Legal experts say it is fine for commodity traders to make all the money they can–right up to the point where their trading dictates the prices, as regulators allege BP did in cornering the market for propane.
Government regulators accuse BP of manipulating the market, and have filed suit against the company in Chicago federal court, while the Justice Department has obtained a guilty plea on a conspiracy charge against one trader.
In parsing the difference between aggressive trading and an illegal scheme, there is “continuum” from being a speculator to being a manipulator, said Brian Winters, an attorney specializing in anti-trust and trade regulation issues in the Milwaukee office of law firm Quarles & Brady.
It is not illegal to have a big position in a market and be aggressive in getting there, said Winters. Problems arise if, as the government alleges in the BP investigation, traders were manipulating the market.
“There’s no problem with trying to buy low and sell high,” he said. “If I’m a speculator in a commodity, a dealer in a commodity, I’m supposed to be analyzing all the information that’s available to me and coming to conclusions.
“Where it becomes manipulation . . . is when I actually try to influence the market myself,” he said.
The best financial speculators use research, experience and a little luck to be able to determine where the price of commodities will be months into the future. “That’s a valuable social activity,” Winters said.
“What’s not thought to be valuable is to do things that simply cause the price to move because of what you have done. That makes you a profit, but it doesn’t help society,” he said.
Government attorneys will have to do more than show that BP and its traders took a dominant position in the propane market, said Fred McChesney, a professor of law and business at Northwestern University.
“Mere size is not a crime,” he said. “You can measure it in total assets or percent of the market. Is having 90 percent of the market a problem? No. The real question is how did you get there? You may just be better than the rest,” he said.
The government will have to show that BP gained dominance through “bad acts”–through misinformation or leaking details about the market to only a select group of traders.
“Maybe they realize that a surge in demand for this gas is coming along, they realize it and the competition doesn’t,” McChesney said. “Then you’re doing your job. That’s what BP pays you to do.”
The Commodity Futures Trading Commission is suing BP in federal court in Chicago alleging the company cornered the market in propane in early 2004. The agency alleges that BP intentionally bought so much propane that it could control the price buyers would pay.
The Justice Department won a guilty plea from Dennis Abbott, a former BP trader, who was charged with conspiracy to manipulate and corner the propane market.
“Abbott admitted that he understood that the scheme was approved by senior executives at BP,” prosecutors said in a statement. They said Abbott is cooperating in an ongoing criminal investigation, but they did not identify the executives under suspicion.
BP denies that it manipulated the market in propane or committed any other wrongdoing.
Legal experts said that if any other BP employees are charged with a crime, the government will probably concentrate on the criminal cases first, then pursue the CFTC lawsuit.
“It is unlikely they would both go forward simultaneously,” said Timothy McInnis, a former assistant U.S. attorney who now practices white-collar criminal defense.
McInnis said prosecutors do not want to reveal any more than necessary about a criminal case, and pursuing the lawsuit first could disclose evidence useful to defendants.
Former federal prosecutor Neal Sonnett said it is quite possible the CFTC lawsuit will never go before a jury.
Companies often agree to pay a penalty rather than suffer the bad public relations of a trial. And evidence unearthed in a lawsuit filed by the government can be used in other lawsuits filed against the company.
“There is a large incentive to settle,” Sonnett said.
Chicago lawyer Kenneth Wexler has already filed suit against BP. He is seeking class-action status to represent the many thousands of customers he alleges were overcharged because BP manipulated the propane market.
Although the trading was carried out in Texas the lawsuits are being filed in federal court in Chicago because London-based BP’s U.S. operations are based in Warrenville.
The 4,400 people at the Warrenville site, with satellite offices elsewhere in the area, handle administrative functions such as legal affairs, human resources, taxes and other corporate responsibilities, a company spokesman said. The trading in energy, including propane, would have been overseen by BP’s corporate office in Houston, the spokesman said.
BP became a major player in the U.S. energy industry after it acquired Chicago-based Amoco Corp. in 1998.
———-
mskertic@tribune.com
rmanor@tribune.com
