By Joshua Schneyer and Timothy Gardner
NEW YORK/WASHINGTON (Reuters) - Regulators launched one of the biggest ever crackdowns on oil price manipulation on Tuesday, suing two well-known traders and two trading firms owned by Norwegian billionaire John Fredriksen for allegedly making $50 million by squeezing markets in 2008.
The Commodity Futures Trading Commission (CFTC) said traders James Dyer of Oklahoma's Parnon Energy, and Nick Wildgoose of Europe-based Arcadia Energy, amassed large physical positions at a key U.S. trading hub to create the impression of tight supplies that would boost oil prices.
Later they dumped those barrels back onto the market, causing prices to crash and racking up profits from short positions they had accrued in futures markets, the suit said.
"Defendants conducted a manipulative cycle, driving the price of WTI (crude) to artificial highs and then back down, to make unlawful profits," the lawsuit filed in New York said.
"This is a very big deal in that we seldom allege that the defendants manipulated the crude oil market to the tune of 50 million dollars in ill-gotten gains," CFTC commissioner Bart Chilton told Reuters.
"That's an awful lot of money, and when we look at how consumers are suffering at the gas pump, we need to prosecute activity like this to the fullest extent of our authority under the law," Chilton 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.
"This is exactly what we expect the CFTC to be doing," said Democratic Senator Maria Cantwell, who has pushed the Obama administration to tackle market manipulation in energy markets.
"Consumers have felt the impact of manipulation we've seen in the electricity, natural gas and oil markets. I expect the CFTC to be aggressive in policing these markets and standing up for consumers who are getting gouged at the pump," she said.
The suit names two traders familiar to U.S. oil market veterans, who recall Dyer and Wildgoose from their days as high-flying traders at BP Plc in the early 2000s, when the British oil giant's trading practices were under scrutiny due to its large ownership of oil tanks at Cushing, Oklahoma, the delivery point for U.S. oil futures.
BP was hit with a record $2.5 million fine by the New York Mercantile Exchange in 2003 for alleged U.S. oil market manipulation, which it paid without admitting any wrongdoing. That case did not include any allegations of misconduct by Dyer or Wildgoose.
Both Parnon and Arcadia are controlled by shipping magnate Fredriksen, who was born in Norway but is based in Cyprus, and whose $10.7 billion fortune placed him at number 72 in the latest Forbes list of the world's billionaires.
The lawsuit says that the CFTC may seek damages of as much as triple the monetary gains derived from the illicit trading violations, among other potential fines and injunctions. If the CFTC won damages of $150 million it would match the second-largest fine in the agency's history.
A CFTC spokesman declined comment on the specific damages it would seek in the suit. In the past, the CFTC has had a hard time winning manipulation cases, although U.S. financial reforms last year gave it broader powers to get tough.
While the trading strategy itself focused mainly on oil futures' price spreads, or time spreads, rather than outright prices of crude, the alleged scheme occurred in a year when global oil prices experienced their largest swings ever.
The CFTC said the traders aborted the trading strategy after April 2008, when they learned of regulators' investigations. Just months later U.S. oil prices surged to a record $147 a barrel, then crashed to nearly $30 a barrel by the end of the year.
Sought for comment, officials at Arcadia and Parnon did not return phone calls. Wildgoose, Dyer and Fredriksen were not immediately reachable.
Using positions in physical markets -- and even making a loss in physical trading -- to gain profits in derivative markets is not an uncommon phenomenon in oil markets.
The CFTC explained that the traders' "repeated conduct lead to at least a physical WTI trading loss of over $15 million. However, the artificial spread prices that were created as a result of Parnon/Arcadia's physical trading created profits of over $50 million in their WTI Derivative positions."
In the early 2000s, oil market trading plays known as "squeezes" were commonplace on both sides of the Atlantic, and BP was known as one of the most aggressive traders, using its control of important physical assets like the Forties pipeline that transports Europe's benchmark Brent crude, and the tanks that store crude at Cushing for leverage on paper positions.
And although the plays have rarely been successfully prosecuted by regulators, they have diminished in U.S. markets amid years of heightened scrutiny and high-profile investigations since the collapse of Enron.
"It feels like a blast from the past," said a veteran U.S. oil trader who requested anonymity.
A LOT OF MONEY TO BE MADE
In September 2007, according to CFTC suit, Dyer said in an email to other Parnon/Arcadia traders that there was a "shitload of money to be made" in creating the appearance that available stocks of crude at Cushing, Oklahoma -- the NYMEX futures delivery hub -- were low, a move that would cause prompt oil prices to rise.
As traders bid up oil for immediate delivery on fears of a shortage, Dyer and Wildgoose would then take a short position in near-term futures contracts, by selling them and acquiring oil contracts for delivery further in the future, CFTC said.
They would then gain profits by dumping large volumes of physical supplies back onto the market, ending the perception of a short-term "shortage," and causing oil futures spreads to collapse as premiums for prompt crude vanished.
The trading duo named in the lawsuit executed a manipulative strategy by amassing "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.
The scheme worked in January and March 2008, but later failed in April, CFTC said, as prices rose by almost $20 a barrel toward $120 over the course of that month. Prices barely paused from then until they hit an all-time high in July.
Parnon, headquartered in Oklahoma, owns at least 3 million barrels of storage facilities at Cushing. London-based Arcadia is a major global oil trading firm, which typically markets about 800,000 barrels a day of crude and product around the world.
Both are controlled by Fredriksen's Farahead Holdings, based in Cyprus. Fredriksen's energy empire, which also includes top oil tanker operator Frontline, liquefied natural gas company Golar and offshore driller Seadrill, has hired away several traders who once worked at BP, including Parnon's current CEO, Paul Adams.
Arcadia itself, years before Fredriksen bought it from Japanese trading house Mitsui, was sued by U.S. refiner TOSCO in 2000 for allegedly executing a "squeeze" on European Brent crude with other conspirators, although it settled out of court for an undisclosed sum, without admitting wrongdoing.
Volatility in commodity prices has renewed calls for the CFTC to crack down on speculators in oil markets, with some lawmakers calling on the commission to immediately impose position limits.
CFTC first began stepping up its monitoring of U.S. oil trading in early 2008.
According to the Commodity Exchange Act, manipulation or an attempt to manipulate the price of physical commodities or futures on exchanges like NYMEX are illegal, and distortions in futures spreads that are deemed to have been caused by such trading are also considered violations.
(Reporting by Ayesha Rascoe, Christopher Doering, Tom Doggett in Washington, Jeffrey Kerr, David Sheppard and Joshua Schneyer in New York and Robert Campbell in Mexico City; editing by Jonathan Leff)