In re Amaranth Nat. Gas Commodities Litig.

12-2075-cv
In re Amaranth Nat. Gas Commodities Litig.

1 United States Court of Appeals
2 FOR THE SECOND CIRCUIT
3
4 August Term 2012
5
6 (Argued: February 15, 2013 Decided: September 23, 2013)
7
8 No. 12-2075-cv
9 _____________________________________
10
11 IN RE: AMARANTH NATURAL GAS COMMODITIES LITIGATION
12
13 ROBERTO E. CALLE GRACEY, on behalf of himself and all others similarly
14 situated, JOHN F. SPECIAL, GREGORY H. SMITH, on behalf of himself and all
15 others similarly situated, ALAN MARTIN, individually and on behalf of all
16 other persons similarly situated,
17 Plaintiffs-Appellants,
18
19 -v.-
20
21 J.P. MORGAN CHASE & CO., J.P. MORGAN CHASE BANK, INC., J.P. MORGAN
22 FUTURES, INC.,
23 Defendants-Appellees,
24
25 AMARANTH ADVISORS, LLC, AMARANTH ADVISORS CALGARY ULC, AMARANTH
26 CAPITAL PARTNERS LLC, AMARANTH PARTNERS LLC, NICHOLAS M. MAOUNIS,
27 ALX ENERGY INCORPORATED, JAMES DELUCIA, GOTHAM ENERGY BROKERS INC.,
28 AMARANTH MANAGEMENT LP, AMARANTH INTERNATIONAL ADVISORS L.L.C.,
29 AMARANTH LLC, AMARANTH GROUP INC., AMARANTH INTERNATIONAL LIMITED,
30 JAMES DELUCIA, L.P., BRIAN HUNTER, TFS ENERGY FUTURES LLC, MATTHEW
31 DONOHOE,
32 Defendants.
33 _____________________________________
34
35 Before: SACK, HALL, and LIVINGSTON, Circuit Judges.
36
37

1
1 Plaintiffs-Appellants appeal from orders of the United States District
2 Court for the Southern District of New York (Scheindlin, J.) dismissing their
3 claim against Defendants-Appellees for aiding and abetting commodities
4 manipulation in violation of Section 22 of the Commodities Exchange Act, 7
5 U.S.C. § 25. On appeal, Plaintiffs-Appellants argue that their amended
6 complaint adequately states such a claim. We disagree, and therefore AFFIRM.
7

8 CHRISTOPHER LOVELL (Gary S. Jacobson, Amanda
9 N. Miller, Lovell Stewart Halebian Jacobson
10 LLP, New York, NY, Peter D. St. Phillip Jr., and
11 Vincent Briganti, Lowey Dannenberg Cohen &
12 Hart, P.C., White Plains, NY, on the brief), Lovell
13 Stewart Halebian Jacobson LLP, New York, NY,
14 for Plaintiffs-Appellants.
15
16 ERIC S. GOLDSTEIN (Daniel J. Toal, on the brief),
17 Paul, Weiss, Rifkind, Wharton & Garrison LLP,
18 New York, NY, for Defendants-Appellees.
19
20 DEBRA ANN LIVINGSTON, Circuit Judge:

21 In the fall of 2006, Amaranth Advisors LLC (“Amaranth”), a hedge fund

22 that had heavily invested in natural gas futures, collapsed. A Senate

23 investigation would later conclude that Amaranth, in the months leading up to

24 its demise, had taken positions in natural gas futures and swaps so massive that

25 its trading directly affected domestic natural gas prices and price volatility. See

26 Staff Report of S. Permanent Subcomm. on Investigations, Comm. on Homeland

27 Security and Governmental Affairs, 110th Cong., Excessive Speculation in the

28 Natural Gas Market 6 (2007) (“Senate Report”). Plaintiffs-Appellants, traders

29 who had bought or sold natural gas futures during these same months, filed a

2
1 complaint in the United States District Court for the Southern District of New

2 York alleging that Amaranth had manipulated the price of natural gas futures

3 in violation of the Commodities Exchange Act (“CEA”), 7 U.S.C. § 1 et seq.

4 Plaintiffs-Appellants also alleged that Defendants-Appellees J.P. Morgan Chase

5 & Co., J.P. Morgan Chase Bank, Inc., and J.P. Morgan Futures, Inc. (“J.P.

6 Futures”) (collectively, “J.P. Morgan”) had aided and abetted Amaranth’s

7 manipulation of natural gas futures through J.P. Futures’s services as

8 Amaranth’s futures commission merchant and clearing broker. The district

9 court (Scheindlin, J.), in October 6, 2008 and April 27, 2009 orders, concluded

10 that both Plaintiffs-Appellants’ complaint and amended complaint failed to state

11 claims against J.P. Morgan.

12 Plaintiffs-Appellants argue on appeal that the district court did not apply

13 the correct standard for evaluating the sufficiency of their amended complaint

14 and likewise failed to recognize the amended complaint’s well-pleaded

15 allegations that J.P. Futures aided and abetted Amaranth’s manipulation within

16 the meaning of Section 22 of the CEA, 7 U.S.C. § 25(a). We conclude that the

17 district court did not err in concluding that Plaintiffs-Appellants’ amended

18 complaint failed to state a claim against J.P. Futures. Because we conclude that

19 this is so even under the pleading standards that Plaintiffs-Appellants argue

20 should apply, we do not decide whether the district court’s application of a more

21 stringent standard was error.

3
1 BACKGROUND

2 1. Commodity Futures Trading

3 The CEA prohibits manipulation of the price of any commodity or

4 commodity future. See 7 U.S.C. §§ 9(1), 13(a)(2). While the CEA itself does not

5 define the term, a court will find manipulation where “(1) Defendants possessed

6 an ability to influence market prices; (2) an artificial price existed; (3)

7 Defendants caused the artificial prices; and (4) Defendants specifically intended

8 to cause the artificial price.” Hershey v. Energy Transfer Partners, L.P., 610 F.3d

9 239, 247 (5th Cir. 2010).1 This case is about the alleged manipulation of natural

10 gas futures traded on the New York Mercantile Exchange (“NYMEX”). The

11 alleged manipulative scheme, however, also involved a second standardized

1
Since the events alleged in Plaintiffs-Appellants’ amended complaint, the
CEA has undergone some significant changes. Among them, Congress amended 7
U.S.C. § 9(1) to prohibit the use of “any manipulative or deceptive device or
contrivance, in contravention of such rules and regulations as the [Commodity
Futures Trading] Commission shall promulgate.” See Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L. No. 111-203, Tit. VII, § 753(a), 124
Stat. 1376, 1750 (2010); see also 7 U.S.C. § 25(a)(2) (providing private right of action
for violation of such rules and regulations). The Commodity Futures Trading
Commission (“CFTC”) has since promulgated a regulation making it unlawful for
any person to “intentionally or recklessly” manipulate prices through various
deceitful or fraudulent conduct. See 17 C.F.R. § 180.1(a) (2013). This regulation
does not impact the present appeal, however, given the regulation’s effective date of
August 15, 2011. See Prohibition on the Employment or Attempted Employment of
Manipulative and Deceptive Devices, 76 Fed. Reg. 41398, 41398 (July 14, 2011).
The CFTC also promulgated a separate regulation at the same time for cases of
manipulation not involving deceitful or fraudulent devices, and explained that
interpretation of that regulation “will be guided” by existing law on commodities
manipulation. See 17 C.F.R. § 180.2 (2013); 76 Fed. Reg. at 41407.

