When commodity traders get caught

Companies and/or individuals involved: Vitol Inc. (United States); SK Energies Americas, Inc. (United States), SK Trading International Co., Ltd. (United States)

Charges: Unlawful trust, unfair competition; harm to consumers 

Swiss lawyers used: None

Countries affected: United States

Proceedings: United States (State of California Department of Justice - Office of the Attorney General; United States District Court for the Northern District of California)

Outcome:

• Office of the Attorney General: Settlement payment of USD 50 million paid by Vitol, Inc. (USA), SK Energies Americas, Inc. (USA) und SK Trading International Co., Ltd. (USA); court approval of the settlement pending
• United States District Court for the Northern District of California: A civil class action by end consumers was also settled, no details available

Forfeiture of profits/Compensation: None

The case

On 8th February, 2015, an explosion shook the ExxonMobile refinery in Torrance, California. Flames shot high into the sky, with ash raining down.

The refinery had produced about 10% of California’s gasoline. Finding a replacement source was difficult because the Golden State in the East of United States is cut off from the rest of the oil and gasoline market in the country. Gasoline prices skyrocketed.

As luck would have it, Vitol Inc. and the U.S. companies SK Energy Americas, Inc. and SK Trading International Co., Ltd. were able to step into the breach. Vitol Inc. is part of the Vitol Group, which is headquartered in Rotterdam and Geneva.

These companies promised to supply gasoline at the relevant daily price (“floating price”). 

So, all’s well that ends well?

Not quite, according to the assessment of the Attorney General of California.

This is how he sees it: The responsible traders at Vitol Inc. and SK had previously worked together at Vitol Inc. They agreed to collaborate shortly before the explosion to drive up the daily price (“spot price”) of gasoline in California. However, the market was saturated and prices were low. Then the explosion changed the game.

In the aftermath, the parties involved allegedly exploited the peculiar features of the Californian gasoline market: For the rest of the United States, gasoline is mostly traded on the New York Mercantile Exchange (“NYMEX”). All transactions are recorded there centrally and assessed transparently. In California, on the other hand, market participants trade directly with each other. They can voluntarily report prices to a price information service, but they don’t have to. The most commonly used one is the Oil Price Information Service LLC (“OPIS”). There are only few reports for regular gasoline and often none at all in the premium range and for the alkylate required for its production.

In the crucial period for the identification of the relevant spot price, the parties would deliberately sell small quantities of regular gasoline to each other or to third parties at inflated prices and report only this to OPIS. Sometimes they would deliberately make a loss. Other times, they would complete a transaction in the opposite direction, thereby neutralizing the deal but often not reporting this “wash trading” to OPIS. According to the Attorney General’s office, the companies concluded further deals in order to conceal their activities or share the profits among themselves. OPIS only knew out about selected deals at the prices chosen by the companies.

By selectively reporting inflated prices, Vitol Inc. and the other traders allegedly drove up the OPIS price and then sold their own products at a higher price. This would, in turn, drive up the price for consumers.

The Attorney General of California filed a complaint in 2020. A group of consumers filed a class action. Vitol denied the charges and described the transactions as normal hedging transactions.

There were also other cases in which Vitol was accused of market manipulation:

• On 3rd December 2020, Vitol Inc. admitted as part of a settlement with the U.S. Commodity Futures Trading Commission that the company had attempted to manipulate certain oil benchmarks in August 2014 and July 2015.
• On 9th October 2018, the French Commission de régulation de l’énergie (CRE), the supervisory authority for the energy market, imposed a fine on Vitol SA for manipulation in the French energy market. Vitol denied the charges. The Conseil d'État, France’s highest administrative court, upheld the decision against Vitol on 18th June 2021.
• On 4th January 2024, Vitol Inc. admitted manipulations in the California electricity market in October 2013 in a settlement with the Federal Energy Regulatory Commission (FERC). The company agreed to pay more than USD 2 million.

On 10th July 2024, the California prosecutor’s office announced a settlement. In order to end a bitter legal dispute the outcome of which was uncertain for both sides, Vitol and SK agreed to pay a total of USD 50 million dollars without admitting any guilt. A large part of the money is to be paid directly to the end consumers. The details of this very complex process are already included in the agreement. Any Californian resident who attests under penalty of perjury to have purchased gasoline in Southern California from February 20, 2015 through November 10, 2015 is eligible for payment. The public prosecutor's office will not further pursue the allegations of market manipulation following the Torrance incident. Court approval is still pending. The class action lawsuit has also been settled. Details in this regard are not known.

Document related to this affair

• State of California Department of Justice - Office of the Attorney General: Complaint (4th May 2020) 

Timeline

Legislative loopholes

• Lack of monitoring of pricing mechanisms
• Voluntary nature of data delivery for pricing mechanisms
• Lack of monitoring of group-wide compliance with minimum legal standards
• No specific supervisory authority in the commodities sector and no appropriate due diligence obligations for traders