Propane trader case: How a 'smoking gun' got snuffed out

When the CFTC and later Department of Justice announced allegations in 2006 that a group of BP propane traders tried to manipulate one section of that market two years earlier, it seemed like a pretty strong case.
There was the clear spike in propane prices at the time of the alleged manipulation in 2004, thus triggering the investigation.
There were the taped phone conversations between some of the traders. One trader was compared to the Hunt Brothers who tried to corner the silver markets in 1980. In another one of the traders muses after trying out the scheme ” … we would know from thereafter that we could control the market at will.”
One trader even plead guilty and agreed to cooperate, and BP entered into a deferred prosecution agreement with the government and paid $303 millon in fines, including $53 million to reimburse losses suffered by others in the market.
But on Thursday afternoon U.S. District Judge Gray Miller threw the indictments out, saying the law didn’t prohibit the transactions that took place.
So how did a case that seemed like such a slam-dunk from the earliest days come to this?
For starters, there’s that little issue of the law. Defense attorneys for the traders said the judge’s ruling is identical to the arguments they made to the DOJ before the indictments were handed down. In a nutshell, they argue that the Commodity Exchange Act didn’t apply to this case because the transactions – essentially buying up as many propane contracts as possible and selling them to counterparties who had shorted gas – were not done on an exchange and were negotiated between sophisticated parties. The full decision is here: Download file
“We always knew it was a foolish indictment,” said Mitch Lansden, an attorney for one of the traders, Cody Claborn. “We’re very happy it’s thrown out and this is at an end.”
The traders actually looked long and hard at the trading strategy beforehand and got approval from their higher-ups. They even had a PowerPoint presentation on the pros and cons and lessons learned. At first blush the slide show seems damning, but in retrospect it doesn’t seem like the kind of thing you do if you’re trying to be sneaky or think you’re breaking the law.
It’s also unclear who the victims of the scheme were, or if there were they were any, simply than other large market participants who were betting prices would do something different. The price spike doesn’t appear to have shown up in retail propane markets.
“It’s possible the price spike never showed up for retail customers,” said Dan Lippe, president of energy consulting firm Petral Worldwide, an interview with us in 2007. “It just didn’t last long enough.”
Because wholesale and retail distributors usually have several days of inventory on hand, they could simply have chosen not to buy propane when the prices were clearly inflated.
“Companies could have just decided to not buy that day, or bought from another source,” Lippe said.
The alleged manipulation also occurred at the end of the heating season, when most retail customers have stopped buying propane.
So far none of the $53 million BP had to pay for restitution has been paid out, according to a Department of Justice spokesman. The application deadline for the funds has been extended twice and the criteria for applying broadened in an effort to attract applications.
The case was originally filed in Chicago, where BP has its trading headquarters, even though all the traders were in Houston. Perhaps the hope was that a Chicago jury that would be on the receiving end of the gas for winter heating would be more outraged over the allegations. Regardless, the Chicago judge agreed with the defense on their change of venue motion – a rare occurrence – and moved the case to Houston.
The defense was also helped by deep pockets – namely BP. Even though the company entered into a plea agreement in the case it continued to pay the legal fees of the four traders’ attorneys, allowing them to continue an aggressive challenge. That’s hardly been the case in past energy cases in Houston, including the case of former Dynegy accounting exec Jamie Olis and some of the natural gas index trading cases.
Another sign of trouble? When the government re-indicted the traders last fall they made a big change in the theory: in the CFTC civil case and prior DOJ indictment there was a hint that higher-level execs at BP were complicit in the scheme. The superseding indictment said the four tried to hide it from others, a claim that the defense said was highly unlikely given all the communication around the plans.
“It was a huge change of theory, very shocking actually,” said Charlie Mills, an attorney for trader Mark Radley.
What’s next in the case? The Department of Justice is reviewing the decision, said a spokesman, but that’s a process that can take a while.
For now the four defendants are breathing a little easier, their attorneys say, and hope to move on.