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Felix Shipkevich May 30, 2011

Last week’s public sparring between the CFTC and oil traders Arcadia Petroleum, Parnon Energy, and Arcadia Energy (all owned by Norwegian shipping magnate John Fredriksen) won’t be simmering down any time soon. Stephen Ardizzone, a derivatives trader, has thrown his proverbial hat into the ring and is suing for damages as  result of the alleged price manipulation. He is keen to make the suit class-action. His lawyer estimates that thousands of other traders were harmed by the defendant’s scheme, and will be seeking damages above the $50 million sought by the CFTC.

Arcadia has already pledged to fight the CFTC charges, so it is likely to do the same in this case. However, attempting to gauge where this may lead is tricky. Cases such as these rarely make it to trial, opting instead for out-of-court settlements.  In 2003, BP was fined $2.5 million for price manipulation (which it paid without admitting any wrongdoing). More recently, Marathon was fined $1 million for market manipulation. Neither even approaches the $50 million the CFTC is seeking from Arcadia/Parnon.

But how will they prove their case? Under recent legislative revisions, the Commission will only need to prove potential to manipulate the market. But proving that Wildgoose and Dyer held enough physical crude or had a high enough NYMEX volume to significantly affect the market may be difficult. However, according to the lawsuit, Dyer estimated that the January shipment would be small, approximately 7 million barrels. The two set about purchasing 4.2 million of those barrels, 66% of the estimated shipment. Then Wildgoose revised Dyer’s estimate: there would only be 5 million barrels. Arcadia/Parnon held a dominant position in the market. They then held on to those barrels, in what the CFTC calls an effort to delude the market into believing supply would remain tight.  But John Kingston of Platts makes this point:

Based on one passage, it seems that the traders did not use the NYMEX as their means to acquire the oil. The acquisition was done in a fairly short period, between Jan. 8 and Jan. 16 of 2008. “Can we get this issue resolved pls. time is of the essence here, we need to trade cash with 3rd parties tomorrow as part of the feb/mar wti strategy,” Wildgoose writes in an email to an Arcadia officer, according to the lawsuit. The reference to “cash” can be interpreted to mean the trades went on in the OTC market.

One question, and this is sheer speculation: did Arcadia/Parnon want the industry to know it was acquiring such a large position? Based on the lawsuit, it wanted the market to think the tanks were drying up, so maybe not. But if you want to take a large position and do it anonymously, the place to do it is on the NYMEX. In the “old days,” when trading was done by open outcry, floor brokers could see that broker A was buying a lot of oil, and since broker A usually handles the needs of oil company B, that meant oil company B had a play on. Since that trading is now almost completely virtual, that market intelligence is no longer available. But if the company bought a lot of February oil in the cash market, its activities might have been noticed, which would have undercut trying to persuade that there was growing tightness in Cushing.

The CFTC has more than just $50 million riding on this case. A win would send a clear message to other would-be manipulators, at a time when public rage about gas prices is once again on the rise. Last week, Senator Bernie Sanders took Commissioner Gensler to task for not acting to curb speculation, or even to impose position limits on commodities this January, as was directed by Dodd-Frank. “There is nothing that I heard from him which suggests any sense of urgency about the need to protect consumers or in fact to protect our economy,”grumbled the Senator after the meeting. Though Gensler apparently said that speculators made up 80% of the traders on the energy market, he did not offer the lawmakers any specifics on what was to be done. A victory over Aracia/Parnon could save the CFTC from being tarred and feathered on Capitol Hill.

Read the full text of the CFTC complaint.

Read more about Ardizzone’s lawsuit.

Read more about oil market manipulation.

Read John Kingston’s coverage.

Follow our ongoing Arcadia/Parnon coverage.

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