4
1 energy contract: natural gas swaps traded on the Intercontinental Exchange

2 (“ICE”), an electronic exchange based in Atlanta, Georgia. A full understanding

3 of Plaintiffs-Appellants’ allegations requires background on both of these

4 financial instruments and their respective exchanges.

5 A. NYMEX Natural Gas Futures

6 NYMEX is a futures and options exchange based in New York City. N.Y.

7 Mercantile Exch. v. IntercontinentalExchange, Inc., 497 F.3d 109, 110 (2d Cir.

8 2007). We have previously described the basic features of commodity futures

9 trading:

10 A commodities futures contract is an executory contract
11 for the sale of a commodity executed at a specific point
12 in time with delivery of the commodity postponed to a
13 future date. Every commodities futures contract has a
14 seller and a buyer. The seller, called a “short,” agrees
15 for a price, fixed at the time of contract, to deliver a
16 specified quantity and grade of an identified commodity
17 at a date in the future. The buyer, or “long,” agrees to
18 accept delivery at that future date at the price fixed in
19 the contract. It is the rare case when buyers and sellers
20 settle their obligations under futures contracts by
21 actually delivering the commodity. Rather, they
22 routinely take a short or long position in order to
23 speculate on the future price of the commodity. Then,
24 sometime before delivery is due, they offset or liquidate
25 their positions by entering the market again and
26 purchasing an equal number of opposite contracts, i.e.,
27 a short buys long, a long buys short. In this way their
28 obligations under the original liquidating contracts
29 offset each other. The difference in price between the
30 original contract and the offsetting contract determines
31 the amount of money made or lost.
32
33 Strobl v. N.Y. Mercantile Exch., 768 F.2d 22, 24 (2d Cir. 1985).

5
1 One type of futures contract traded on NYMEX is for the delivery of

2 natural gas. In its standard form, this contract obligates the buyer to purchase

3 10,000 MMBtu2 of natural gas released during the contract’s delivery month at

4 the Henry Hub distribution facility in Erath, Louisiana. Trading on the future

5 begins five years before the delivery month and ends three business days before

6 the first calendar day of the delivery month. To determine the future’s final

7 price, NYMEX uses a weighted average of the trades executed during the final

8 half hour of trading—2:00 to 2:30 P.M.—on the last trading day. This final half

9 hour is referred to as the contract’s “final settlement period,” and final price as

10 the “final settlement price.”

11 NYMEX is a designated contract market, or “DCM.” As a DCM, NYMEX

12 may offer options and futures trading for any type of commodity, but is subject

13 to extensive oversight from the Commodity Futures Trading Commission

14 (“CFTC”). See 7 U.S.C. §§ 6(a)(1), 7. Among other things, NYMEX must

15 maintain an internal monitoring and compliance program that meets statutory

16 criteria listed in the CEA. See id. § 7. One of these criteria is that NYMEX

17 establish position limits and accountability levels for each type of contract that

18 it offers for trading. See id. § 7(d)(5). A “position limit” is a cap on the number

19 of contracts that a trader may hold or control for a particular option or future at

2
1 MMBtu is equal to 1 million BTU (British Thermal Unit).

6
1 a particular time, with exceptions provided for traders engaged in bona fide

2 hedging. See id. § 6a(a)(2)(A), (c)(1). An “accountability level” provides that once

3 a trader holds or controls a certain number of contracts for a particular option

4 or future she must provide information about that position upon request by the

5 exchange and, if the exchange so orders, stop increasing her position. At the

6 time of the events alleged in the amended complaint, NYMEX had set a position

7 limit of 1,000 contracts, net short or net long, for any natural gas future,

8 applicable during the last three days of trading. NYMEX had also set

9 corresponding accountability limits, which varied in size based on the trader’s

10 capitalization and applied at all times the future was traded.

11 All trades on NYMEX must go through the exchange’s clearinghouse. To

12 finalize, or “clear,” a trade, traders must transact with a NYMEX clearing

13 member—a firm approved as a member of the clearinghouse. The seller’s

14 clearing firm will sell the contract to the clearinghouse, which then sells the

15 contract to the buyer’s clearing firm. Through this act of simultaneously buying

16 and selling the contract, the clearinghouse guarantees both sides of the trade

17 and ensures that neither buyer nor seller is exposed to any counterparty credit

18 risk. The clearing firms, in turn, guarantee their clients’ performance to the

19 clearinghouse.

20

7
1 To protect itself from risk of nonpayment, the NYMEX clearinghouse

2 requires that its members deposit margin sufficient to cover any potential short-

3 term losses on their clients’ open positions. At the end of each trading day, the

4 clearinghouse examines the change in value to these positions and determines

5 whether the firm must post additional margin (generally the case if value has

6 decreased) or receives payment on margin (generally the case if value has

7 increased). This process is called “marking-to-market.” See N.Y. Mercantile

8 Exch., 497 F.3d at 111. Clearing firms engage in the same process with their

9 customers, requiring an initial margin payment for any newly acquired position

10 and conducting a daily recalculation of that margin requirement as the position

11 changes in value.

12 In addition to clearing members, traders on NYMEX also interact with

13 futures commissions merchants, or “FCMs.” “An FCM is the commodity

14 market’s equivalent of a securities brokerage house, soliciting and accepting

15 orders for futures contracts and accepting funds or extending credit in

16 connection therewith.” First Am. Discount Corp. v. CFTC, 222 F.3d 1008, 1110

17 (D.C. Cir. 2000); see also 7 U.S.C. § 1a(28). FCMs must register with the CFTC,

18 see id. § 6d(a)(1), and are subject to numerous regulatory requirements. A firm

19 may be both a clearing member and an FCM. Such dual status would enable it

20 to both accept orders from clients and clear any resulting trades.

8
1 B. ICE Natural Gas Swaps

2 ICE is an electronic commodity exchange based in Atlanta, Georgia. At

3 the time of the events alleged in the amended complaint, ICE offered trading in

4 natural gas swaps.3 Swaps, unlike futures contracts, do not contemplate

5 delivery of the underlying commodity. Rather, in a typical commodity swap, the

6 buyer agrees to pay the seller a fixed amount of money and the seller agrees to

7 pay the buyer the price of an underlying commodity at the time the swap

8 expires. For ICE’s Natural Gas Henry Hub Swap, this “floating value” paid by

9 the seller was the final settlement value of the NYMEX natural gas future for

10 the corresponding month. Hence, if the final settlement value of the NYMEX

11 natural gas future was above whatever price the buyer paid for the swap, the

12 buyer would profit; if it was below, the seller would.

