Release: 4765-03
For Release: March 26, 2003

EL PASO TRADING UNIT AGREES TO PAY $20 MILLION TO SETTLE CFTC CHARGES OF ATTEMPTED MANIPULATION AND FALSE REPORTING

El Paso Merchant Energy, L.P. Settles Claims Under the Commodity Exchange Act That It Intentionally Reported False Natural Gas Price and Volume Information to Energy Reporting Firms in an Attempt to Affect Prices of Natural Gas Contracts

WASHINGTON, D.C. - The U.S. Commodity Futures Trading Commission (CFTC) announced today the issuance of an administrative order settling charges of attempted manipulation and false reporting against Houston, Texas energy company El Paso Merchant Energy, L.P. (EPME), a division of El Paso Corporation (El Paso).

In commenting on this matter, CFTC Chairman James E. Newsome said:

"The Commission has been aggressive, yet methodical, as it performs the difficult task of thoroughly investigating energy companies. Today’s settlement is yet another indication of progress being made in our energy investigation. We will continue to work hand-in-hand with the President’s Corporate Fraud Task Force to uncover and prosecute false reporting, wash trading, and manipulation in the markets that we oversee."

CFTC Commissioner Sharon Brown-Hruska stated:

"The gas and power markets are vital to the U.S. economy, and the Commission, as a market regulator, is committed to maintaining their credibility. This settlement demonstrates that commitment by sending a strong message that fraudulent and manipulative schemes will not be tolerated. I believe this action, in conjunction with others that the Commission has taken, will serve as deterrence to others who contemplate similar actions and will aid in the restoration of confidence and integrity in the energy markets."

The CFTC settlement order finds that from at least June 2000 through November 2001, EPME reported false natural gas trading information, including price and volume information, and failed to report actual trading information, to certain reporting firms. According to the order, price and volume information is used by the reporting firms in calculating published indexes of natural gas prices for various hubs throughout the United States. The order finds that EPME knowingly submitted false information to the reporting firms in an attempt to skew those indexes for EPME’s financial benefit. According to the order, natural gas futures traders refer to the published indexes for price discovery and for assessing price risks. The CFTC found that EPME’s false reporting conduct violated the Commodity Exchange Act (CEA).

The order also finds that EPME’s employees provided false trade data because they believed it benefited their trading positions or derivative contracts. In addition, the order finds that EPME did not maintain required records concerning the information that it provided to the reporting firms or the true source of the information relayed to those firms, as required by Commission regulations. As a result of its actions, EPME violated the CEA and Commission regulations.

The order further finds that EPME specifically intended to report false or misleading or knowingly inaccurate market information concerning, among other things, trade prices and volumes, and withheld true market information, in an attempt to manipulate the price of natural gas in interstate commerce, and that EPME’s provision of the false reports and failure to report true market information were overt acts that furthered the attempted manipulation. According to the order, EPME’s conduct constituted an attempted manipulation under the CEA, which, if successful, could have affected prices of NYMEX natural gas futures contracts.

Gregory Mocek, the Director of the CFTC’s Division of Enforcement, noted:

"We will be fair, though firm, with companies like EPME that come forward and promptly divulge all of their wrongdoing. However, this is only part of the process of cooperation. As with EPME, companies should take prudent steps such as executing internal investigations of their trading operations and swiftly turning over documents, emails, and interviews prior to our discovery of prohibited activity.

There remain a few companies on notice that certain unlawful practices ran rampant throughout the industry that, unlike EPME, have failed to take any meaningful steps to determine whether misconduct occurred in their corporations. Others are taking four months or more to respond to our document and email requests. Some are even playing a cat-and-mouse game. That is not cooperation."

The CFTC order provides for the following sanctions:

• requires EPME to cease and desist from further violations of the Commodity Exchange Act and Regulations;
• requires EPME and El Paso, jointly and severally, to pay a civil monetary penalty of $20 million -- $10 million now and $10 million plus post-judgment interest within three years of the entry of the order; and
• obliges EPME and El Paso to comply with various undertakings, including an undertaking to cooperate with the CFTC in this and related matters, including any investigations of matters involving the reporting of natural gas trading information.

In consenting to the entry of the order and the findings in the order, EPME and El Paso neither admitted nor denied the findings of the order. EPME provided significant cooperation in the course of the CFTC’s investigation by, among other things, conducting an internal investigation through an independent law firm, waiving work product privilege as to the results of that investigation, and compiling and analyzing trading data which detailed all reported and actual trades in the natural gas markets. The Commission has taken that significant cooperation into consideration in its decision to accept EPME’s settlement offer.

The following CFTC Division of Enforcement staff were responsible for this case: Elizabeth M. Streit, Jennifer Diamond, Hugh Rooney, Joy McCormack, Rosemary Hollinger, and Joan Manley. The Commission would like to thank the President’s Corporate Fraud Task Force for its assistance in this matter, and specifically the office of U.S. Attorney, Southern District of Texas, for its cooperation and support.

To see a copy of the settlement orders, go to the following Internet web address http://www.cftc.gov/

Media Case Contacts, CFTC Division Enforcement:
Gregory Mocek, Director
Washington, DC
(202) 418-5378

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