a broker can be held liable when it plays “a dominant and knowing role” in its client’s market manipulation.

Categories: Antitrust Litigation

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