13 Since the settlement price of an ICE Henry Hub natural gas swap was

14 pegged to the final settlement price of the corresponding NYMEX natural gas

15 future, the two instruments were functionally identical for risk management

16 purposes. Indeed, arbitrageurs ensured that their prices moved in virtual

17 lockstep with one another. Whether a trader decided to transact in ICE swaps

3
ICE has since stopped offering natural gas swaps for trading, and instead
offers trading in natural gas futures and options. See Press Release, ICE Completes
Transition of Energy Swaps to Futures (Oct. 16, 2012), http://ir.theice.com/release
detail.cfm?ReleaseID=713717.

9
1 or in NYMEX futures often depended on factors such as which market had

2 greater liquidity.

3 An important difference between the two instruments, however, was that

4 ICE did not face the same level of regulatory oversight as did NYMEX. At the

5 time of the events alleged in the amended complaint, ICE qualified as an

6 “exempt commercial market,” or “ECM,” under the CEA.4 While this status

7 limited both the type of instruments ICE could offer for trading and the parties

8 that could trade them, it also exempted ICE from most of the regulatory

9 obligations placed upon NYMEX. See 7 U.S.C. § 2(h)(3) (2006). As an ECM, ICE

10 did not have to set position limits or accountability levels, nor did it need to

11 monitor trading to ensure compliance with market rules and prevent

12 manipulation.

13

14

4
In 2008, Congress increased the CFTC’s oversight of any ECM that offered
trading in products the CFTC deemed to be “significant price discovery contracts.”
See Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-246, Tit. XIII, Sub.
B, 124 Stat. 1651, 2197–2204. Two years later, the Dodd-Frank Wall Street Reform
and Consumer Protection Act repealed the statutory basis for ECMs. See Dodd-
Frank Act § 723, 123 Stat. at 1675 (repealing 7 U.S.C. § 2(h)(3)–(5)). The effective
date of this repeal was July 16, 2011. Id. The CFTC, however, has conditionally
exempted preexisting ECMs from compliance with the new laws as it works to
implement Dodd-Frank’s changes. See CFTC Letter No. 13-28, No-Action Letter
(June 17, 2013) (providing conditional no-action relief until October 2, 2013).

10
1 At the time of the events alleged in the amended complaint, ICE did not

2 have a central clearinghouse.5 ICE did, however, permit its traders to employ

3 clearing firms, and many of the companies that operated as clearing firms on

4 NYMEX also operated as clearing firms on ICE.

5 2. Factual Background

6 The following facts are taken from the amended complaint, the allegations

7 of which we accept as true, as well as from other materials referenced in the

8 amended complaint. See, e.g., ONY, Inc. v. Cornerstone Therapeutics, Inc., 720

9 F.3d 490, 496 (2d Cir. 2013).

10 A. Amaranth

11 Amaranth was a multi-strategy hedge fund based in Greenwich,

12 Connecticut. Founded in 2000, Amaranth initially pursued an investment

13 strategy that did not particularly focus on energy trading. This changed over the

14 next half-decade, however, and by 2005 energy trading consumed over thirty

15 percent of Amaranth’s capital. Amaranth profited from this focus on energy

16 when, in late 2005, Hurricanes Katrina and Rita disrupted domestic natural gas

17 distribution. The resultant spike in prices produced returns on Amaranth’s

18 investments so large that energy trading would ultimately account for 98% of the

5
In 2009, ICE acquired The Clearing Corporation, an independent clearing
house. See http://www.clearingcorp.com.

11
1 fund’s 2005 performance. By the beginning of 2006, Amaranth managed over $8

2 billion in assets and employed over 400 people.

3 Amaranth continued to focus on energy trading in 2006. Among other

4 things, it began to acquire large “spread” positions in NYMEX natural gas

5 futures.6 Specifically, Amaranth acquired “calendar” spreads between natural

6 gas futures for different months. Since many homes and businesses use it for

7 indoor heating, natural gas has a highly seasonal price that rises in the colder

8 winter months and falls in the warmer summer months. By taking large spread

9 positions, Amaranth was betting that the difference between these winter and

10 summer prices would increase.

11 Amaranth started to build up short positions for the March 2006, April

12 2006, and November 2006 NYMEX natural gas futures, while at the same time

13 acquiring a long position for the January 2007 future. The sizes of these

14 positions were exceptional. Most traders consider control of only a few hundred

15 contracts to be a substantial position; a position of 10,000 NYMEX natural gas

16 futures contracts, meanwhile, will produce $1,000,000 in profit or loss for every

17 cent of price change. Amaranth, however, soon acquired positions of over 40,000

6
A spread position is created when a trader takes a long position in one
future and a short position in another. The trader seeks to profit from changes in
the difference between the two futures’ prices, rather than from any absolute
changes to the futures’ prices themselves.

12
1 March 2006 and 27,000 April 2006 contracts. These positions also represented

2 a substantial share of the market. By February, Amaranth controlled over half

3 of the open interest on NYMEX November 2006 natural gas futures contracts,

4 and held a similar percentage of January 2007 contracts.

5 While Amaranth was building its spread positions during the first half of

6 2006, it also engaged in several unusual transactions, referred to by Plaintiffs-

7 Appellants in their amended complaint as “slamming the close” trades. These

8 trades all followed the same pattern: in the weeks leading up to a NYMEX

9 future’s expiration, Amaranth would simultaneously acquire a long position in

10 the future and a short position in the corresponding swap on ICE. Then, during

11 the last half hour of trading on the final trading day—the final settlement

12 period—Amaranth would sell most or all of its long position, thus lowering the

13 future’s final settlement price. This would then lower the final settlement price

14 of the corresponding ICE swap, allowing Amaranth to profit from its short

15 position in that swap.

16 Amaranth engaged in these “slamming the close” trades for the March

17 2006, April 2006, and May 2006 NYMEX natural gas futures. For example, on

18 the March 2006 future’s final trading day, Amaranth acquired a long position in

19 the future of over 3,000 contracts. It then sold off this position during the

20 future’s final settlement period, lowering the future’s final price by $0.29 and

13
1 realizing a gain for its short positions of over $29 million. Amaranth engaged

2 in similar conduct the next two months, building up a large long position, selling

3 it off during the final settlement period, and profiting by virtue of short positions

4 on ICE as well as in other NYMEX natural gas futures also suppressed in price

5 by the trades. Subsequent investigations would reveal that Amaranth traders

6 discussed “smashing” the settlement price of these NYMEX futures and directed

7 floor brokers not to sell the contracts until the final minutes of trading.

8 In conducting these trades, Amaranth violated NYMEX position limits and

9 accountability levels, which prompted investigations from both NYMEX and the

10 CFTC. NYMEX also sought to limit Amaranth’s trading for the June 2006

11 future, even contacting J.P. Futures, Amaranth’s clearing broker, in May to

12 remind it that Amaranth needed to remain below applicable position limits.

13 Amaranth failed to heed these warnings, and on June 1 it appeared on a list of

14 traders exceeding applicable accountability levels. Nevertheless, NYMEX’s

15 initial response to Amaranth’s having again exceeded accountability levels was

16 to recommend their temporary increase. Then in early August, NYMEX

17 informed Amaranth that it should reduce its positions in the September 2006

18 natural gas future. Amaranth responded by shifting its positions in September

19 and October natural gas futures to the corresponding swaps on ICE. It

20 subsequently increased the size of those positions.

