| James Brooks, center, his attorney Wendell Odom and Brooks’ wife in 2005, after his arraignment. (Steve Campbell/Chronicle)
The former head of El Paso Corp.’s natural gas trading business was sentenced to 14 years in prison for his role in a scheme to report false price data to industry publications. Two colleagues were sentenced to 11 years, 3 months each.
James Brooks, the head of trading and a managing director at El Paso, was found guilty of 45 counts during a 2007-2008 trial, including a single conspiracy charge, 22 counts of false reporting and 22 counts of fraud.
Wes Walton and James Phillips, traders who worked for Brooks, were each found guilty of one count of conspiracy, 10 counts of false reporting and 10 counts of wire fraud.
Prosecutors accused the men of repeatedly lying to energy industry publications that gathered natural gas trades to create indexes that were widely followed by other companies. The false data was reported in an effort to manipulate natural gas prices to positions that favored El Paso.
Defense lawyers asserted that the men reported accurate information under an “imperfect system.” The government didn’t have to prove the reports affected prices, just that the men were trying to deceive the publications.
The men remain free on bond and will report to prison at a later date.
David Gerger, Walton’s attorney, was disappointed in the lengthy sentence.
“When the government can increase your sentence 10 fold for going to trial, then very few innocent people will have the courage to take that risk,” Gerger said. “They will just plead guilty, and that’s wrong.”
Brooks is the highest ranking employee charged in the wide-ranging investigation of natural gas price reporting, that was centered in Houston. More than a dozen former employees of companies like Dynegy, Reliant Energy, and other firms were charged.
Many entered guilty pleas and avoided trial. Dynegy trader Michelle Valencia and El Paso trader Greg Singleton chose to go to trial and were found guilty on a number of charges. Valencia is currently serving a four year, 9-month sentence while Singleton received a 28-month sentence.
Walton was a basis trader, a position usually held by more experienced employees who trade to take advantage of the difference between the price of natural gas delivered at spots around the country and the price of a benchmark contract traded on the New York Mercantile Exchange.
Another basis trader, Todd Geiger, was charged in the investigation in 2002. He agreed to cooperate with investigators in exchange for a five-year sentence.
During the sentencing hearing Thursday attorneys for the men argued against the government’s sentencing report, saying such factors as the number of victims of the scheme and the amount of money lost by the victims was too difficult to determine and wasn’t addressed properly by the government.
For example, the report referred to a law suit involving California natural gas customers who sued El Paso and some state utilities claiming they tried to drive up natural gas prices there.
But Gerger argued there was nothing in the trial that linked his client to trades at that natural gas hub or any direct connection between those customers’ losses and his client.
“You do agree there were victims in this case, though, don’t you?” asked U.S. District Court Judge Melinda Harmon.
“I’m very serious when I say I’m really not sure about that,” Gerger said. There was such widespread false price reporting by most traders that it was nearly impossible to determine what the true index prices should be, he argued, and therefore difficult to determine who lost or gained money on a particular transaction.
David Adler, Phillips attorney, argued that given the difficulty of figuring out victim losses, the sentencing should instead take into consideration how much the main gained in bonuses from their actions.
Ultimately Harmon rejected all of the defendant’s arguments but she gave sentences at the bottom of the recommended sentencing ranges.
Brooks, whose sentence could have gone as high as 18 years, 3 months, was contrite before Judge Harmon.
“I am a sinner. If I have caused anyone pain or suffering I pray in the name of my Lord Jesus Christ they forgive me.”
“I made a mistake of listening to another man,” he said, but he didn’t name the person. “I trusted him blindly.”
Phillips, whose sentence could have gone as high as 14 years, asked the judge to consider the years away from his wife and four-year-old son that a lengthy sentence would impose.
Walton, who also could have faced 14 years, said he keeps “hoping that I’ll wake up and this nightmare will be over. My family has been through seven years of always being scared.”
During trial prosecutors played recorded phone conversations where Walton swore regularly and talked crudely, language that Walton said now embarrasses him.
“I am a good person,” Walton said in a halting voice. “I was very embarrassed by the way I sounded on the tapes. I’m a good father. I believe if you had a chance to meet my sons you’d see I’m not the raving lunatic on those tapes.”
“But I’m a trader, and a trader can’t be successful if they don’t have a lot of confidence in themselves,” Walton said.
The mark-to-market accounting that trading operations use, where a company’s net trading position is calculated daily and counted against the firm’s balance sheet, meant Walton’s trades lost millions of dollars one day and gained millions on another, he said.
“You have to have confidence that you’re doing the right thing if you want to survive” in the trading business, he said.
All three men asked to be entered into prison programs for the treatment of drug and/or alcohol abuse, which can take up to a year off of a sentence.