(Warning: Strong language in paragraph 17)
NEW YORK - Global trading house Arcadia Energy rejected on Wednesday claims that its traders had manipulated crude oil markets in early 2008, saying it would fight the suit brought by U.S. regulators in court.
The CFTC is wrong on both the facts and the law, said Colin Hurley, the Chief Financial Officer of Arcadia, in an e-mailed statement to Reuters.
The quick rebuttal sets up a rare public show-down over trading practices in the opaque physical oil market. Many such past cases have been settled out of court, and regulators have struggled in the past to make manipulation charges stick.
The CFTC sued firms and traders including London-based Arcadia and U.S. subsidiary Parnon Energy on Tuesday, alleging that they carried out an illegal squeeze in benchmark U.S. West Texas Intermediate (WTI) oil markets in 2008 that led to $50 million in illicit profits.
Arcadia has carefully looked at its WTI crude oil trading in the period from January to April 2008, and retained independent experts to assist in that process, Hurley, who also speaks for Parnon, said.
In short, our activity involved legitimate and lawful trades at market prices that were dictated by the fundamentals of supply and demand... We look forward to proving this in court.
The CFTC said traders James Dyer of Oklahoma's Parnon Energy, and Nick Wildgoose of Arcadia, amassed large physical positions at a key U.S. trading hub to create the impression of tight supplies that would boost prompt oil prices.
Later they dumped those barrels back onto the market, causing prices to fall and racking up profits from short positions they had accrued in futures markets, the suit said.
While the civil suit comes after three years of heightened scrutiny into oil price speculation by the CFTC, it also arrives at a time when President Barack Obama is seeking to reassure Americans he is trying to curb high U.S. gasoline prices and ensure they aren't subject to manipulation.
HARD TO PROVE
The CFTC's complaint alleges both manipulation and attempted market manipulation. Proving the former is considered extremely difficult because so many factors can affect prices.
If they're alleging manipulation, that means that the data is pretty dramatic, said Michael Greenberger, a professor at the University of Maryland School of Law and a former director of the division of trading and markets at the CFTC.
Lots of civil actions around the derivatives markets have been settled before reaching trial, with firms often agreeing to pay fines without admitting wrongdoing.
In this case, Arcadia said it did not expect a settlement to be possible.
Rather than consent to the resolution of the matter based on allegations that are unjustified and untrue, we accepted that the matter would be adjudicated in the courts, said Hurley.
A potential trial could be years away. The CFTC sued former Amaranth Advisors trader Brian Hunter for attempting to manipulate natural gas futures nearly four years ago. While Amaranth settled for $7.5 million two years ago, the Hunter case is still pending.
The lawsuit filed on Tuesday cited a series of internal communications it said showed a cycle of manipulation by going long the prompt U.S. crude oil spread on the way up, then shorting the spread before dumping barrels on the market.
In September 2007, according to CFTC suit, Dyer said in an email to other Parnon/Arcadia traders that there was a s---load of money to be made in creating the appearance that available stocks of crude at Cushing were low.
The trading duo amassed a sufficient quantity of physical WTI to be delivered the next month at Cushing to dominate and control WTI supply even though they had no commercial need for crude oil, the CFTC said.
Hurley dismissed the notion of a dominant position.
Arcadia plainly lacked the ability and the intent to control prices in a market as large and complex as the WTI crude oil market, he wrote.
The suit alleges that Arcadia bought up enough crude at and around the Cushing, Oklahoma, delivery point for the New York Mercantile Exchange (NYMEX) crude oil futures contract to affect prices for a few days before and after expiry.
SECRETIVE BILLIONAIRE OWNER
Arcadia and Parnon are both owned by secretive Norwegian billionaire John Fredriksen, known as Big Wolf and more widely as Big John in the shipping industry. He is the owner of the world's largest independent oil tanker firm, Frontline.
While some ship industry sources have described him as a chancer who doesn't like to follow rules, others have pointed out that the 67 year old built up his shipping and trading empire from scratch, acquiring an estimated fortune of $10.7 billion along the way.
He is a rough businessman, said editor Gunnar Stavrum of Norway's Nettavisen, who has written two unauthorized biographies about Fredriksen.
He has been involved in speculative trading before, among other things in currencies. It's too early to say if these claims of illegal oil trading will hold up.
Parnon, headquartered in Oklahoma, owns at least 3 million barrels of storage facilities at Cushing, Oklahoma, delivery point of the benchmark WTI U.S. crude contract.
London-based Arcadia is a major global oil trading firm, which typically markets about 800,000 barrels a day of crude and oil products around the world.
The CFTC suit was brought in the Federal Southern District Court of New York.
(Additional reporting by Andrew Longstreth in New York, Jonathan Saul in London and Terje Solsvik in Oslo; Editing by Alden Bentley and Lisa Shumaker)