services provider), Hunter, Matthew Donohoe (an execution trader) and, significantly, AmaranthCapital Partners LLC, Amaranth Partners LLC, Amaranth International Limited, and Amaranth LLC(the multi-strategy fund entities), alleging that these respondents
manipulated the sameexpiring NYMEX natural gas futures contracts on the same dates alleged in the CFTC’s complaint,plus the additional date of March 29, 2006. The FERC proposed penalties totaling nearly $300 millionagainst the various respondents, including the Funds. The discovery process was scheduled toconclude on July 31, 2009, and a “trial-type” proceeding before an administrative law judge employedby the FERC was scheduled to commence on August 4, 2009.
Appellate Court Review of the FERC’s Jurisdiction
On December 6, 2007, Amaranth Advisors filed a notice of appeal in the U.S. Court of Appealsfor the District of Columbia Circuit seeking review of the FERC’s determination that it has jurisdictionover alleged manipulation of the NYMEX natural gas futures market (the “Jurisdictional Appeal”).The NYMEX, as well as a number of futures industry trade associations, filed amicus briefs in that casesupporting Amaranth Advisors’ position. In addition, the CFTC itself intervened in the case to opposeFERC’s jurisdiction over the matter, arguing that Congress granted the CFTC exclusive jurisdictionover trading on futures exchanges such as the NYMEX. The Jurisdictional Appeal had been fullybriefed in 2008 and was scheduled for oral argument before a three-judge panel on September 23,2009.
On July 20, 2009, the FERC Enforcement Staff and Amaranth Advisors, the Funds, AmaranthManagement Limited Partnership, Amaranth Group Inc. and Donohoe entered into a SettlementAgreement resolving all claims against the settling respondents arising from allegations made in theFERC’s July 26, 2007 Order to Show Cause (the “FERC Settlement”), and the FERC Commissionersvoted on August 12, 2009 to approve the FERC Settlement. Brian Hunter is not a party to the FERCSettlement.On August 10, 2009, the CFTC Commissioners voted to approve a Consent Order resolving theCFTC Action against Amaranth Advisors (the “CFTC Settlement,” together with the FERC Settlement,the “Settlements”), and the Court approved it on August 12, 2009. Brian Hunter is not a party to theCFTC Settlement.The Settlements were closely coordinated with both regulatory agencies as to both timing andterms. As a result, a
civil monetary penalty in the amount of $7.5 million will be paid to resolve
cases against all defendants/respondents (except Hunter).
Impact on the Funds
The Settlements provide several benefits to the Funds. First, the Settlements eliminate thelitigation risk posed by the FERC Action, in which the FERC sought to hold
(not just thetraders and their employer) liable for penalties approaching $300 million. Second, the Settlements willallow the Funds to avoid significant legal defense costs for themselves and various parties they arerequired to indemnify under the governing documents of the Funds, estimated to exceed $10 million forthe FERC Action alone. Third, the Settlements remove a significant source of legal and financialuncertainty. In exchange for these benefits, the Funds are contributing $5 million as part of theSettlements. Amaranth Advisors has agreed to contribute the balance and will not seek indemnificationfrom the Funds for this amount.We believe that the Settlements are in the best interests of the Funds, but we would also notethat both the master fund, Amaranth LLC, and the off-shore feeder fund, Amaranth International