14
1 By early September 2006, Amaranth had a total open position in natural

2 gas futures and swaps of 594,455 contracts. The fund’s ever-increasing positions

3 kept the spreads between winter and summer natural gas prices artificially

4 high. Indeed, energy traders would subsequently describe the spread between

5 winter and summer prices as “clearly out-of-whack” and “ridiculous.” The

6 Senate Permanent Subcommittee on Investigations would later conclude that

7 Amaranth “dominated” the domestic natural gas market in 2006, and “had a

8 direct effect on U.S. natural gas prices and increased price volatility in the

9 natural gas market.” This investigation would reveal that Amaranth traders

10 discussed using the fund’s large positions to, among other things, “push” and

11 “widen” spreads.

12 By September 2006, however, the market for natural gas moved in ways

13 that disrupted Amaranth’s positions. As the winter months approached, it

14 became clearer that the price of natural gas would not rise considerably; the

15 winter/summer price spreads in which Amaranth had invested consequently

16 began to fall. Amaranth, faced with ballooning margin requirements, struggled

17 to find the capital or credit necessary to continue buying large positions that

18 could prop up prices. On the brink of collapse, the fund entered into negotiations

19 with several investment banks to sell off its natural gas positions. These

20 negotiations fell through, and on September 20, 2006, Amaranth sold most of its

15
1 natural gas portfolio to J.P. Morgan. J.P. Morgan eventually earned $725

2 million from the takeover. Amaranth liquidated the remainder of its assets.

3 On July 25, 2007, the CFTC filed a complaint against Amaranth and its

4 head energy trader, Brian Hunter, alleging that they “intentionally and

5 unlawfully attempted to manipulate the price of natural gas futures contracts

6 on the New York Mercantile Exchange (‘NYMEX’) on February 24 and April 26,

7 2006 . . . and that Amaranth Advisors L.L.C. made material misrepresentations

8 to NYMEX in violation of Section 9(a)(4) of the [CEA].” CFTC v. Amaranth

9 Advisors L.L.C., No. 07-cv-6682, 2009 WL 3270829, at *1 (S.D.N.Y. Aug. 12,

10 2009). The defendants settled with the CFTC for a civil penalty of $7.5 million.

11 Id. at *3. On July 26, 2007, the Federal Energy Regulatory Commission

12 (“FERC”) commenced an administrative proceeding against Amaranth for civil

13 penalties and disgorgement of profits. See CFTC v. Amaranth Advisors, LLC,

14 523 F. Supp. 2d 328, 331 (S.D.N.Y. 2007). Amaranth likewise settled for a civil

15 penalty of $7.5 million.7

16 B. J.P. Futures

17 Throughout the class period, J.P. Futures served as Amaranth’s FCM and

18 clearing firm. This meant, among other things, that J.P. Futures processed and

7
The D.C. Circuit granted Brian Hunter’s petition for review of FERC’s
orders fining him for his involvement, and concluded that FERC lacked jurisdiction.
See Hunter v. FERC, 711 F.3d 155, 160 (D.C. Cir. 2013).

16
1 settled Amaranth’s trades on both NYMEX and ICE.8 J.P. Futures profited from

2 this role: between the beginning of 2005 and September 2006, it earned over $32

3 million in commissions from Amaranth’s trading, as well as fees and interest on

4 Amaranth’s margin deposits.

5 As Amaranth’s clearing broker, J.P. Futures “marked to market”

6 Amaranth’s positions on a daily basis in order to determine if Amaranth needed

7 to deposit additional margin. This, along with J.P. Futures’s other roles as a

8 clearing broker, meant that it knew of Amaranth’s positions and trading activity.

9 As the clearing broker, J.P. Futures also knew when Amaranth violated NYMEX

10 position limits or exceeded NYMEX accountability levels. Indeed, NYMEX

11 contacted J.P. Futures directly in May 2006 to warn it about Amaranth’s

12 position in the June 2006 NYMEX natural gas future. Additionally, J.P. Futures

13 knew of the positions Amaranth took in connection with its “slamming the close”

14 trades. It similarly knew about the NYMEX and CFTC investigations into

15 Amaranth’s trading.

16

8
Though the amended complaint alleges that J.P. Futures accepted
Amaranth’s trade orders, other sections of the complaint suggest that Amaranth
placed orders directly with floor brokers. In particular, the complaint identified
other third-party floor brokers as the brokers who accepted the “slamming the close”
trades in March, April, and May 2006. Plaintiffs-Appellants’ counsel clarified at
oral argument that J.P. Futures permitted Amaranth to contact floor brokers
directly to execute trades.

17
1 Throughout the class period, J.P. Futures continued to service all of

2 Amaranth’s trades, including those that put Amaranth’s positions above

3 applicable NYMEX position limits and accountability levels. On one occasion in

4 late May 2006, J.P. Futures bypassed its own internal position limits for natural

5 gas futures in order to clear a series of large trading transactions undertaken by

6 Amaranth. During the summer months of 2006, J.P. Futures regularly granted

7 Amaranth credit limit increases to support its positions on ICE. J.P. Futures

8 facilitated Amaranth’s transfer of positions from NYMEX natural gas futures to

9 ICE natural gas swaps, which were beyond CFTC and NYMEX scrutiny. This

10 transfer resulted in higher margin requirements for Amaranth, and thus

11 increased fees and interest for J.P. Futures.

12 3. Procedural History

13 On July 12, 2007, Plaintiffs-Appellants filed a complaint on behalf of all

14 traders who purchased and sold NYMEX natural gas futures contracts between

15 February 16 and September 28, 2006.9 Named as defendants were the entities

16 and individuals that formed Amaranth, the entities and individuals that served

17 as Amaranth’s floor brokers, and the entities forming J.P. Morgan. The

18 complaint alleged, inter alia, that Amaranth had manipulated NYMEX natural

19 gas futures prices in violation of Sections 6(c), 6(d), 9(a), and 22(a) of the CEA,

9
Plaintiffs-Appellants filed a corrected complaint on February 14, 2008.

18
1 7 U.S.C. §§ 9, 13b, 13(a), and 25(a). The complaint divided this alleged

2 manipulation into two separate schemes: the “self-fulfilling prophecy” of

3 Amaranth’s increasingly large spread positions and the “slamming the close”

4 trades that Amaranth executed in connection with the March, April, and May

5 2006 NYMEX natural gas futures. The complaint further alleged that J.P.

6 Morgan, by virtue of J.P. Futures’s role as Amaranth’s FCM and clearing broker,

7 aided and abetted these manipulations in violation of Section 22(a)(1) of the

8 CEA, 7 U.S.C. § 25(a)(1).

9 Defendants filed a motion to dismiss. In an October 6, 2008 opinion, the

10 district court granted the motion in part and denied it in part. See In re

11 Amaranth Natural Gas Commodities Litig. (“Amaranth I”), 587 F. Supp. 2d 513

12 (S.D.N.Y. 2008). The district court determined as an initial matter that

13 Plaintiffs-Appellants’ allegations of manipulation were subject to the heightened

14 pleading standards of Federal Rule of Civil Procedure 9(b). Id. at 535–36.

