Shell agrees to pay $1 million in fines over junior trader's allegedly manipulative trading

Oversights in its compliance program and lax supervision of a junior trader will cost Shell Energy North America $1 million in combined penalties and disgorged profits, according to a Federal Energy Regulatory Commission order approving a settlement resolving natural gas market manipulation charges.

Following an investigation, FERC enforcement staff alleged that Shell engaged in a related-positions fraudulent scheme, in violation of the Natural Gas Act and the commission's anti-manipulation rule. The scheme entailed physical trading at the Pacific Gas and E city-gate and Kern River Station trading hubs in California during the May 2016 bidweek that was designed to manipulate monthly index prices to benefit a trader's derivative financial positions.

Shell neither admitted nor denied the alleged violations, but it agreed to pay a $951,683 civil penalty to the US Treasury and to disgorge $48,317 in profits, plus interest. The disgorged profits will be allocated to National Trading II, Enstor Energy Services, Macquarie Energy, Noble Americas Gas & Power, and ConocoPhillips. The company also agreed to be subject to two years of compliance monitoring, the June 15 order (IN21-8) said.

At issue in the enforcement case were the actions of a junior trader in Shell's San Diego, California, office, an inadequate compliance presence in that office and the lack of sufficient FERC-specific compliance training for Shell's gas traders to ensure their understanding of FERC's rules, the order said.

Fraudulent scheme

FERC enforcement staff found that a junior trader on Shell's Southwest desk, after being instructed by the desk supervisor to zero out May 2016 exposures in their personal speculative book due to significant losses in that book, instead retained those basis and index swap derivative positions and engaged in physical fixed-price gas trading in Shell's shared customer book at the KRS and PG&E city-gate trading hubs during the May 2016 bidweek.

The shared customer book was used by Shell traders for gas trades specific to the trading region while the speculative book was specific to each trader, allowing trading based on that individual's view of how gas prices would change in the future.

The junior trader's physical trades "had the net effect of moving the published [Natural Gas Intelligence] monthly index prices in directions that benefited derivative financial positions in [the] junior trader's speculative book," enforcement staff asserted in the settlement agreement.

Specifically, because Shell was a net-seller at KRS during the May 2016 bidweek, its transactions reported to the price publisher lowered the volume-weighted average price for the NGI monthly index price at the Southern California Border for May 2016. The lower monthly index generated positive profit and loss for the junior trader's speculative book.

Similarly, due to Shell being a net buyer at PG&E city-gate at the time, its transactions increased the PG&E city-gate May 2016 NGI price, and again benefited the junior trader's speculative book for that month.

Enforcement staff determined that Shell intended to manipulate NGI's monthly indexes for May 2016 and that oversights in Shell's compliance program contributed to the alleged violations.

Shell "did not appropriately supervise [the] junior trader during the May 2016 bidweek, nor did [Shell] take appropriate compliance action during or after the May 2016 bidweek to address the junior trader's failure to follow their manager's instructions," the order said.

The matter was flagged by the enforcement's division of analytics and surveillance for investigation. The order adds that Shell, during the inquiry, made improvements to its compliance program.

Other enforcement action

Separately, the Commodity Futures Trading Commission settled a second batch of enforcement charges against former energy broker Classic Energy and its owner, Mathew Webb, tied to the misuse of client information in connection with natural gas futures.

Specifically, the CFTC found that Webb, in concert with other traders, used the confidential block trade order information of Classic's brokerage customers to facilitate fictitious trades. The agency also charged Webb and Classic "with a scheme to defraud these brokerage customers by paying kickbacks to certain individual traders of these customers, as well as supervision violations and making false statements to ICE Futures US," a June 15 press release said.

Building on a 2019 CFTC order to pay a $1.5 million civil penalty for misconduct between April 2014 and September 2015, the CFTC June 15 required Webb and Classic "to disgorge $585,000 in ill-gotten gains, to comply with undertakings to never apply for CFTC registration or engage in any activity requiring CFTC registration, and permanently bans both Webb and Classic from trading commodity interests," for violations of the Commodity Exchange Act and CFTC regulations between September 2015 and November 2019, according to the press release.

The agency added that Webb admitted to the misconduct and, in a parallel matter, "pleaded guilty to one count of conspiracy both to confirm the execution of fictitious trades and engage in a scheme to defraud."