Insider's Game

Eugene Scalia, son of the Supreme Court Justice, had neither the law nor the facts on his side. So, when he and his colleagues at Gibson Dunn & Crutcher drafted the complaint on behalf of two Wall Street trade groups, they fabricated their own statutory language and their own facts.  They must believe that the judges at the U.S. District Court in D.C. don’t know how to read.

This frivolous lawsuit, filed to overturn new rules on position limits drafted by the Commodity Futures Trading Commission, should not be viewed as a legal document, as such.  It’s really a press release designed to spearhead a broad based disinformation campaign on behalf of the International Swap and Derivatives Association, or ISDA, and the Securities Industry and Financial Markets Association. Or it’s a political stalling tactic. The line between legal advocacy and lobbying seems to be blurred here.  Among the litany of false claims and distortions made in the complaint, those made in Paragragh 5 stand out:

The Commission [i.e. the CFTC] grossly misinterpreted its statutory authority. Congress did not require the Commission to establish position limits without regard to whether they would harm the U.S. economy by increasing the cost of food, energy, and other necessities. Rather, Congress authorized the Commission to establish position limits only if it first finds that they “are necessary to diminish, eliminate, or prevent” “an undue and unnecessary burden on interstate commerce” caused by “[e]xcessive speculation” (7 U.S.C. Section 6a(a)(1)), and are otherwise “appropriate” (id. section 6(a)(2)(A)). The Commission did not make those findings here. Such an abdication of the Commission’s responsibility to apply its expertise to record evidence before establishing new regulations is the essence of unreasoned decisionmaking.

None of that is true. Congress never suggested that it granted the CFTC limited authority, “to establish position limits only if it first finds that they “are necessary to diminish, eliminate, or prevent’ “an undue and unnecessary burden on interstate commerce’ caused by “[e]xcessive speculation’.” Quite the opposite. Anyone who read the statute would quickly ascertain that Scalia et al. are trying to a pull a fast one before the District Court. The statute, 7 U.S.C. Section 6a, declares, upfront, that:

Excessive speculation in any commodity under contracts of sale of such commodity for future delivery made on or subject to the rules of contract markets is an undue and unnecessary burden on interstate commerce in such commodity.

In other words, Congress, not the CFTC, declared that excessive speculation is an undue and unnecessary burden on interstate commerce. Which is why it enacted and amended statutes to limit such excessive speculation. This is nothing new. Congress first authorized regulators to impose limits on excessive speculation back in 1936, when it passed the Commodity Exchange Act, or CEA. As the CFTC noted,

CEA section 4a states that “”excessive speculation” in any commodity traded on a futures exchange “”causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity is an undue and unnecessary burden on interstate commerce” and directs the Commission to establish such limits on trading “”as the Commission finds necessary to diminish, eliminate, or prevent such
burden.” This basic statutory mandate has remained unchanged since its original enactment in 1936 and through subsequent amendments to section 4a, including the Dodd-Frank Act.

It may be worthwhile to recap why excessive speculation has caused such wreckage in commodity markets.  Only a small percentage of commodity trades are executed on regulated exchanges, such as the CME. But the vast majority of over-the-counter trades are priced according to the benchmarks set by the exchanges. So, for instance, a sale of natural gas in Los Angeles might sell at a premium to the price of gas sold at the Henry Hub in Louisiana, according to prices set by contracts traded on the NYMEX in New York. If there are no position limits on the exchanges, then it’s very easy to corner the market in a commodity and manipulate prices up or down. Price discovery in commodity markets is based on the balance between actual production and actual consumption and the effectiveness of the distribution system that connects producers and consumers. If someone corners the market on the exchange, he can subvert that price discovery mechanism.

The people from Enron manipulated gas prices, to the harm of consumers in Los Angeles. They manipulated gas prices when they worked at Enron, and they manipulated gas prices after they left Enron, and worked at hedge funds. A report prepared by Carl Levin’s staff on Senate Permanent Subcommittee on Investigations showed how two hedge funds founded by former Enron employees–Amaranth and Centaurus–went to extreme lengths to manipulate gas prices and subvert the price discovery function of the exchanges. They were able to get away with it as long as they could, because Mr. and Mrs. Enron, aka Phil and Wendy Gramm, neutered the CEA, first with a secret side deal with Goldman, then by circumventing the rules to exempt Enron’s energy trading business, and then with legislation, passed in 2000, known as the Enron Loophole.

And since Congress has long held that excessive speculation is, ipso facto, an undue burden on interstate commerce, it specifically tasked the CFTC with the obligation to impose position limits that would diminish the excessive speculation. It wrote:

For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall, from time to time,… by rule, regulation, or order, proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person…

Congress, goes further, dictating, under 7 U.S.C. Section 6a(3)(B) that the CFTC shall set those limits:

(B) to the maximum extent practicable, in its discretion–
(i) to diminish, eliminate, or prevent excessive speculation as described under this section;
(ii) to deter and prevent market manipulation, squeezes, and corners;
(iii) to ensure sufficient market liquidity for bona fide hedgers; and
(iv) to ensure that the price discovery function of the underlying market is not disrupted. [Emphasis added.]

The CFTC studied the issue at length. It held numerous open hearings and meetings, and reviewed more than 15,000 comments, including those submitted by ISDA. The process of ascertaining the proper position limits to curtail excessive speculation is described, in about 98,000 words, in the Federal Register.

The complaint has 80 additional paragraphs wherein the attorneys, to put it charitably, dissemble to the point of fraud. It demands that the Court both enjoin the CFTC from implementing the Position Limits Rule, and vacate the rules entirely. But this isn’t really a legal action. It’s a smear campaign. As coincidence would have it, the two lead attorneys on the case, Scalia and Miguel Estrada, are members of The Federalist Society.