15 Applying this standard, the court found that the complaint’s “slamming the

16 close” allegations, but not its allegations about Amaranth’s exceptionally large

17 open positions, raised a sufficient inference of scienter to state a claim for

18 manipulation under the CEA. Id. at 539–41. Turning to the complaint’s aiding

19 and abetting claim against J.P. Morgan, the court determined that the complaint

20 raised “a strong inference that [J.P. Futures] had knowledge of the

19
1 manipulations and intended their success.” Id. at 544.10 But it also concluded

2 that J.P. Futures’s actions did not go beyond normal clearing services, and that

3 such routine services could not constitute the kind of “overt act” necessary for

4 aiding and abetting liability under the CEA. See id. at 545 (citing Greenberg v.

5 Bear, Stearns & Co., 220 F.3d 22, 29 (2d Cir. 2000)). The court consequently

6 dismissed Plaintiffs-Appellants’ claim against J.P. Futures, allowing leave to

7 replead. Id. at 547–48.

8 Plaintiffs-Appellants filed an amended complaint on November 26, 2008,

9 bringing the same claims against Amaranth and J.P. Morgan but providing more

10 detailed allegations about the two companies’ intent. In an April 27, 2009

11 opinion, the district court concluded that the amended complaint sufficiently

12 stated a claim against Amaranth for manipulation based on its acquisition of

13 large open positions, but still failed to state a claim against J.P. Futures for

14 aiding and abetting manipulation under Section 22 of the CEA. See In re

15 Amaranth Natural Gas Commodities Litig. (“Amaranth II”), 612 F. Supp. 2d 376

16 (S.D.N.Y. 2009). Evaluating the complaint under Rule 9(b), the district court

10
The district court also concluded, however, that the complaint did not
adequately plead scienter with respect to the other J.P. Morgan entities, and thus
dismissed the aiding and abetting claim against them without considering whether
they had undertaken any actions to assist Amaranth. See id. Plaintiffs-Appellants
do not argue that this conclusion was error and have not made any other argument
as to why the claims against those defendants were not properly dismissed.
Accordingly, they have waived any claim as to these dismissals. See Norton v.
Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998).

20
1 found that Plaintiffs-Appellants had “once again failed to adequately support

2 their contention that [J.P. Futures] had committed an overt act in furtherance

3 of the Amaranth entities’ alleged manipulation.” Id. at 392-93. According to the

4 district court, the amended complaint’s additional allegations still did not show

5 that J.P. Futures’s actions went beyond those routinely provided by clearing

6 firms. Id. The court declined to consider Plaintiffs-Appellants’ argument that

7 the provision of routine services could constitute aiding and abetting when

8 considered in light of all the circumstances of the case, explaining that it had

9 rejected that argument when it stated in its first opinion that “a clearing broker

10 cannot be held liable as an aider and abettor simply because it performed its

11 contracted-for services.” Id. at 392-93 (quoting Amaranth I, 587 F. Supp. 2d at

12 545).

13 Plaintiffs-Appellants’ class action claims against Amaranth and the floor

14 broker defendants were eventually certified, and in December 2011 the parties

15 reached a settlement agreement dismissing the claims for $77.1 million. See In

16 re Amaranth Natural Gas Commodities Litig., No. 07-cv-6377, 2012 WL

17 2149094, at *1 (S.D.N.Y. June 11, 2012). In April 2012, the district court

18 entered final judgments dismissing all remaining claims against the remaining

19 defendants, including J.P. Futures. Plaintiffs-Appellants filed a timely notice

20 of appeal.

21
1 DISCUSSION

2 1. Standard of Review

3 We review de novo a district court’s dismissal of a complaint for failure to

4 state a claim. Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d 18, 22 (2d Cir. 2013).

5 “To survive a motion to dismiss, a complaint must contain sufficient factual

6 matter, accepted as true, to state a claim to relief that is plausible on its face.”

7 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted).

8 “A claim has facial plausibility when the plaintiff pleads factual content that

9 allows the court to draw the reasonable inference that the defendant is liable for

10 the misconduct alleged.” Id. This standard requires that the complaint allege

11 “more than a sheer possibility that a defendant has acted unlawfully” and more

12 than “facts that are merely consistent with a defendant’s liability.” Id. (internal

13 quotation marks omitted). Applying this standard is “a context-specific task that

14 requires the reviewing court to draw on its judicial experience and common

15 sense.” Id. at 679.

16 The district court concluded below that Plaintiffs-Appellants’ amended

17 complaint was subject to the heightened pleading standard of Rule 9(b). See

18 Amaranth II, 612 F. Supp. 2d at 382; Amaranth I, 587 F. Supp. 2d at 535. It

19 based its conclusion on this Circuit’s statement in ATSI Communications, Inc.

20 v. Shaar Fund, Ltd., a securities manipulation case, that “‘a claim for market

22
1 manipulation is a claim for fraud.’” Amaranth I, 587 F. Supp. 2d at 535 (quoting

2 ATSI, 493 F.3d 87, 101 (2d Cir. 2007)). Plaintiffs-Appellants argue that it was

3 error for the district court to extend ATSI to the commodities context. As

4 support, they point to other district court opinions that have endorsed a case-by-

5 case approach to determining whether a manipulation claim sounds in fraud and

6 thus must satisfy Rule 9(b). See CFTC v. Parnon Energy Inc., 875 F. Supp. 2d

7 233, 244 (S.D.N.Y. 2012); CFTC v. Amaranth Advisors, L.L.C., 554 F. Supp. 2d

8 523, 530–31 (S.D.N.Y. 2008). We need not decide this issue, because we conclude

9 that Plaintiffs-Appellants’ amended complaint fails to state a claim against J.P.

10 Futures even under the more relaxed standard of Rule 8(a)(2).11 For similar

11 reasons, we need not decide whether the district court erred in subjecting the

12 allegations about J.P. Futures’s intent to a “strong inference” standard. See

13 Amaranth I, 587 F. Supp. 2d at 535–36 (citing Tellabs, Inc. v. Makor Issues &

14 Rights, Ltd., 551 U.S. 308, 324 (2007)).

15 2. Aiding and Abetting under the CEA

16 Section 22 of the CEA provides a private right of action against “[a]ny

17 person (other than a registered entity or registered futures association) who

11
We do note for future cases that the current CFTC regulations on
manipulation, which were promulgated after the district court’s decision,
distinguish between fraud-based and other forms of manipulation. See 17 C.F.R. §§
180.1, 180.2.

