Former Hedge Fund Gas Trader Disputes Report on High Prices

A former natural gas trader for a hedge fund facing congressional scrutiny yesterday disputed the findings of Senate investigators who blamed high natural gas prices last winter on the company's speculative bets.

Shane Lee, a former trader at Amaranth Advisors, which collapsed after losing more than $6 billion in natural gas trades, said the fund "was responding to the market rather than driving it."

Speaking at a hearing of the Senate's permanent subcommittee on investigations, Lee said natural gas prices were driven primarily by weather and demand for fuel. Heavy trading would affect prices only in the "extreme short term," he said.

In a report, senators on the panel called for more oversight of unregulated electronic commodities exchanges such as Intercontinental Exchange, including closing the "Enron loophole" that allows those exchanges to operate outside federal regulation.

The senators also wrestled with how the federal government could regulate trading in other places, such as foreign exchanges, and voice trades conducted between two parties.

Senate investigators found that Amaranth, to avoid trading limits on the New York Mercantile Exchange, shifted its activity to Intercontinental in Atlanta, which is free from such constraints.

Lee, who is starting a hedge fund called Solengo Capital with Amaranth's former chief energy trader, Brian Hunter, said he would support federal regulation of electronic exchanges.

Amaranth said its trading did not overwhelm the market, arguing that it was only one of many active players, including Goldman Sachs Group; Morgan Stanley; several hedge funds; and energy companies like BP, Sempra Energy and Chevron.

At the hearing, University of Maryland law professor Michael Greenberger said the federal Commodity Futures Trading Commission has been a "captive of the industry it regulates" and not responsive to consumers.

Greenberger said the industry lobbied against previous efforts to reverse a law that that allowed Enron to set up an online trading system and now allows electronic exchanges to operate outside of regulation.

Consumers of natural gas called for regulation of unregulated exchanges and more funding for CFTC enforcement. Sean Cota, president of the New England Fuel Institute, a trade group representing more than 1,000 fuel dealers, said regulations should be tightened.

"At what point do you allow speculation to just run rampant?" Cota said. "I don't think, for a huge chunk of the market, that there are any cops on the beat."

Sen. Carl M. Levin (D-Mich.), the subcommittee's chairman, has introduced legislation to subject electronic exchanges to federal regulatory oversight, and he intends to push the idea later this year.

Levin said the CFTC has been "starved for resources for too long" with a budget one-eighth the size of the Securities and Exchange Commission's.