Billionaire shipping magnate at the heart of alleged scam to manipulate the market for illegal $50m gain. Tamsin Carlisle writes
The Norwegian-born shipping magnate John Fredriksen has some explaining to do after US regulators implicated two of his trading companies in an alleged oil-price manipulation scheme.
On Tuesday, the US Commodity Futures Trading Commission (CFTC) sued Parnon Energy and Arcadia Energy over an alleged US$50 million (Dh183.6m) in illicit profits from squeezing markets in 2008, as crude headed towards a record $147 a barrel.
"Defendants conducted a manipulative cycle, driving the price of [West Texas Intermediate crude] to artificial highs and then back down, to make unlawful profits," the CFTC said in a lawsuit filed in New York.
The complaint suggested the commission may seek $150m in damages, which would equal the second-largest fine in its history.
Squeezing the market is an established tactic in the crooked commodity traders' arsenal of dirty tricks designed to steal from the poor to give to the rich. As revealed by a US government inquiry, it was notoriously applied in the 1990s by Enron, the defunct US energy trader, to engineer artificial power shortages in California for financial gain.
Big petroleum companies have been implicated in similar schemes. In 2003, BP paid a record $2.5m fine to the New York Mercantile Exchange (Nymex) to settle allegations that it had manipulated the price of North Sea Brent crude in the 1980s. The company did not admit to any wrongdoing.
According to the CFTC suit, two alleged rogue traders, James Dyer of Oklahoma's Parnon and Nick Wildgoose of the Wales-based Arcadia, bought up large volumes of crude stored in tanks at the Cushing, Oklahoma, trading hub for the sole purpose of holding the oil off the market to create the impression of short supplies. After that pushed up the price of Nymex oil futures, they then allegedly released their cache, causing the price of West Texas Intermediate (WTI) to drop.
Before lowering the boom, the two traders would take short positions in the WTI futures market, which is priced off supplies at Cushing, betting the price of the US benchmark crude would fall.
Parnon, Arcadia and their parent Farahead Holdings have yet to issue any response. Calls to numbers listed for Mr Dyer and Mr Wildgoose were not answered.
Conspiracy theories involving price manipulation routinely surface whenever a rapid run-up in commodity prices is followed by a bust, as happened dramatically with oil in 2008. But it is usually extremely difficult for prosecutors to prove that price manipulation has occurred. That makes the CFTC's legal action big news.
"This is a very big deal in that we seldom allege that the defendants manipulated the crude oil market to the tune of $50m in ill-gotten gains," the CFTC commissioner Bart Chilton told Reuters on Tuesday. "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."
The alleged scheme to defraud other investors, and indirectly all oil consumers, by artificially boosting prices, unfolded during a year of exceptional oil price volatility. The CFTC said the traders had successfully applied the strategy twice, in January and March of 2008, before aborting a third attempt in April. It is unclear whether the trading duo's alleged activities contributed to the record oil rise that summer, which was followed by an 80 per cent plunge.
In September 2007, according to the CFTC complaint, Mr Dyer said in an e-mail to other Parnon-Acadia traders that there was "money to be made" in creating the appearance of low stocks at Cushing. Parnon owns at least 3 million barrels of storage facilities at the oil hub.
Parnon and Arcadia are controlled by Mr Fredriksen's Farahead Holdings, based in Cyprus. The billionaire's energy empire also includes the oil tanker operator Frontline, the liquefied natural gas company Golar and the offshore driller Seadrill.
The civil suit culminates three years of heightened scrutiny of apparent trading irregularities by the CFTC, which has been charged with cracking down on price manipulation. Its launch coincides with a campaign by the Obama administration to reassure Americans that the government is doing all it can to protect consumers.
"This is exactly what we expect the CFTC to be doing," said the Democratic Senator Maria Cantwell, who has urged the administration to tackle the issue of price manipulation in energy markets.