Some of the world’s largest oil traders including Vitol Group, Morgan Stanley and Royal Dutch Shell Plc (RDSA) are asking a judge to stop the disclosure of millions of records gathered by the top U.S. commodity regulator during its nationwide investigation of the crude markets.
The haul includes e-mails, depositions, trading records and audio files obtained by the U.S. Commodity Futures Trading Commission since its probe of the oil market began in December 2007. The companies appealed an Oct. 25 order by U.S. District Judge William H. Pauley that would allow the handover of the trove to lawyers leading a civil case alleging market manipulation by firms controlled by Norwegian billionaire John Fredriksen. The U.S. Court of Appeals in New York today ordered a temporary stay halting the release of the records while it considers speeding up review of the challenge.
The battle over the records reveals for the first time the breadth of the CFTC’s investigation. The agency told Pauley in August that 5.7 million documents and almost 200,000 audio files had been sent to the defendants in the manipulation case. Many of the files came from the national probe.
“Society needs more inspection of trading in the crude oil markets, not less,” said Chris Lovell, an attorney with Lovell Stewart Halebian Jacobson LLP in New York, who is leading the case and seeking class action status on behalf of traders who claim to have lost money because of alleged manipulation. “These guys should be subject to more transparency. I think we’d all be better off.”
Pauley’s Oct. 25 order sharply restricts access to materials from the CFTC cache that the companies claim are “highly confidential.” Circulation of the documents will be limited, and Lovell and other attorneys involved in the civil case will have to sign declarations promising to comply with the confidentiality provisions. Use of the files for any other business purpose, such as trading strategies or unrelated lawsuits, is forbidden.
The case stems from the CFTC’s 2011 claims against Nick Wildgoose and James Dyer, traders at Fredriksen affiliates Parnon Energy Inc. in Houston and Arcadia Petroleum Ltd. in London. They are accused of manipulating the oil market in 2008 as prices rocketed toward $147 a barrel. The defendants have denied the allegations. Some of the companies whose records were disclosed to Parnon earlier this year weren’t notified until after the files were sent, court records show.
“We believe the CFTC may have improperly disclosed certain records,” said Brad Leone, a spokesman for Plains All American Pipeline LP (PAA), one of the companies appealing Pauley’s order.
The dispute is the latest blow for a trading fraternity that has long prized secrecy.
In May, the European Commission raided the offices of Shell, BP Plc and Statoil ASA along with price reporting company Platts as part of a probe into how benchmark energy prices are set. The commission hasn’t charged any of the companies with wrongdoing. Last month, four longtime traders on the New York Mercantile Exchange filed a lawsuit claiming they can prove that BP, Statoil and Shell conspired with other firms, including Morgan Stanley and Vitol, to manipulate Brent crude, a benchmark used to price more than half the world’s oil.
Shell, Morgan Stanley (MS), Vitol, Plains and Castleton Commodities International LLC have appealed Pauley’s order. Spokesmen for Vitol, Shell and Morgan Stanley declined to comment; an attorney for Castleton didn’t return calls and an e-mail seeking comment.
“These documents obviously have public interest value,” said Michael Greenberger, a former director of trading and markets at the CFTC and a law professor at the University of Maryland. “Within the CFTC papers, there may be evidence of manipulation of the market that has not been acted upon aggressively by the CFTC.”
Despite the confidentiality restrictions and the CFTC’s redactions, the files have already put lawyers for Wildgoose and Dyer “tantalizingly close” to identifying a confidential informant whose tip led to the charges, Jonathan P. Robell, a CFTC attorney, said during an Aug. 29 hearing.
Parnon’s lawyers used the CFTC records to find and subpoena the informant’s attorney and identify the company the whistle-blower worked for, court records show. Documents including the identity of the informant’s attorney were sealed by the court.
The CFTC in May 2011 accused Parnon of manipulating prices of West Texas Intermediate crude available at Cushing, the delivery point for the U.S. benchmark Nymex futures.
Parnon and its affiliates, subsidiaries of Fredriksen’s Cyprus-based Farahead Holdings Ltd., bought up a large share of WTI, then exploited its dominant position to create a perception that supplies were scarce in January 2008 and again March 2008, the CFTC said. That drove prices higher, allowing them to make money on a sizable derivatives bet, the CFTC said.
Wildgoose and Dyer then dumped their supplies, sending oil into a tailspin while profiting on derivatives that rose in value as prices fell, the CFTC said. The abrupt selloff cost the firm $15 million, which was more than offset by a $50 million gain on their paper positions.
Attorneys representing the defendants declined to comment.
Fredriksen, a shipping magnate known within the industry as “The Viking King,” said in May 2011 that the CFTC’s lawsuit was “rubbish.”
“This came as a surprise to me, I wasn’t aware of it,” Fredriksen said in an interview outside Oslo at the time. “Those who work with buying and selling oil, that’s how they operate all of them. It’s completely normal.”
Plains told the court that the company provided more than 1 million pages to the CFTC, including transcripts of confidential depositions of Plains employees. Court records show the CFTC in 2010 deposed John von Berg, a senior vice president with Plains, and Hugo Zagaria, a director with the company.
Plains provided its records to the CFTC “in response to an unsolicited subpoena associated with a proceeding for which Plains was not a target,” Leone said.
Parnon has also subpoenaed Zagaria and von Berg, and Plains tried to quash the subpoena, court records show. The company also asked Parnon to provide declarations saying Zagaria and von Berg hadn’t participated in any manipulation with the defendants, according to an Oct. 11 e-mail from Elizabeth Bradshaw, an attorney at Winston & Strawn LLP representing Parnon.
“Plains’s documents, even though several years old, provide a road map for Plains’s business strategies,” the company said in its Nov. 13 request that the U.S. Court of Appeals stay Pauley’s order. “They demonstrate how Plains makes pricing decisions, its profit margins, and its hedging and risk-management strategies.”
Shell said the records the company turned over to the CFTC included details of its “refining operations, pipeline capacity, storage capacity and trading of crude oil,” court records show.
Morgan Stanley gave the CFTC “detailed and highly confidential records pertaining to its commodity trading business,” according to a June court filing. The records, if released, “would potentially reveal strategies employed by Morgan Stanley traders.”
Vitol gave 1.4 million pages to the CFTC between 2008 and 2010 pursuant to requests from the agency and “in response to investigative subpoenas.”
“We’ve argued to the court that the deliverable supply and how the crude oil markets work and the communication among those trading in the market, are all pertinent to the case,” Lovell said.
U.S. oil stockpiles expanded last week by 375,000 barrels to 388.5 million, the Energy Information Administration said today. Supplies at Cushing climbed to 39.9 million.
The case is In Re: Crude Oil Commodity Futures Litigation, 11-cv-03600. The CFTC case is U.S. Commodity Futures Trading Commission v. Parnon Energy Inc., 11-cv-3543, U.S. District Court, Southern District of New York (Manhattan). The appeal is U.S. Commodity Futures Trading Commission v. Parnon Energy Inc., 13-04206, Second U.S. Circuit Court of Appeals (Manhattan).