United States v. Brooks

681 F.3d 678

UNITED STATES of America, Plaintiff–Appellee,

v.James BROOKS, Wesley C. Walton, James Patrick Phillips, Defendants–Appellants.

No. 09–20871.

United States Court of Appeals, Fifth Circuit.

May 18, 2012.

Paula Camille Offenhauser, Tony Ray Roberts (argued), James Lee Turner, Asst. U.S. Attys., Houston, TX, for Plaintiff–Appellee.

Gerald Harris Goldstein (argued), Van Galen Hilley, Cynthia Eva Hujar Orr, Goldstein, Goldstein & Hilley, San Antonio, TX, David Benjamin Gerger (argued), (Court–Appointed), Gerger & Clarke, Houston, TX, David Adler (argued), Bellaire, TX, for Defendants–Appellants.

John Patrick Elwood, Vinson & Elkins, L.L.P., Washington, DC, Barbara Bergman, Albuquerque, NM, for National Ass'n of Criminal Defense Lawyers, Amicus Curiae.

Appeals from the United States District Court for the Southern District of Texas.

Before KING, BENAVIDES and DENNIS, Circuit Judges

BENAVIDES, Circuit Judge:

Defendants–Appellants James Patrick Phillips, Wesley C. Walton, and James Brooks (collectively, the “Defendants–Appellants”) appeal their conviction of and sentencing for false reporting of natural gas trades in violation of the Commodities Exchange Act and the federal wire fraud statute. We AFFIRM.

Factual and Procedural Background

The Defendants–Appellants are former employees of El Paso Merchant Energy Corporation (“EPME”), a subsidiary of the El Paso Corporation (“El Paso”). The government alleges that the Defendants–Appellants violated the Commodities ExchangeAct (“CEA”) and the wire fraud statute by sending false information about natural gas prices to trade magazines that report natural gas prices in indexes, in an effort to affect and manipulate those indexes, which, in turn, would affect the market for natural gas futures and benefit the company's financial positions.

Some background on the natural gas industry is necessary for understanding this case. Natural gas is transported throughout North America via a network of pipelines. The gas transportation network is centered around “hubs,” which are geographical locations where major pipeline systems interlink. These hubs act as separate markets, at which supply and demand dictate prices that may differ between the hubs.

Gas trades are divided into different types. Most basically, physical gas is traded, whereby one company agrees to purchase a quantity of gas to be physically delivered to a particular location. In addition to the sale of physical gas, financial trades are made based on gas prices. One particular financial trade, a gas contract for future delivery, is traded on the New York Mercantile Exchange (“NYMEX”). NYMEX contracts are based on the price of gas trading at Henry Hub, Louisiana. Other financial trades, termed “swaps,” are transactions where two traders agree to buy a volume of gas from each other at the same time, but at different prices. In one common format, called a “basis” trade, one party agrees to pay a first-of-the-month index price and the counterparty agrees to pay based on the last day NYMEX settle. Another common financial transaction is an exchange for physical futures (“EFP”), which is a swap with one end priced off the NYMEX futures market and the other prices off an index plus or minus a differential.¹ Financial trades generally do not result in the transfer of physical gas, but are resolved financially.

The market index prices for physical gas are most prominently published in two privately owned newsletters: Inside FERC Gas Market Report (“ Inside FERC”) and Natural Gas Intelligence (“ NGI”). Both of these publications publish the natural gas price marketing indicators at the major pipeline hubs and market centers in the United States, and it is undisputed that both publications are highly influential to market price for physical gas. The indexes also are used to determine royalties and public gas contracts, among other things. The publications gather pricing information about the various markets and pipeline hubs by requesting data about physical gas transactions from natural gas traders. After receiving data from the gas traders, and taking a variety of other factors into account, the publications release indexes that purport to represent the price of natural gas at different delivery points. In requesting data, Inside FERC and NGI requested that traders report fixed-price, baseload deals negotiated during bidweek, and it also instructed that basis or EFP trades not be reported.²

