A U.S. investigation into whether the world's biggest crude oil traders fix prices has sparked an escalating and high-stakes court battle over the disclosure of records.
Royal Dutch Shell PLC, Vitol Group and Plains All American Pipeline LP have joined Morgan Stanley in a federal court case that aims to stop mounds of trading data given to U.S. regulators from being used in civil cases alleging market manipulation by a trading house controlled by Norwegian shipping magnate John Fredriksen.
The narrow case against Fredriksen's traders is tied to a 6-year-old probe by the U.S. Commodity Futures Trading Commission into crude oil markets. CFTC stepped up its investigation of oil traders as crude prices climbed toward a record high in 2008. Recent court documents suggest the regulator is set to aggressively defend the government's decision to examine the details behind closely held oil trading strategies and then pass those data to opposing attorneys.
Cloaked in secrecy, investigations by U.S. and European regulators appear to focus on a small handful of oil traders. Yet in the process of gathering data to understand how the broader market operates, CFTC, for its part, has ensnared the powerful trading houses.
As a result, an increasing number of class-action lawsuits brought by New York traders are trying to place a spotlight on the opaque world of global oil trading, where they say a tight circle of oil giants, major commodity traders and powerful Wall Street firms set prices.
Shell and Vitol, the Switzerland-based multinational oil trader, are pressing the 2nd U.S. Circuit Court of Appeals to reverse a lower court decision that opened the door for CFTC to send millions of documents and audio files it collected from the companies to defense lawyers in an enforcement case against Parnon Energy, the trading team tied to Fredriksen.
Shell and Vitol say what they're really concerned about is the prospect of antagonistic lawyers casting wide nets for information pointing to collusion and market manipulation. In a court filing in late December, Vitol cited "the risk that plaintiffs' attorneys will use the Vitol documents in the class-action lawsuits."
Shell asserted that CFTC should never have turned over confidential business information, period. "Those documents included, among others, records relating to Shell's crude oil refineries, storage caverns to which Shell had access, and pipelines on which Shell transported crude oil."
Where's Wall Street?
Overlapping court cases are driving at two related questions: To what extent did traders game physical and financial oil markets in 2007 and 2008 as prices ripped past $100 a barrel? And secondly, is the price of Brent crude a result of collusion among oil giants and highly leveraged financial players?
In Washington, the relationship between commodity markets and Wall Street megabanks is attracting the attention of Congress and the Federal Reserve. On Tuesday, the Fed requested public comment on whether it should tighten the regulations around big banks' ownership of physical commodity businesses, including oil, gas and metals.
The Fed asked whether Goldman Sachs, Morgan Stanley and other financial holding companies that maintain substantial commodity businesses owning and trading oil, gas and metals should bear the risks associated with oil spills, rail explosions and litigation.
Under a settlement with the Federal Energy Regulatory Commission last summer, for example, JPMorgan Chase & Co. agreed to pay $410 million for gaming energy markets in California and the Midwest. Since then, JPMorgan has said it plans to sell off its commodity trading arm.
In the fall of 2013, FERC brought a nearly $500 million case against Barclays Bank PLC, charging it with manipulating power markets in California and other Western states.
Goldman Sachs has been accused of controlling aluminum prices through its ownership of key U.S. warehouses.
And for its part, Morgan Stanley is wrapped up in CFTC's crude oil litigation.
Collusion to manipulate
Brent crude is the North Sea pricing point for about half of the world's crude and a major component of gasoline prices in the United States. It's also at the center of an investigation by the European Union.
E.U. antitrust regulators last spring raided the London office of Platts, a privately held, New York-based price reporting agency, in search of information about how crude oil is priced. The inquiry is also targeting Shell, BP PLC and Norway's Statoil.
In the United States, European and CFTC actions are fueling lawsuits.
"By providing false and inaccurate information and engaging in false or sham trading, defendants undermined the entire pricing structure for the Brent crude oil physical and futures markets," claims an Oct. 4, 2013, class-action suit filed in a U.S. district court in Manhattan.
The case alleges collusion to manipulate spot prices among Shell, BP, Statoil, Morgan Stanley, Vitol, the Dutch trading giant Trafigura Beheer BV and others since 2002, a period during which physical and financial oil trading shifted into high gear.
The case was brought by four veteran commodity traders on the New York Mercantile Exchange. They say traders were often taken by surprise when the buying and selling of large cargoes of oil during critical pricing periods caused "violent price changes."
With charts and cargo manifests, the lawsuit alleges, the companies often traded oil strategically on certain days for the purpose of driving prices up or down.
In February 2011, for example, Shell allegedly sold a cargo of oil at a cheaper price to Morgan Stanley. That, according to the suit, was enough to fetch a lower price for some 2.4 million barrels of oil. That benefited Shell's derivatives.
"However, the purpose was not to trade the cargoes, but to pressure the market downward," it said. "Shell sold the one cargo only to Morgan Stanley, a party to this collusion with coincident interests."
Meanwhile, next month, a federal court in New York will begin pretrial hearings for another batch of suits alleging effectively the same thing.
This one, led by Chicago-based Prime International Trading Ltd., goes after BP, Shell and Statoil, focusing almost exclusively on allegations of false price reporting to Platts and market power.
A 'highly confidential' market
A year ago, U.S. District Judge William Pauley gave the green light to litigation based on the CFTC claims about manipulation of West Texas Intermediate oil (WTI), the Cushing, Okla.-based benchmark price for U.S. and Canadian crude.
In refusing to dismiss CFTC claims about U.S. oil market gaming in 2007 and 2008, Pauley said Parnon, the CFTC's main target in the investigation, had enough to contest the charges but not enough to dismiss the case.
"It describes in detail a willful scheme in which defendants acquired a dominant position in physical WTI for the purpose of manipulating prices of WTI derivatives," he wrote of the regulators' charges.
In recent months, however, the case has been mired in paperwork. Big companies, oil traders and a number of other companies that turned over data to CFTC, including Chevron and ConAgra Food, have sought protective orders barring other lawyers from examining the mounds of information about the tumultuous oil market in 2007 and 2008.
In a ruling in October -- just before the companies appealed to a higher court -- the judge tightened up the rules around viewing "highly confidential" material. But he said Parnon, the defendant in the agency's case, can review any of those documents the CFTC sent it.
But, he noted, "This court encourages all parties to make good faith efforts to modify any excessive and unwarranted 'highly confidential' designations in order to afford the fullest possible access."
Six days later, Plains -- a major pipeline into the oil hub at Cushing -- joined Vitol and soon Shell in an appeal to the U.S. circuit to stop the disclosure. In March, the judge will hold an initial hearing.
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