Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Traders claim Shell, BP manipulated Brent Crude oil benchmarks, (Oct 7, 2013)

By Anne Sherry, J.D.

Traders in Brent Crude oil futures contracts filed a class action complaint against large oil and gas companies and financial institutions, including Royal Dutch Shell plc, BP plc, Statoil ASA, and Morgan Stanley. The complaint alleges that the defendants reported false information and engaged in sham trading to manipulate the “Dated Brent” benchmark for Brent Crude oil prices in violation of the Commodity Exchange Act and conspired to manipulate prices and monopolize the Brent Crude market in violation of the Sherman Act (McDonnell v. Royal Dutch Shell plc, October 3, 2013).

The market and benchmark. The complaint explains that Brent Crude is a light sweet crude oil that is pulled from the North Sea region of Europe. To bring transparency to crude oil pricing, large market participants voluntarily provide their trades to Platts, a unit of McGraw Hill Financial, Inc. Platts’ price assessments serve as the basis for pricing physical Brent Crude oil cargoes and Brent Crude oil derivatives contracts, including Brent Crude oil futures contracts on the NYMEX and ICE exchanges, which the plaintiffs traded. The primary benchmark for Brent Crude oil is Dated Brent, which is based on cargo sizes of Brent Crude oil with actual loading times. Dated Brent is therefore intended to reflect actual physical market prices.

Susceptibility to manipulation. The plaintiffs argue that because Platts uses a “Market on Close” (MOC) methodology to capture the price of oil closest to the market, often assessing prices within a 30-minute window that involves few market players, the benchmark is susceptible to manipulation by market participants. If there are no trades, Platts uses bids or offers to indicate where market participants were willing to buy or sell. According to the complaint, the defendants deliberately reported false information regarding Brent Crude oil prices and transactions to Platts, selectively reporting bids, offers, spoof orders, and transactions with aberrant pricing during a designated 30-minute MOC window. Large market participants allegedly have the power to push Dated Brent prices in a particular direction by purposefully and selectively reporting false and misleading data for transactions during the last seconds before the 4:30 p.m. close of the MOC window. The complaint notes that IOSCO issued a report in October 2012 cautioning that price reporting agency assessment methodologies were susceptible to manipulation.

Alleged manipulations. The plaintiffs focus on trading during February 2011 and September 2012. In February 2011, according to the complaint, Shell suppressed nearby contracts for differences (CFDs) and Dated Brent prices in order to advantage a large short position that it had in a CFD and likely also the futures markets. By the end of the month, the plaintiffs argue, Shell was able to do this by engaging in trades designed to manipulate prices during the short MOC window, which set the prices for Dated Brent and related markets.

In September 2012 Shell, BP, Vitol, Phibro, and Trafigura manipulated the Dated Brent Crude market, according to the plaintiffs. The complaint asserts that in the first part of the month, BP dominated the suppression of the Dated Brent market; in the latter half, Shell, Vitol, Phibro, and Trafigura suppressed the market through spoofing, wash trades, and other artificial transactions; and, in the middle of the month, the defendants manipulated Dated Brent upwards. Also, during the month, the plaintiffs allege, the spread between Brent and another North Sea oil field, “Forties,” was manipulated. In part, the complaint continues, these defendants’ suppression of Dated Brent at the end of the month was designed to allow for Brent Crude oil to trade to Asia.

Sherman Act allegations. In addition to four counts for Commodity Exchange Act violations (including claims for principal-agent liability and aiding and abetting) and one count for unjust enrichment and restitution/disgorgement, the complaint brings two causes of action for violations of Sections 1 and 2 of the Sherman Act. During the class period, the plaintiffs allege, the defendants possessed market power in the setting of Brent Crude oil prices and the prices of Brent Crude oil futures contracts. The conspiracy allegedly consisted of a continuing agreement, understanding, or concerted action between and among the defendants and their co-conspirators in furtherance of which the defendants fixed, maintained, suppressed, and/or made artificial Brent Crude Oil market prices and the prices of Brent Crude Oil futures contracts.

The complaint also alleges that the defendants violated Section 2 of the Sherman Act and Section 4 of the Clayton Act by attempting to monopolize, and monopolizing, the Brent Crude oil market, including the MOC. The defendants allegedly controlled the delivery points and the trading in the MOC process, therefore also controlling prices in the market for Brent Crude oil-based derivative contracts, including futures contracts. This allegedly unlawful price control reflects monopoly power, according to the plaintiffs, who allege a concerted effort between and among the defendants and their co-conspirators, in furtherance of which they created artificial prices for Brent Crude oil-based derivative contracts, including futures contracts, by providing Platts with physical or derivative transaction data based on false, inaccurate, or misleading information for the purpose of affecting Brent Crude oil prices.

The complaint was filed in the federal district court for the Southern District of New York.

The case is No. 13-cv-07089.

Attorneys: David E. Kovell, Lauren Wagner Pederson, Of Counsel and Thomas W. Elrod (Kirby McInerney LLP) for Kevin McDonnell, Anthony Insinga, Robert Michiels and John Devivo.

Companies: BP PLC; Morgan Stanley; Phibro Trading LLC; Royal Dutch Shell PLC; Statoilasa; Trafigura Beheer B.V.; Trafigura AG; Vitol, S.A.

News: Antitrust NewYorkNews