23
1 violates this chapter or who willfully aids, abets, counsels, induces, or procures

2 the commission of a violation of this chapter.” 7 U.S.C. § 25(a)(1). This language

3 tracks that of 7 U.S.C. § 13c(a), which establishes aiding and abetting liability

4 generally under the CEA.12 Congress modeled Section 13c(a) itself, moreover,

5 after the federal statute for criminal aiding and abetting, 18 U.S.C. § 2.13 See In

6 re Richardson Secs., Inc., CFTC No. 78-10, 1981 WL 26081, at *5 (Jan. 27, 1981)

7 (“The section was modeled after the federal criminal aiding and abetting statute,

8 18 U.S.C. § 2.”); see also Bosco v. Serhant, 836 F.2d 271, 279 (7th Cir. 1987)

9 (noting “that the aiding and abetting provision was modeled on, and was

12
That provision provides, in relevant part:

Any person who commits, or who willfully aids, abets, counsels,
commands, induces, or procures the commission of, a violation of any of
the provisions of this chapter, or any of the rules, regulations, or orders
issued pursuant to this chapter, or who acts in combination or concert
with any other person in any such violation, or who willfully causes an
act to be done or omitted which if directly performed or omitted by him
or another would be a violation of the provisions of this chapter or any of
such rules, regulations, or orders may be held responsible for such
violation as a principal.

7 U.S.C. § 13c(a).
13
That statute provides, in part:

Whoever commits an offense against the United States or aids,
abets, counsels, commands, induces or procures its commission, is
punishable as a principal.

18 U.S.C. § 2(a).

24
1 intended to be interpreted consistently with, the federal statute that makes

2 aiding and abetting a crime, 18 U.S.C. § 2”).

3 Accordingly, both the CFTC and courts have determined that the standard

4 for aiding and abetting liability under the CEA is the same as that for aiding

5 and abetting under federal criminal law. The CFTC has held, drawing from

6 Judge Learned Hand’s classic formulation of criminal aiding and abetting

7 liability in United States v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938), that “proof

8 of a specific unlawful intent to further the underlying violation is necessary

9 before one can be found liable for aiding and abetting a violation of the [CEA].”

10 In re Richardson Secs., CFTC No. 78-10, 1981 WL 26081, at *5. The Seventh

11 Circuit has likewise noted that “[t]he elements that a plaintiff must allege to

12 state a claim for aiding and abetting under § 22 of the CEA are therefore the

13 same elements that must be established to prove a violation of 18 U.S.C. § 2.”

14 Damato v. Hermanson, 153 F.3d 464, 473 (7th Cir. 1998). The Seventh Circuit

15 articulated these elements, consistent with its own case law on criminal aiding

16 and abetting, as: “that [defendant] (1) had knowledge of the principal’s . . . intent

17 to commit a violation of the Act; (2) had the intent to further that violation; and

18 (3) committed some act in furtherance of the principal’s objective.” Id. The

19 Third Circuit has endorsed the same definition. See Nicholas v. Saul Stone &

20 Co., 224 F.3d 179, 189 (3d Cir. 2000).

25
1 This Circuit has yet to articulate a precise standard for aiding and

2 abetting liability under the CEA. We agree that Section 22 should be

3 interpreted consistently with the criminal law, and that a complaint therefore

4 states a claim for aiding and abetting under 7 U.S.C. § 25 when it plausibly

5 alleges conduct that would constitute aiding and abetting under 18 U.S.C. § 2.

6 We have not typically evaluated criminal aiding and abetting under a three-part

7 test, however, but have instead continued to follow Judge Hand’s statement in

8 Peoni that aiding and abetting requires the defendant to “in some sort associate

9 himself with the venture, that he participate in it as in something that he wishes

10 to bring about, that he seek by his action to make it succeed.” 100 F.2d at 402;

11 see also United States v. Frampton, 382 F.3d 213, 222 (2d Cir. 2004) (citing Peoni

12 as the “traditional understanding of the law of aiding and abetting”). We do not

13 understand this traditional articulation of the standard to differ, in substance,

14 from the standard employed by the Seventh and Third Circuits.14 Because this

15 articulation of the test for aiding and abetting is the one with which the courts

16 of this Circuit are most familiar, however (as well as to avoid the confusion

17 potentially generated by using two different articulations for the same

18 substantive legal standard), we conclude that Judge Hand’s formulation,

14
Indeed, Damato also endorses Peoni as the “traditional understanding of
aiding and abetting liability.”See 153 F.3d at 472 & n.10.

26
1 understood in light of our subsequent case law on 18 U.S.C. § 2, most properly

2 states the standard for aiding and abetting under the CEA.

3 We recently reaffirmed Peoni’s continued validity in SEC v. Apuzzo, 689

4 F.3d 204 (2d Cir. 2012), which found the standard helpful for determining aiding

5 and abetting liability under the Securities Exchange Act.15 In reversing the

6 district court’s dismissal of an SEC complaint, we held that the “substantial

7 assistance” prong of aiding and abetting under the Act was commensurate with

8 Peoni. Id. at 212. That is, in order to allege substantial assistance, the SEC

9 must plead, as Peoni instructs, that the defendant associated himself with a

10 violation of the Act, participated in it as something that he wished to bring

11 about, and sought by his actions to make the violation succeed. Id. As the panel

12 explained, “Judge Hand’s standard has thus survived the test of time, is clear,

13 concise, and workable, and governs the determination of aider and abettor

14 liability in securities fraud cases.” Id.

15

15
Section 20(e) of the Securities Exchange Act permits the SEC to bring an
action against “any person that knowingly or recklessly provides substantial
assistance” to a primary violator of the securities laws. 15 U.S.C. § 78t(e). To prove
a violation of the Section, the SEC must show: “(1) the existence of a securities law
violation by the primary (as opposed to the aiding and abetting) party; (2)
knowledge of this violation on the part of the aider and abettor; and (3) substantial
assistance by the aider and abettor in the achievement of the primary violation.”
SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009) (internal quotations omitted).
Section 20(e) now also reaches reckless conduct, though this was not the case at the
time of the events in Apuzzo. See Apuzzo, 689 F.3d at 211 n.6.

27
1 Apuzzo is also instructive on how this standard works in the context of

2 Rule 12(b)(6) determinations. The Apuzzo panel observed that a nexus exists

3 between a defendant’s knowledge of, intent to further, and assistance given to

4 a primary violation. Id. at 214–15. That is to say, a complaint with weak

5 allegations about a defendant’s affirmative assistance may still state a claim for

6 aiding and abetting if its allegations about the defendant’s knowledge and intent

7 are particularly strong, and vice versa. Though the panel discussed this nexus

8 within the context of the three discrete elements of aiding and abetting liability

9 under Section 20(e), it also suggested that the approach equally applies to a

10 standard like Peoni’s. See id. at 215 (“[I]f a jury were convinced that the

11 defendant had a high degree of actual knowledge . . . they would be well justified

12 in concluding that the defendant’s actions, which perhaps could be viewed

13 innocently in some contexts, were taken with the goal of helping the fraud

14 succeed.”). We agree. Such an evaluation of the different aspects of a

15 defendant’s asserted relationship to the primary violator, consisting of the

16 alleged aider and abettor’s knowledge of the primary violation, his intent to

17 further it, and the actions supposedly undertaken to assist it, is inherent in

18 determining whether the defendant “in some sort associate[d] himself with the

19 venture, that he participate[d] in it as in something that he wishe[d] to bring

20 about, that he [sought] by his action to make it succeed.” Peoni, 100 F.2d at 402.

