City of Long Beach v. Total Gas & Power N. Am., Inc.

465 F.Supp.3d 416

CITY OF LONG BEACH, on behalf of itself and all others similarly situated, Plaintiff,

v.TOTAL GAS & POWER NORTH AMERICA, INC., Total, S.A., and Total Gas & Power, Ltd., Defendants.

19 Civ. 8725 (LAK)

United States District Court, S.D. New York.

Signed June 8, 2020

Solomon B. Cera, Pamela A. Markert, Cera LLP, Jeffrey A. Klafter, Seth R. Lesser, Morgan Stacey, Klafter Olsen & Lesser LLP, Daniel J. Sponseller, Law Office of Daniel J. Sponseller, Attorneys for Plaintiff.

Brad Schoenfeldt, William S. Scherman, David Debold, Jason Fleischer, Gibson, Dunn & Crutcher LLP, Attorneys for Defendants.

MEMORANDUM OPINION

Lewis A. Kaplan, District Judge.

This class action involves futures contracts for natural gas. The complaint alleges that the three defendants – Total Gas & Power North America ("Total Gas"), its French parent company Total, S.A. ("Total S.A."), and Total Gas & Power, Ltd. ("Total Ltd."), a U.K. subsidiary of Total S.A. – unlawfully manipulated various indices that are used to price natural gas contracts traded at four hubs in the Southwestern United States. The plaintiff, the City of Long Beach, California, ("Long Beach"), claims that this conduct caused it to pay artificially inflated prices for natural gas that it purchased at one such hub.¹ On behalf of itself and others similarly situated, Long Beach raises claims for damages under Section 2 of the Sherman Act, restitution under the California Unfair Competition Law ("UCL"), and restitution and damages under the law of unjust enrichment.²

Before the Court are two motions to dismiss, one filed jointly by Total S.A. and Total Ltd. and one filed by Total Gas. The former presents issues concerning personal jurisdiction. The latter raises the question whether this alleged manipulation of a futures market states a legally sufficient antitrust claim. I hold that it does not. For the following reasons, both motions are granted.

Facts

The facts alleged are fairly straightforward but require some understanding of abstract financial instruments called derivatives. The Court begins by explaining what those instruments are and how they are used in the natural gas trade.

Derivatives and the Natural Gas Trade

"The term ‘derivative,’ as it is used in today's financial world, refers to a financial instrument that derives its value from the price of an underlying instrument or index."³ Like other financial instruments, derivatives can be bought and sold. This case involves two types of derivatives: futures and swaps.

Futures Contracts and Natural Gas Pricing

A futures contract is a derivative that requires the holder to purchase a physical commodity in the future. The futures at issue here were for the purchase of natural gas throughout the following month at one of four delivery hubs in the Southwestern United States (the "Southwestern Hubs"). Those hubs are known as Southern California Gas Co. ("SoCal"), El Paso Natural Gas Co., Permian Basin ("Permian"), West Texas, Waha ("Waha"), and El Paso San Juan Basin ("San Juan").⁴

There are two common ways of pricing natural gas, quantities of which typically are referred to in millions of British Thermal Units ("MMBtu"). Some contracts use a predetermined "fixed rate," such as $4.10 per MMBtu, that remains the same throughout the life of the contract.⁵ Others use a "floating rate," which is a rate pegged to a variable quantity that changes over time.⁶ At the four Southwestern Hubs, the floating rates in some natural gas contracts incorporated hub-specific indices.⁷ According to the complaint, companies called Platts and NGI calculated a "Monthly Index Price" for each hub by averaging the price of natural gas sold on the hub (as reported by the traders) during the last five business days of each month, a period called "bidweek."⁸ Other floating rate contracts used the New York Mercantile Exchange ("NYMEX") price, which was derived from trading prices at Henry Hub, Louisiana.⁹ The Monthly Index Prices essentially were local rates specific to each of the four hubs, while the NYMEX price was used as a nationwide benchmark.

