Probes of BPPoint to HurdlesU.S. Cases Face
In Commodities Markets, Trading
On Inside Insight Can Be Legal;
Price Manipulation Is Fine Line
By ANN DAVIS
August 30, 2006; Page C1
Government investigations into oil trading at BP PLC raise fresh questions about when a powerful energy company can legally trade on inside information about its own operations.
The surprising answer: more often than you think.
In contrast to the stock market, it generally is legal in the commodities markets to have an informational jump on others -- and to profit from that information -- as long as the behavior isn't considered price manipulation. And to prove manipulation, the government must establish that a company or trader intended to affect the price, had the ability to do so and successfully caused the price to move artificially.
As a result, regulators probing BP's behavior have faced a high burden of proof in seeking to establish that the British petroleum giant used internal information to affect prices, rather than simply turned a profit from what it knew.
If the government decides to bring civil or criminal charges, it will likely focus on manipulation itself, which commodities lawyers say is difficult to prove.
As reported yesterday in The Wall Street Journal, regulators have been examining, among other things, whether BP used information about its own pipelines and storage tanks at a key oil-delivery point in Cushing, Okla., to influence crude-oil price benchmarks that are set each day and influence billions of dollars of transactions. Regulators are also looking at other players in the crude market as part of a continuing probe. In a separate criminal probe, investigators are examining whether BP manipulated gasoline prices on a single day's trading on the New York Mercantile Exchange in 2002, traders and lawyers contacted or briefed on their investigations said.
Historically, the commodities markets have been a place where large companies go to manage risks that only they may be aware of. Because energy companies, refiners, pipeline and storage-terminal owners have legitimate commercial reasons to supply, buy or hold large quantities of fuel, they are allowed to make trades to fulfill obligations or simply make money from what they know. Companies can even do so if they will soon announce big news, such as a refinery outage, that could move prices, legal experts say.
Commercial firms that have inside information "need to use that information to hedge their price risks, which is one of the primary purposes of the commodity markets," says Marcia Blase, counsel to Fred Hatfield, Democratic commissioner of the Commodity Futures Trading Commission, which regulates the futures markets.
In the past, the U.S. government has brought civil and criminal cases when a company allegedly took an action, such as shutting a power plant or sending out false information about their operations, in order to manipulate prices. But the legal bright line, and what crosses an ethical line, may be different. Some of the activities at issue in a recently closed energy-trading probe into BP, which didn't result in charges, put a spotlight on the limited scope of behavior that commodities-market cops can police.
BP's business activities can affect the world-wide price of crude oil, natural gas, gasoline, propane and other commodities. According to the lawyers and traders informed of the case, the CFTC and Justice Department want to know whether BP traders, who possess powerful inside information, engaged in behavior intended to influence price benchmarks.
The CFTC says it doesn't confirm or deny the existence of an investigation. The Justice Department has declined to comment on the probe. A BP spokesman has said, "We are aware of investigations being done by the authorities, and we are cooperating fully."
By definition, a big energy company always has a jump-start on information that could interest the market. When BP announced earlier this month that a pipeline it operated in Alaska was corroded and that oil shipments from Alaska would be curtailed, it caused a big jump in oil prices.
Rep. Joe Barton (R., Texas), chairman of the House Committee on Energy and Commerce, asked BP in a letter on Aug. 11 if there was "a market strategy component to BP's decisions that led up to the oil shutdown." He cited recent civil claims that the CFTC has brought in an unrelated case, pending in a Chicago federal court, accusing BP of manipulating the market for propane gas. A hearing before his committee is set for next week.
Lawmakers and regulators are likely to ask how much BP traders may have known about that outage ahead of time, and whether BP historically put any sort of internal barriers between its operational divisions and its trading desk.
BP says that it will cooperate with the committee's questioning and that it shut the pipeline to prevent a major oil spill.
Notwithstanding the legal issues, Wall Street trading desks tell traders to be cautious, for example, before trading on information about an energy disruption if it hasn't hit the broader market, several traders said.
But in general, if there is a pipeline outage, one of the first things an oil company's traders may be asked to do is buy fuel elsewhere to meet obligations to customers. The CFTC says that this action, by itself, actually helps spread the news in the marketplace that an event has occurred to change supply-and-demand fundamentals.
"One of the objectives of the futures market is price discovery. If a company is using the market to manage its risk, and it trades, it sends a signal through its trading that enables others to make informed decisions," says Michael Haigh, the CFTC's associate chief economist.
What is prohibited is spread of misinformation. In 2004, the Department of Justice, with CFTC assistance, brought criminal charges against Reliant Energy Services Inc., a unit of Reliant Energy Inc. in U.S. District Court in Northern California. Prosecutors alleged that Reliant intentionally drove up the price of electricity in California in 2000 by shutting off its power generation to create the false appearance of a shortage. Spot electricity prices soared, the government asserts.
Reliant has sought to get the indictment dismissed but a court recently denied its request, and the case is pending. Reliant has said that its unit "violated no laws" and that it intends to vigorously contest the case.
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