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Harry v. Total Gas & Power North America, Inc.

United States Court of Appeals, Second Circuit

May 4, 2018

ALAN HARRY, LEVANTE CAPITAL, LLC, PUBLIC UTILITY DISTRICT NO. 1 OF CLARK COUNTY, WASHINGTON, DBA CLARK PUBLIC UTILITIES, C&C TRADING, LLC, Plaintiffs-Appellants,
v.
TOTAL GAS & POWER NORTH AMERICA, INC., TOTAL S.A., TOTAL GAS & POWER LIMITED, Defendants-Appellees. [1]

          Argued: November 15, 2017

         Drawing on CFTC and FERC findings, investors who trade natural gas derivatives on the New York Mercantile Exchange and Intercontinental Exchange sued for damages resulting from Defendants' manipulation of natural gas trading at four regional hubs in the western part of the United States. However, the derivatives that Plaintiffs traded were not indexed to the natural gas at those regional hubs. Instead, they derived their prices from natural gas trading at Henry Hub, a regional hub in Louisiana that dwarfs all other regional markets. The district court (John G. Koeltl, J.) dismissed Plaintiffs' suit on the grounds that they did not successfully plead injury, and thus failed to establish standing or to state a claim under the Commodities Exchange Act or antitrust laws. We find, to the contrary, that the Plaintiffs successfully pleaded standing. Having satisfied ourselves of our jurisdiction, we agree with the district court that Plaintiffs failed to plausibly allege injury under any of their claims. The order and judgment of the district court are modified to remove the dismissal for lack of standing. As modified, we AFFIRM the district court's judgment.

         Affirmed.

          DAVID E. KOVEL, Kirby McInerney LLP (Michael Eisenkraft, Times Wang, Cohen Millstein Sellers & Toll, PLLC, Kellie C. Lerner, Bernard Persky, Robins Kaplan LLP, on the brief), New York, NY, for Plaintiffs-Appellants.

          DAVID DEBOLD, Gibson, Dunn & Crutcher LLP (William S. Scherman, Jason J. Fleischer, on the brief), Washington, DC, for Defendants-Appellees.

          Before POOLER, WESLEY, and HALL, Circuit Judges.

          POOLER, CIRCUIT JUDGE

         This case provides us an occasion to clarify pleading standards under the Commodities Exchange Act ("CEA") and to differentiate those standards from the standard for pleading constitutional standing.

         Drawing on Commodities Future Trading Commission ("CFTC") and Federal Energy Regulatory Commission ("FERC") findings, several investors[2]who trade commodities derivatives on the New York Mercantile Exchange and Intercontinental Exchange sued for damages resulting from Defendants' manipulation of natural gas trading at four regional hubs in the western part of the United States. However, the derivatives that Plaintiffs traded were not indexed to the natural gas traded at those regional hubs. Instead, the contracts they have traded derive their prices from natural gas trading at Henry Hub, a regional hub in Louisiana that dwarfs all other regional markets. The district court (John G. Koeltl, J.) dismissed Plaintiffs' suit on the grounds that they did not plead injury, and were thus unable to establish standing or to successfully state a claim under either the CEA or antitrust laws. We agree that Plaintiffs failed to do more than establish that their injury was conceivable. While we disagree that this fact dooms their ability to establish Article III standing, we agree that it is fatal to their ability to plead substantive causes of action. Accordingly, the judgment and order of the district court are modified to remove the dismissal for lack of standing. As modified, we affirm the district court's judgment.

         BACKGROUND

         I. Factual Background

         Natural gas flows from extractors to refiners through a network of pipes. Once refined, it travels through to regional hubs of varying sizes, whence it makes its way to wholesalers, distributors, and, ultimately, end users. When a wholesaler or speculator buys the right to a certain amount of natural gas, they buy it from a particular regional hub. Although trading of natural gas takes place at these hubs all day every day via "spot trades, " the trading that takes place during "bidweek"-i.e. the last five business days of a month-is the most important. During bidweek, producers sell and purchasers buy most of the natural gas they will use in the coming month. These traders then report the details of these transactions to the trade publications of Platts and Natural Gas Intelligence, which calculate monthly price indices based on the weighted average of each hub's prices. These indices are then used as the reference point in pricing spot trades of natural gas over the course of the following month.