Swap Contracts

The second type of derivative relevant to this case is a "swap" contract. A swap is an "instrument[ ] whereby two counterparties agree to exchange cash flows on two financial instruments over a specific period of time."¹⁰ "These are (1) a ‘reference obligation’ or ‘underlying asset’ such as a security, a bank loan, or an index, and (2) a benchmark loan, generally with an interest rate set relative to a commonly used reference rate such as the London Inter–Bank Offered Rate (‘LIBOR’)."¹¹ Swaps are purely financial transactions and do not involve the exchange of commodities. While parties often enter into swaps because they have exposure to the underlying commodity and wish to hedge various types of risk, others simply are speculating. Typically, swaps making use of different cash flows are executed when the party with the less favorable cash flow pays the difference between the two quantities to the counterparty.¹²

This case involves swaps referenced to the price of natural gas. Many involved exchanging the Monthly Index Price at a Southwestern Hub with the NYMEX price.¹³ To understand how this works, imagine that Alice believes that the NYMEX price for natural gas in June will be lower than the SoCal Monthly Index Price. Alice can bet on this belief by swapping the SoCal price for the NYMEX price. If the NYMEX price is lower, the counterparty will pay Alice the difference between the prices multiplied by the quantity covered by the transaction. If instead the SoCal Monthly Index Price is lower, Alice will pay the difference to the counterparty. Neither party needs to own or purchase natural gas to enter into this transaction, and no natural gas changes hands.

For the swaps at issue in this case,¹⁴ everything turned on the Monthly Index Price at one of the Southwestern Hubs. Depending on the net position of a trader's swaps for a given month at a given hub, an increase or decrease in the Monthly Index Price for that hub would yield higher or lower profits on the swaps. Accordingly, if a swap trader could control the Monthly Index Price at a particular hub, that trader could increase its profits at will – at the expense of the counterparties to its swaps, and to the detriment of other traders whose financial instruments are priced according to the same Monthly Index Price. That, in essence, is what Long Beach claims happened here.

This Lawsuit

The Defendants

Total S.A. is a large oil and gas company headquartered in Paris that operates all over the world.¹⁵ Total Ltd. is a subsidiary of Total S.A. based in London that directs Total S.A.’s global trading operations.¹⁶ Total Gas is a subsidiary of Total S.A. headquartered in Houston, Texas and incorporated in Delaware that trades natural gas and related energy products in the United States and worldwide markets.¹⁷ Long Beach alleges that Total Gas, through its trading activity, serves "to optimize market access for [Total S.A.’s] current and future natural gas production and reserves."¹⁸ In furtherance of this purported goal, Total Gas purchases large quantities of natural gas products, and particularly liquefied natural gas, for export each year.¹⁹

In 2008, a natural gas trader at Total Gas in Houston named Aaron Hall founded the company's "West Desk."²⁰ Total Gas there executed trades of physical and financial natural gas securities – meaning, as explained above, futures and swaps.²¹ From at least July 1, 2009 through July 31, 2012 (the "Class Period"), the West Desk traded futures and swaps pertaining to natural gas sold at the Southwestern Hubs.²² Hall ran the West Desk until approximately September 2011.²³ At that time, a veteran West Desk trader named Therese Tran took over as its leader.²⁴

Total Gas's Alleged Scheme

According to the complaint, the traders at Total Gas's West Desk, in Long Beach's word, "manipulated" the Monthly Index Prices for natural gas at the Southwestern Hubs during the Class Period. The alleged scheme involved two steps. Prior to certain bidweeks, Total Gas traded large volumes of futures and swaps using floating rates and taking positions on a Monthly Index Price at one of the four Southwestern Hubs relative to the NYMEX price.²⁵

Then, during those bidweeks, Total Gas traded large volumes of natural gas futures using fixed rate prices.²⁶ According to the complaint, these fixed rate futures offset the floating rate futures that Total Gas had purchased prior to bidweek.²⁷ This "flattening" process generally meant that Total Gas owned no natural gas at the end of the month.²⁸

According to the complaint, Total Gas lost $2.09 million on its bidweek trades during the Class Period.²⁹ Allegedly, these trades often were made at artificially high or low prices, meaning that Total Gas could have gotten better rates.³⁰ However, the complaint claims that Total Gas ultimately made over $9 million in profit from its net trading activity throughout the Class Period.³¹ This occurred because the bidweek trades moved the Monthly Index Prices in directions favorable to Total Gas's positions on its pre-bidweek trades.³² The purported scheme allegedly succeeded because the West Desk traded a large volume of natural gas during the bidweek periods. Often, it was on one side or the other of transactions accounting for more than 50 percent of the total volume traded at a given hub during the measured period.³³

These fairly abstract allegations can be explained more easily with an example. As alleged in the complaint: Prior to the July 2011 bidweek, the West Desk entered into numerous futures and swaps that left it with a "long" position of 14,000,000 MMBtu.³⁴ Total Gas would profit on these trades if the SoCal Monthly Index Price for August 2011 was high.³⁵ And the Monthly Index Price would be high if, during bidweek, buyers of fixed price futures at SoCal agreed to pay high fixed rates.³⁶ When SoCal bidweek arrived, Total Gas...