El Paso Merchant Energy: Gas Reports to Suit the Trading Book

El Paso Merchant Energy and El Paso Corporation agreed to pay a $20 million civil penalty over allegations of false gas reports and attempted natural-gas price manipulation. The Commodity Futures Trading Commission alleged that employees changed the prices and volumes of real trades, reported trades that never happened and left actual trades out. For someone who knew both the trading book and the reports sent to price publishers, the discrepancy had a direction: the numbers allegedly favored the desk’s own positions.

El Paso Merchant Energy handled El Paso Corporation’s merchant energy business and was a large trader in natural-gas futures and options on the New York Mercantile Exchange. The Commodity Futures Trading Commission announced the settlement on March 26, 2003. Its allegations concerned reporting from at least June 2000 through November 2001, with price information feeding indexes for natural-gas hubs across the United States.

What the Gas Reports Were Supposed to Represent

Gas-price publishers used reported transaction prices and volumes to calculate indexes that market participants used to price and settle commodity transactions. The El Paso order describes the connection between those cash-market reports and futures trading: traders consulted published gas prices to assess price levels and risk. A rising hub price could signal stronger demand or weaker supply, influencing how they traded futures.

That gave the submissions a life beyond the transaction they purported to describe. The publisher received a price and a volume, calculated an index, and supplied information other businesses used in their own decisions. The company submitting the information also had trading interests that could benefit from the resulting price.

This is a connection insiders recognize in physical commodity and energy manipulation: the cash market supplies a reference price, while exposure to that price sits elsewhere in the business. In El Paso’s case, the agency alleged that employees supplied false data because they believed it benefited trading positions or derivatives contracts. The reporting function and the trading book belonged in the same investigation.

Real Trades Altered, Invented Trades Added, Actual Trades Omitted

The alleged false reporting changed both the contents of the submissions and the selection of trades included. The Commodity Futures Trading Commission alleged that employees altered the price and volume of actual transactions and reported nonexistent trades by telephone, fax and the Internet. The agency also alleged that they failed to report actual trades to the publishers.

Those differences call for different comparisons. An altered transaction can still have a real trade behind it, but the reported terms disagree with the execution. An invented transaction adds activity that the trading records cannot explain. An omitted transaction leaves real activity out of the picture the publisher receives.

We look at the submitted trades alongside the complete trading record because the missing entries can matter as much as the false ones. A gas-desk supervisor may recognize which transactions disappeared. A price reporter may know which numbers were changed before they left the company and who asked for the changes.

The agency’s account tied the false reports and withheld trades to an attempt to skew the indexes for El Paso Merchant Energy’s financial benefit. The alleged distortion therefore ran through information other market participants treated as a description of actual trading. We see the absurdity: a report of what happened in the market was allegedly being edited to suit what the reporter wanted the market to do.

The Position Behind the Report

The El Paso order recorded an unusually direct description of the reporting incentive. Its account of what employees said connected the submitted trades to the firm’s net position:

That makes the position record part of the reporting story. A price reporter could see a changed number without seeing the exposure it was allegedly meant to help. Someone in risk could see the exposure without seeing which trades reached the publisher. Read together, those records can explain why a particular departure from the actual trades mattered to the desk.

The agency settled an attempted-manipulation charge in the El Paso action. It alleged that the false reports and withheld real trades were intended to manipulate natural-gas prices and, if successful, could have affected NYMEX futures prices.

A Parallel in Natural-Gas Price Reporting

WD Energy Services also settled the Commodity Futures Trading Commission’s allegations of attempted natural-gas price manipulation through false reports to price-reporting firms. In its July 28, 2003 announcement, the agency described false gas-price and volume reporting intended to influence hub indexes. The allegations concerned conduct from at least June 2000 through at least August 2001.

The recurring feature is the information supplied to an index publisher by a market participant with an interest in the resulting price. El Paso’s order makes that connection particularly concrete through the employees’ description of reporting to the firm’s position. For an insider considering comparable conduct, we want to understand how the submitted numbers diverged from the trades and what exposure the divergence was meant to favor.

Missing Reports and the Reconstruction Behind the Settlement

The Commodity Futures Trading Commission also alleged that El Paso Merchant Energy failed to retain required records of information sent to the reporting firms. Those recordkeeping failures concerned the very material needed to compare what the company traded with what it told the market. The order addressed records of the reports and the true source of the information they contained.

According to the order, El Paso Merchant Energy compiled and analyzed data detailing all reported trades and all actual natural-gas trades. It also produced emails and audio recordings, and made a senior risk manager available to explain its risk management operations.

That reconstruction joined the transactions, the submissions, the communications and the explanation of the risk. For someone inside a reporting desk, the connection matters: the trade records show the discrepancy, while the communications and positions can explain its purpose.

What Evidence Is Required to Prove Fraud?

For suspected false gas reporting, we connect actual trades, index submissions and the desk’s exposure, even when an insider sees only part of that picture. We work through those connections with you, using your knowledge of who controlled the reports and what the desk stood to gain:

• Trade tickets and submitted prices and volumes. We compare the terms of executed trades with the information sent to the publisher, including reported transactions with no corresponding actual trade.
• Actual trades and omissions. We examine which real transactions were left out and how that selection related to the exposure the desk held.
• Positions and desk communications. We connect the intended benefit to the trading book and to the messages or conversations explaining the reporting decisions.

You may know the reporting side, the trading side or the risk side of that comparison. Our work starts with what you saw and builds the connections with you. Someone who knows why a report was changed can supply context that a published index leaves invisible.

Under the CFTC whistleblower program, whistleblower awards total 10% to 30% of the monetary sanctions the government collects. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. These are separate programs, and we work with commodity whistleblower lawyers who know gas-index cases to assess the conduct you describe.

You Know Why the Numbers Changed

If you saw gas reports adjusted to favor the desk’s book, speak to one of our Whistleblower Experts about what changed and who directed it. We build the account around your knowledge of the trades and bring in CFTC whistleblower lawyers who understand gas indexes and the positions tied to them. You have a partner through the case, from explaining the discrepancy to pursuing the reward your information can support.