The 'Rogue Trader' Who Got Away with It

09_17_NaturalGas
How Brian Hunter, one of the most notorious traders in history, dodged a guilty verdict—and prison time Mohammed Ameen/Reuters

Brian Hunter, a tall, sandy-haired, self-described “math geek” from Calgary with a taste for expensive cars, was only 32 years old when he was blamed for sinking $9.6 billion hedge fund Amaranth Advisors, based in Greenwich, Conn., eight years ago this week.

Facing trial in New York this October, Hunter finally put longstanding charges of energy market manipulation to rest, settling this week with the nation’s futures market watchdog, the Commodity Futures Trading Commission, for $750,000. The fine is a fraction of his annual earnings during his heyday as head natural gas trader at Amaranth, where he pulled in as much as $100 million a year and earned 15 percent of his profits in an “eat-what you kill” bonus arrangement.

Among his other traderly winnings: a Ferrari F430 Spider and a Bentley Arnage that Hunter told Fortune handled surprisingly well in the Calgary winters.

A preternaturally gifted trader whose father poured concrete for a living, Hunter studied physics at the University of Alberta before becoming known as “one of the biggest wallets on Wall Street” in the run-up to the financial crisis. But he found himself on the wrong side of towering natural gas bets that lost his firm more than $6 billion, forcing Amaranth to liquidate its holdings and shut its doors in 2006.

This fall from grace was especially chafing coming on the heels of 2005, which brought Hunter and his fund immense riches from bets placed on the successive hurricanes of Katrina and Rita that gutted the Gulf Coast and sent energy prices soaring.

Since the closure of Amaranth, the Canadian wunderkind has become something of an escape artist, deftly prancing just out of reach of U.S. regulators despite multiple attempts to bring him to justice.

In the immediate aftermath of the implosion of his hedge fund, Hunter, during an interrogation with market regulators in New York, reportedly asked to break for lunch – then caught a jet out of the country.

In a 130-page treatise in June 2007, the U.S. Senate Permanent Subcommittee on Investigations found that Hunter’s trades had disrupted the nation’s energy prices ahead of the winter. The panel called for regulators to “put the cop back on the beat in all U.S. energy markets,” but did not do a very good job of explaining how traders like Hunter – who placed his bets electronically from Calgary – could be apprehended from across an international border.

In July 2007, Hunter even slammed one U.S. energy market regulator with a restraining order for “improperly bringing an enforcement action” against him “in excess of its statutory authority.”

While Amaranth’s executives entered into settlement discussions with market regulators in 2008 and settled for a civil penalty of $7.5 million in August 2009, Hunter steadfastly maintained his innocence and continued to fight U.S. authorities as the lone defendant.

Hunter’s closest call came in April 2011, when a Federal Energy Regulatory Commission administrative law judge found him guilty of manipulating the natural gas market and slapped him with a $30 million fine. Hunter brazenly appealed, taking the case to the U.S. Court of Appeals for District of Columbia Circuit and arguing that FERC did not have any jurisdiction over the futures markets where he was trading – and won.

In an odd twist, the CFTC offered Hunter an assist in his appeal, filing a 38-page brief that sided with the Hunter against FERC, stating that “federal courts have repeatedly recognized the CFTC’s exclusive jurisdiction” over the futures markets, despite the fact the 2007 Senate panel investigation had found Hunter’s bets had resonated across the nation’s energy complex, including in the physical gas markets over which FERC presided.

In 2011, The Wall Street Journal called Hunter one of the top “rogue traders” of all time – yet noted he was the only one who had not been sentenced to prison.

One of the most noteworthy aspects of Hunter’s trading exploits was the fact he kept records of them on instant messages he sent to other traders. These were later used as evidence against him by U.S. market regulators, including the CFTC, to prove intent to manipulate energy prices.

In one such correspondence from February 2006, Hunter told a fellow trader “just need [March natural gas futures prices] to get smashed on settle Friday,” referring to the delicate and critical time when prices settle at the end of the trading day. In another, he noted to an admiring colleague “I am flexing here... hahahahnha.”

Having fought long and hard for the right to apprehend Hunter, the CFTC finally got its moment to pursue him in April 2013, when the U.S. District Court for the Southern District of New York lifted a stay that it had imposed in January 2012, pending the resolution of FERC’s case against Hunter.

Some anticipated the CFTC would bring Hunter to trial this fall. Others thought it would  at least try to match the $30 million fine imposed by FERC. But the CFTC did neither.

In the settlement with the CFTC announced Monday – which still requires court approval – Hunter will pay a fine but will be allowed to continue trading -- but with restrictions.

While in the past the CFTC has not hesitated to crack down on errant traders with lifetime trading bans that destroy their careers, Hunter’s restrictions are unusual.

Hunter is permanently banned from trading during final settlement periods for all CFTC-regulated products in general, and banned from trading during the daily closing period for all CFTC-related natural gas products in particular. Historically, the CFTC does not typically tailor trading bans so tightly. Usually it imposes a wider, blanket-style trading ban.

A source close to the Hunter negotiations told Newsweek Tuesday the agency tried to impose a broader ban, but was unable to prevail in settlement talks. The CFTC did not have any comment, nor did Hunter’s lead lawyer Matthew Menchel at at Kobre & Kim.

Hunter is prohibited from registering with the CFTC but, seeing as Hunter is Canadian, this should not be a problem. According to the CFTC’s rules, non-U.S. residents and firms need not register with the agency, so long as they have no U.S. clients and submit all trades for clearing to a futures commission merchant.

The CFTC has long been criticized by members of Congress for not coming down harder on traders when they are found to be manipulating prices, even as U.S. energy prices hit record highs in recent years and then fell again. Indeed, its fine against Hunter is 40 times less than the FERC fine.

“The CFTC’s decision to settle with Brian Hunter for what amounts to little more than the cost of a few more high-priced cars for his collection and sends the wrong message to Wall Street traders,” says Barbara T. Dreyfuss, who chronicled Hunter’s trading exploits in “Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster,” published by Random House last year.

“In light of everything that has happened in the financial markets since Hunter’s wild trading collapsed his hedge fund, the CFTC should either have gone to trial or imposed tougher penalties to make clear it won’t tolerate manipulating markets,” Dreyfuss told Newsweek.

Hunter was not immediately available for comment and his legal team says there will be no statement. According to the terms of the settlement agreement, Hunter “neither admits nor denies the allegations” of the CFTC complaint.