28
1 Thus, in sum, the standard for aiding and abetting liability under 7

2 U.S.C. § 25 is the same as for criminal aiding and abetting under 18 U.S.C. § 2.

3 The best articulation of this standard is that found in Peoni. Inherent in Peoni’s

4 articulation is a relationship between a defendant’s knowledge, intent, and the

5 nature of assistance given. Accordingly, in evaluating a complaint alleging the

6 aiding and abetting of a violation of the CEA, allegations about the defendant’s

7 knowledge, intent, and actions should not be evaluated in isolation, but rather

8 in light of the complaint as a whole.

9 3. Analysis

10 Commodities manipulation requires “that (1) Defendants possessed an

11 ability to influence market prices; (2) an artificial price existed; (3) Defendants

12 caused the artificial prices; and (4) Defendants specifically intended to cause the

13 artificial price.” Hershey, 610 F.3d at 247; see also DiPlacido v. CFTC, 364 F.

14 App’x 657, 661 (2d Cir. 2009). There is thus no manipulation without intent to

15 cause artificial prices. Accordingly (and because aiding and abetting requires

16 knowledge of the primary violation and an intent to assist it), Plaintiffs-

17 Appellants were required to allege that J.P. Futures knew that Amaranth

18 specifically intended to manipulate the price of NYMEX natural gas futures and

19 that J.P. Futures intended to help. Looking at the amended complaint as a

20 whole, we conclude that Plaintiffs-Appellants’ allegations of such knowledge and

29
1 intent, considered in connection with the routine services that J.P. Futures

2 allegedly provided to Amaranth, fail to state a claim for aiding and abetting

3 manipulation under the CEA.

4 As stated earlier, Plaintiffs-Appellants allege that Amaranth manipulated

5 the price of NYMEX natural gas futures in two ways: (1) the accumulation of

6 large open positions that artificially propped up natural gas calendar spreads;

7 and (2) its “slamming the close” trades. Plaintiffs-Appellants allege that J.P.

8 Futures had knowledge of these manipulative schemes because it had

9 information on Amaranth’s daily trading activity and open positions on NYMEX

10 and ICE. This information also meant that J.P. Futures knew when Amaranth

11 was in violation of NYMEX position limits or accountability levels. Plaintiffs-

12 Appellants further allege that J.P. Futures performed multiple overt acts to

13 assist Amaranth in its manipulations, including the clearing of trades, the

14 extension of credit, and assistance in moving positions from NYMEX to ICE.

15 According to the amended complaint, J.P. Futures assisted Amaranth because

16 of the large commissions J.P. Futures earned from the fund’s trading, as well as

17 fees and interest it earned on the fund’s margin deposits.

18 With respect to Plaintiffs-Appellants’ first theory of manipulation—the

19 building of large open positions—the amended complaint alleges, at most, a very

20 weak inference that J.P. Futures actually knew of Amaranth’s manipulative

30
1 intent, much less that it intended to assist in carrying it out. This is for a simple

2 reason: while J.P. Futures may have known about Amaranth’s large positions

3 in natural gas futures and swaps, such large positions do not necessarily imply

4 manipulation. A trader may indeed acquire a large position in order to

5 manipulate prices. But a trader may also acquire a large position in the belief

6 that the price of the future will, for reasons other than the trader’s own activity,

7 move in a favorable direction. Cf. In re Crude Oil Commodity Litig., No. 06 Civ.

8 6677, 2007 WL 1946553, *8 (S.D.N.Y. June 28, 2007) (declining to impute intent

9 to manipulate market to defendants simply due to the size of their holdings).

10 Put differently, large positions can be indicative either of manipulation or of

11 excessive speculation. The amended complaint contains no allegation from

12 which we can draw the conclusion that a clearing broker like J.P. Futures would

13 know which is the goal of any particular large position held by a client.

14 This remains true even if a trader’s positions violate applicable position

15 limits and accountability levels. As the CEA explains, position limits and

16 accountability levels are intended not only to prevent manipulation, but also “to

17 diminish, eliminate, or prevent excessive speculation,” “to ensure sufficient

18 market liquidity for bona fide hedgers,” and “to ensure that the price discovery

31
1 function of the underlying market is not disrupted.” 7 U.S.C. § 6a(a)(3)(B).16

2 This makes sense: excessive speculation, just as much as manipulation, can

3 result in market illiquidity and artificial prices. If the violation of these

4 restrictions does not necessarily entail manipulation, moreover, then neither

5 should their evasion: that a trader shifts contracts from NYMEX to ICE in order

6 to maintain a large open position, standing alone, does not reveal why the trader

7 seeks that large position.

8 The amended complaint’s factual allegations illustrate these principles in

9 action. By the start of the class period, Amaranth had realized large profits

10 from the high spread between winter and summer natural gas prices that

11 occurred after Hurricanes Katrina and Rita wreaked havoc on the Gulf Coast in

12 2005. The positions Amaranth then acquired were consistent with a belief that

13 the same price pattern would happen again in 2006. Thus, while these positions

14 could have suggested manipulative intent, they equally suggested undue

15 confidence that recent history would repeat itself. This strains any inference

16 that J.P. Futures actually knew—as opposed to, for example, that J.P. Futures

16
Though subsection 6a(a)(3)(B) is specifically about position limits set by the
CFTC, its description of their purpose applies to position limits and accountability
levels generally. Indeed, 7 U.S.C. § 7(d)(5), which relates to position limits and
accountability levels set by the exchanges, similarly states that position limits are
“[t]o reduce the potential threat of market manipulation or congestion (especially
during trading in the delivery month).” Id. (emphasis added).

32
1 simply should have known—that Amaranth was manipulating NYMEX natural

2 gas futures.17

3 The allegations supporting Plaintiffs-Appellants’ second theory of

4 manipulation—the “slamming the close” trades—present a closer issue. In

5 contrast to the acquisition of large open positions, J.P. Futures has provided no

6 obvious legitimate economic reason why Amaranth would wait until the final

7 minutes of trading to sell large quantities of a particular future. This type of

8 trading activity, while not dispositive of manipulation, does strongly suggest it.

9 Indeed, the district court found that “the timing of the sales are suspicious in

10 themselves.” Amaranth I, 587 F. Supp. 2d at 535.

11 Still, per Peoni and Apuzzo, we must consider J.P. Futures’s alleged

12 knowledge and intent regarding Amaranth’s “slamming the close” trades in

13 connection with J.P. Futures’s alleged actions. The amended complaint does not

14 allege that J.P. Futures did anything more to assist Amaranth in these trades

15 than to provide routine clearing firm services. As previous decisions from this

16 Circuit recognize, such allegations provide only weak evidence that J.P. Futures

17 associated itself with Amaranth’s manipulation and “participate[d] in it as in

17
The amended complaint does not allege that Amaranth’s large open
positions were part of a traditional manipulative device such as a “corner” or
“squeeze.” See P. Johnson & T. Hazen, 3 Derivatives Regulation § 5.02 (2004).
Objective indications that a large position is part of such a scheme may raise a more
plausible inference of actual knowledge of manipulation.

