Wednesday, July 25, 2007

U.S. Commodity Futures Trading Commission Charges Hedge Fund Amaranth and its Former Head Energy Trader, Brian Hunter, with Attempted Manipulation of

...February 24, 2006 was the last day of trading (“expiry day”) for the March 2006 NYMEX natural gas futures contract and April 26, 2006 was the expiry day of the May 2006 NYMEX natural gas futures contract. The settlement price of each NYMEX natural gas futures contract is determined by the volume weighted average of trades executed from 2:00-2:30 p.m. (the “closing range”) on the expiry day of such contracts.

The Complaint alleges that, for each of the expiry days at issue, the defendants acquired more than 3,000 NYMEX natural gas futures contracts in advance of the closing range, which they planned to, and for the most part did, sell during the closing range. The Complaint also alleges that defendants held large short natural gas financially-settled swaps positions, primarily held on the IntercontinentalExchange (ICE). The settlement price of the ICE swaps is based on the NYMEX natural gas futures settlement price determined by trading done during the closing range on expiry day. The Complaint alleges that defendants intended to lower the prices of the NYMEX natural gas futures contracts to benefit defendants’ larger swaps positions on ICE and elsewhere.

Excerpts from the Amaranth Complaint:
On February 23, 2006, Defendant Hunter told another Amaranth natural gas trader in an instant message to “make sure we have lots of futures to sell MoC [market on close] tomorrow;”

Defendant Hunter disclosed part of his scheme to a trader at another firm just before the last half hour of trading, saying to that trader, that it was a “bit of an expiriment [sic] mainly;”

CFTC Release
Complaint 43 page PDF
HT: Risk OTC

From Bloomberg:

Amaranth's $6.6 Billion Slide Began With Trader's Bid to Quit

Nicholas Maounis, founder of the Amaranth Advisors LLC hedge fund, made a decision in April 2005 that eventually cost him his firm. His promising natural-gas trader, Brian Hunter, had been offered a $1 million bonus to join Steven Cohen's SAC Capital Advisors LLC. Maounis, who had built his Greenwich, Connecticut-based fund to $6 billion in assets, didn't want Hunter to go. Convertible bond and equity prices were falling and oil and natural gas prices were increasing, making Hunter's expertise more valuable. So Maounis named Hunter co-head of the energy desk and gave him control of his own trades. Hunter, within 17 months, would be responsible for $6.6billion in losses, detonating the biggest hedge fund implosion ever. Since Amaranth's sudden collapse, investors have questioned the unusual trust Maounis put in his star trader, now 32. They say Maounis gave Hunter too much latitude and that Hunter,trading more than half the firm's assets, was blinded by a bet that had worked like a charm for two straight years. ``Amaranth's demise is not due to some complicated quantitative reason -- it's about human failing and frailty,''says Hank Higdon, who runs New York-based Higdon Partners LLC, a recruiter for hedge funds and other money-management firms. Hunter declined to comment for this article when contacted Dec. 4, and Maounis, 43, declined to comment through a spokesman.

Billions Lost

Tallying the final days of Amaranth involves huge sums:During one week in September, Hunter's bet on natural gas lost about $4.6 billion. By month's end, the losses totaled $6.6billion, or 70 percent of Amaranth's assets. At least one investor saw serious warning signs about the big energy bets and pulled out before the collapse. Some former employees -- who, like others familiar with Amaranth's unraveling, spoke on condition of anonymity because the fund is a private company -- also say they raised questions about the extent of that wager. When an abrupt market reversal left the fund facing enormous losses, it was too late to unload positions.

The rest of a pretty amazing story