The Defendants–Appellants were all employees at EPME. EPME traded in both physical and financial transactions of the sort previously mentioned. In 2000, Defendant–Appellant Brooks was EPME's Senior Vice President for Risk Management, and he was responsible for overseeingphysical traders. In 2001, Brooks became the Managing Director for Natural Gas, and he oversaw both physical and basis traders. At the time, EPME was divided into various trading “desks,” which were then split between physical gas trading and finance trading. The desks were based on pipeline network regions. During the time in question, Defendant–Appellant Phillips was a senior physical trader and was manager of the Texas Desk at EPME. Defendant–Appellant Walton was a basis trader on the financial side for both the Texas Desk and the Gulf Coast Region of the Northeast Desk. As a market participant, Inside FERC and NGI would request physical trade information from EPME. EPME would report the information to the trade publications via spreadsheets sent by the physical traders responsible for each of EPME's desks.

From summer 2002 to fall 2002, El Paso received inquires from various federal agencies and a United States Attorney's Office grand jury subpoena seeking information on the reports EPME sent to the trade publications.³ Around that time, El Paso hired Haynes & Boone, a law firm, to conduct an internal investigation into allegations that El Paso employees had submitted false trades to trade publications. Defendants–Appellants Brooks, Walton, and Phillips were interviewed as part of that investigation, and each employee was subsequently terminated. Nonetheless, at least at the beginning of this investigation, El Paso paid the legal fees for both Walton and Brooks.

Starting in March 2003, an Assistant U.S. Attorney began a course of correspondence with El Paso's legal counsel about El Paso's payment of legal fees for former employees. El Paso informed the Assistant U.S. Attorney about the company by-laws, according to which EPME was required to indemnify any employee for legal fees if the employee was found not to have engaged in wrongdoing, but EPME was left with discretion about whether to advance payment of legal fees prior to such determination.⁴ El Paso stated that, based in part on “the limited results of the Haynes & Boone interviews,” it had decided not to advance legal fees for Brooks, but that it was inclined to advance Walton's legal fees. El Paso stressed, however, that it would consider the employee's cooperation with the federal investigation in deciding whether to continue advancing legal fees. After additional correspondence regarding Delaware law and its application to El Paso's indemnification policy, the government, in response to El Paso's request for the identities of any individual who was not cooperating, identified Walton, as well as four other employees, who are not defendants here, as non-cooperating employees. Sometime thereafter, El Paso terminated Walton's legal fees, but it did not inform the government.

Defendant–Appellant Phillips, who had not been discussed in the correspondence, subsequently requested indemnification. On August 12, 2004, El Paso declined Phillips's request, noting that indemnification was made only after an ultimate determination of the legal proceedings, and that it would not advance his legal fees. El Paso also noted that it was not obliged to advance fees, and that EPME was cooperating with the government and so it would not advance legal fees to “potential subjects or targets of their investigations.”⁵

On September 25, 2006, the government filed a second superseding indictment, charging the Defendants–Appellants with forty-nine counts: specifically, twenty-four counts of false reporting in violation of the CEA, 7 U.S.C. § 13(a)(2), twenty-four counts of wire fraud in violation of 18 U.S.C. § 1343, and one count of conspiracy to commit false reporting and wire fraud in violation of 18 U.S.C. § 371. The government alleged that the Defendants–Appellants were involved in a conspiracy, lasting from about April 2000 through May 2002, whereby the Defendants–Appellants reported false information related to natural gas prices to Inside FERC and NGI to manipulate the index prices reported in those magazines. Specifically, the government alleged that Defendant–Appellant Brooks would direct the physical gas traders at EPME to report false data to the publications, such as trades that did not occur, false prices, or false gas volumes, in a manner that would benefit EPME's financial positions. Defendant–Appellant Walton, a basis trader on the Texas and Northeast Desks, would allegedly tell the physical traders his financial positions for the upcoming month, such as whether he wanted the index price of gas to increase or decrease in certain areas, so the physical traders could report data manipulating the published indexes in his favor. The second superseding indictment also alleged that Defendant–Appellant Phillips and the other physical gas traders sent fictitious information and reports to Inside FERC and NGI. The government alleged that twenty-four misleading reports were transmitted to these publications, either personally by the Defendants–Appellants or based on their instructions.⁶

The trial lasted from December 4, 2007 to February 7, 2008. During the trial, the government submitted over 1,000 exhibits, including the bidweek surveys sent to Inside FERC and NGI, internal worksheet versions of those...