33
1 something that [it] wishe[d] to bring about.” Peoni, 100 F.2d at 402. For

2 example, in Greenberg v. Bear, Stearns & Co. we stated that the mere

3 performance of routine clearing services cannot constitute the aiding and

4 abetting of fraud under New York law. See 220 F.3d at 29 (quoting Stander v.

5 Fin. Clearing & Servs. Corp., 730 F. Supp. 1282, 1286 (S.D.N.Y. 1990)). And we

6 have observed more recently that the performance of routine clearing services,

7 without more, cannot trigger primary liability under § 10(b) of the Securities

8 Exchange Act. See Levitt v. J.P. Morgan Secs., Inc., 710 F.3d 454, 466 (2d Cir.

9 2013).

10 Granted, Greenberg and Levitt did not involve commodities trading or the

11 CEA. Their holdings need not control, however, for us to decide the present case.

12 It suffices to conclude that in the circumstances presented here, the provision of

13 routine clearing services, when combined only with allegations that the clearing

14 firm knew of trading activity that was highly suggestive but not dispositive of

15 manipulation, is not enough to state a claim for aiding and abetting under

16 Section 22 of the CEA.18

18
We accordingly need not and do not hold that the provision of routine
clearing services in commodities trading can never constitute aiding and abetting;
again, it is necessary to consider an alleged aider and abettor’s actions in
conjunction with its alleged knowledge and intent. As we said in Apuzzo, “the three
components of the aiding and abetting test ‘cannot be considered in isolation from
one another.’” Apuzzo, 689 F.3d at 214 (quoting DiBella, 587 F.3d at 566).

34
1 Plaintiffs-Appellants argue that the amended complaint also alleges that

2 J.P. Futures performed “non-routine” tasks to assist Amaranth, including

3 helping to transfer positions from NYMEX to ICE, extending credit limits, and

4 bypassing internal position limits. But these acts, even if they are “non-routine,”

5 are alleged to have been performed only in connection with Amaranth’s

6 accumulation of large open positions. Plaintiffs-Appellants do not allege that

7 J.P. Futures transferred positions, extended credit limits, or bypassed internal

8 position limits in connection with Amaranth’s “slamming the close” trades.

9 Without considering the relevance of such actions in other contexts, then, or in

10 conjunction with other evidence of purposeful association with a primary

11 violator, we need only observe here that J.P. Futures allegedly performed these

12 “non-routine” acts in connection with trading activity that was not as suggestive

13 of manipulation as the “slamming the close” trades, weakening the force of such

14 allegations in stating an aiding and abetting claim.

15 In sum, with respect to Plaintiffs-Appellants’ first theory of manipulation,

16 the amended complaint’s allegations allow only a weak inference that J.P.

17 Futures actually knew Amaranth was manipulating natural gas futures through

18 the acquisition of large open positions. This, when considered in connection with

19 the amended complaint’s relatively weak allegations about J.P. Futures’s

20 assistance to Amaranth, fails to state a claim that J.P. Futures aided and

35
1 abetted Amaranth’s market manipulation by purposefully “seeking by its own

2 actions to make it succeed.” Similarly, while the amended complaint more

3 plausibly alleges that J.P. Futures actually knew Amaranth’s “slamming the

4 close” trades were manipulative, its allegations concerning J.P. Futures’s

5 assistance with those trades are even weaker. This too fails to state an aiding

6 and abetting claim under the CEA.

7 Though Plaintiffs-Appellants cite several decisions finding aiding and

8 abetting liability under the CEA, none are contrary to our conclusion here. All

9 these decisions involved defendants who had either greater knowledge of the

10 principal wrongdoing or more active involvement in that wrongdoing. In Kohen

11 v. Pacific Investment Management Co., for example, the defendant allegedly

12 aided and abetted a “squeeze” on ten-year Treasury note futures by actually

13 acquiring the dominant positions in those futures. 244 F.R.D. 469, 482 (N.D. Ill.

14 2007). The defendants in CFTC v. Johnson, meanwhile, were liable under

15 Section 22 because they had allegedly forwarded emails they knew to contain

16 false and misleading information about natural gas transactions. See 408 F.

17 Supp. 2d 259, 268–69 (S.D. Tex. 2005); see also In re Global Minerals & Metals

18 Corp., CFTC No. 99-11, 1999 WL 440439 (June 30, 1999) (non-binding CFTC

19 order confirming settlement offer of defendant that allegedly provided both

20 trading facilities and trading advice to principal manipulator).

36
1 Nor does J.P. Futures’s role as Amaranth’s FCM change the outcome.

2 Plaintiffs-Appellants make generalized assertions that J.P. Futures placed some

3 of Amaranth’s trading orders—as did floor brokers. There are no allegations

4 that J.P. Futures accepted the “slamming the close” trades; to the contrary, the

5 complaint specifically identifies other brokers as the persons who handled these

6 trades. Therefore, at most J.P. Futures’s role as an FCM plausibly heightened

7 J.P. Futures’s knowledge of the large positions Amaranth held—a fact already

8 known to J.P. Futures as the clearing firm.

9 Case law does not suggest a different result. Crediting the facts alleged

10 in the complaint as true, J.P. Futures’s seemingly minimal involvement as an

11 FCM distinguishes this case from Miller v. New York Produce Exchange, which

12 involved a broker described by the court as playing “a dominant and knowing

13 role” in its client’s market manipulation. 550 F.2d 762, 767 (2d Cir. 1977).

14 Plaintiffs-Appellants also cite various CFTC decisions, but these are

15 distinguishable from the instant case because they all involved FCMs

16 transmitting wash orders on behalf of clients. In re Piasio, CFTC No. 97-9, 2000

17 WL 1466069, at *3 (CFTC Sept. 29, 2000) aff’d sub nom. Piasio v. CFTC, 54 F.

18 App’x 702 (2d Cir. 2002); In re LFG, L.L.C., CFTC No. 01-19, 2001 WL 940235,

19 at *1 (CFTC Aug. 20, 2001); In re Mitsubishi Corp., CFTC No. 97-10, 1997 WL

20 345634, at *2–3 (CFTC Jun. 24, 1997); In re Three Eight Corp., CFTC No. 88-33,

37
1 1993 WL 212489, at *1 (CFTC June 16, 1993). Wash orders are explicitly

2 banned by the CEA and, because they involve simultaneous or shortly spaced

3 transactions to buy and sell the same quantity of a commodity or stock, they are

4 much more recognizable to the broker transmitting them. See 7 U.S.C. § 6c(a)

5 (prohibiting “any person to offer to enter into, enter into, or confirm the

6 execution of” a wash sale). In sum, Plaintiffs-Appellants have cited no authority

7 establishing that an FCM must at all times monitor its clients’ trading in order

8 to prevent manipulation. Nor is this a viable theory of aiding and abetting

9 liability pursuant to § 25.

10 CONCLUSION

11 For the foregoing reasons, we AFFIRM the judgment of the district court.

38