         The major hub in the United States is "Henry Hub" in Erath, Louisiana. Henry Hub is considered the central national hub, both because the volume of natural gas that travels through it dwarfs all others and because much of the natural gas at other hubs in the country travels to, from, or through it. Its monthly index price is calculated slightly differently than at other hubs. Rather than averaging trades throughout all of bidweek, it averages only those that take place during the last thirty minutes of the middle day of bidweek.

          Natural gas derivative contracts are valued on the basis of the price of natural gas bought from a particular hub at a particular time. For example, a natural gas future allows a purchaser to buy the right to be paid the value of the natural gas trading at a particular hub at a particular date. A natural gas swap allows traders to exchange the price of natural gas contracts at two different hubs, at two different times, or at two different hubs at two different times. The price of gas at Henry Hub serves as the basis for natural gas futures and options contracts traded on the major national exchanges where natural gas is traded: the New York Mercantile Exchange ("NYMEX") and the Intercontinental Exchange ("ICE"). Derivatives based on smaller regional hubs are traded over the counter, not on these exchanges.

         Although there is some overlap, natural gas commodity trading is mostly regulated by FERC and natural gas derivative trading is mostly regulated by the CFTC. In June 2012 Matt Wilson contacted both the FERC and the CFTC to report market manipulation in four commodities markets and the derivatives based on those markets. Wilson was a trader at the West Desk of Total Gas & Power North America, Inc. ("Total Gas"). Total Gas, a Delaware corporation, is wholly owned by Total S.A., a French corporation. Total S.A. is the world's fourth-largest oil and gas company. It also owns a British affiliate, Total Gas & Power Limited. All of these companies are defendants in this action, but only the actions of the U.S. entity are at issue.

         After FERC and the CFTC investigated Wilson's allegations, both agencies concluded that the West Desk at Total Gas had engaged in a multi-year strategy to repeatedly manipulate the price of natural gas commodities at regional hubs in the western United States. West Desk did so in order to benefit Total Gas's trading of derivatives based on the gas at those hubs. In other words, FERC and the CFTC found that Total Gas placed big bets that certain parts of the natural gas market would look a certain way and then, through a coordinated and concealed effort to overwhelm other traders in that part of the market, ensured that it would look that way. The CFTC settled with Total Gas for $3.6 million. FERC's enforcement action, seeking over $213 million, is ongoing.

         The alleged scheme was oriented towards the maximization of the profit that Total Gas could make from two types of derivatives: basis swaps and index swaps. A basis swap is a bet that the absolute value of the difference between the monthly index price of a regional hub's natural gas and the monthly index price of Henry Hub's natural gas would go up or down. In an index swap, one party pays the monthly index price of natural gas at a given hub-i.e. that which has been determined by averaging the trades during the bidweek that took place before that month-in exchange for the average price of the natural gas at that same hub during that month. Being able to control a monthly index price gives a trader an obvious advantage in making money on both of these derivatives. Traders at West Desk realized that they could do so by "banging the index" at some regional hubs, which necessitated dominating trading during bidweek through the following scheme.

         Trading in the El Paso Permian Basin ("Permian"), El Paso San Juan Basin ("San Juan"), Southern California Gas Co. ("SoCal"), or West Texas Waha ("Waha") regional hub, the West Desk would purchase large amounts of the swaps it wanted to profit on and then obtain a controlling position-generally over 80% of the market-of the natural gas at that hub. When bidweek arrived, West Desk would be able to leverage its overwhelming market power in the targeted hub to make the price of gas go up or down. Sometimes these trades would result in losses (these are referred to as "uneconomic trades"). But even losses in trading of the primary commodity did not matter to Total Gas, because they were swamped by the gains they enabled in derivatives based on the commodity. Total Gas could gain such a controlling share at regional hubs in part because they are traded much more thinly than Henry Hub. One has to buy less gas to own a large portion of it. West Desk traders would keep their peripheral vision on the price at Henry Hub to determine how high or low to push the regional hub they were focused on (since pricing of basis swaps depends on the relationship between the two), but it is not alleged that they took any action to directly manipulate trading at Henry Hub. At the end of bidweek, they would report their trades accurately to Platts and Natural Gas Intelligence.

         Plaintiffs apparently learned about Total Gas's schemes along with the rest of the public when the CFTC released its findings. They are various individuals and entities that traded natural gas derivatives on NYMEX and ICE between June 2009 and June 2012-the period of manipulation. None of them claims to have traded any natural gas or natural gas derivatives at the hubs at which Defendants traded. Instead, they argue that the shockwaves from Defendants' market manipulation at those ...


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