The man who lost $6 billion (p. 2)

Hunter also says that before the FERC filed its charges against him, he flew to his lawyer's offices in New York to provide testimony voluntarily. The FERC was supposedly in fact-finding mode. But when Kim saw FERC lawyer Todd Mullins setting up a videocamera in his conference room and asked what Mullins was doing, Mullins replied, "Oh, this provides superior impeachment material." Kim insisted that Hunter not testify, even though Hunter was willing to do so, because he thought the FERC was not being impartial. But that wasn't the story that the FERC told. Instead, FERC chairman Joseph Kelliher told reporters that Hunter "was in the middle of an interview and there was a lunch break, and he never came back from lunch." (The FERC declined to comment.)

And then there's the press. It has been relentless, at times malicious, and sometimes flat wrong, according to Hunter. He points to a piece in Britain's Sunday Times saying that he had to hire bodyguards to protect him against attacks by former employees. "How could they write that when it isn't true?" he asks in disbelief. A Dealbreaker.com story quoted Kim saying, "We are confident that Brian Hunter will be vindicated." Then the site added its own editorial comment: "Or he will hang himself in his cell." No wonder Hunter's wife gets upset. "I have to keep her off Google," says Hunter.

It's a somewhat surprising spot for a boy from farm country to end up in. Hunter grew up outside Calgary. His father pours concrete for a living. Hunter attended the University of Alberta, majoring in physics. Friends told him that Wall Street was hiring quants, so he got a graduate degree in applied math and then did his thesis on commodity pricing. After his graduation in 1998, he was working with his dad, laying concrete at a sports complex and thinking about heading to Wall Street, when another worker told him that TransCanada (TRP), a large Canadian pipeline company, was hiring energy traders. In 1997 he began working as a junior analyst, developing ways to profit from anomalies in energy prices.

Briefly Hunter was a real Wall Streeter, physically speaking. In 2001 he accepted a job offer with Deutsche Bank (DB) in New York City. He and Carrie moved there right before 9/11. "We didn't like the culture," says Hunter. "I hated my job and hated New York." Carrie couldn't get a green card, and in December 2003, Hunter - who made the bank millions in the previous years - lost $51.2 million in a single week on a wrong-way bet on natural-gas prices. Deutsche Bank refused to pay him a bonus that year. Hunter, who says that overall he made money for the bank in 2003, filed a lawsuit in which he says he was told that he wasn't paid in part because of his "lack of maturity." Deutsche Bank, which complained that Hunter left the office while his natural-gas book was bleeding money that December to attend his grandfather's birthday in Canada, said Hunter wasn't owed anything. In October 2007 a court granted Deutsche Bank a summary judgment.

In April 2004, Amaranth, which was looking to expand its energy-trading business, hired Hunter. Energy trading was just taking off again in the wake of Enron's bankruptcy, and guys who had a clue were scarce. One reason Hunter says he joined is that Amaranth's head, Nick Maounis, told him he could move back to Calgary. Some 20% of the natural gas used in the United States comes from the province of Alberta, and big firms like Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) have offices in Calgary. (With natural-gas prices soaring, Calgary is a boomtown. Hunter tells me it costs $500 a month for parking - outside. An indoor space is $800, and there's a waiting list.)

For a few years life and work went well. The Hunters had their first son, Kaelen, in 2004, and their second son, Asher, in 2005. That year Hunter made a huge bet that natural gas would get more expensive. Hurricane Katrina struck, and it did. Amaranth returned 21% in 2005, almost all of which came from energy trades. Hunter made his fund more than $1 billion in 2005, according to the FERC. And Hunter got his $100 million-plus payday. That year he ranked 29th on Trader Monthly's list of the most highly paid traders.

By then Hunter was becoming a controversial figure in the world of natural-gas trading. He had a reputation as an extraordinarily aggressive trader. "He thinks he's bigger than the market" was the refrain among other traders, and indeed, later the Senate permanent subcommittee on investigations, or PSI, would marvel at just how huge Amaranth's positions were. For instance, according to a PSI report, in early 2006, Amaranth's positions accounted for 60% to 70% of the open interest in futures contracts for the following winter.

Hunter contests the notion that he had outsized positions - he says that there are flaws in the PSI's methodology and that "we were big, but we weren't the biggest." But even other traders believed that Hunter's positions were so large that they were influencing prices. The PSI noted in its report that "many traders were reluctant to take positions opposite Amaranth, regardless of their view on market fundamentals, due to Amaranth's demonstrated ability to affect natural-gas prices through large trades."

Hunter's billion-dollar victory should have been a clear sign that he was taking an inordinate amount of risk, and sure enough, Amaranth's demise was caused by a Katrina-sized bet gone wrong. In 2006, Hunter's analysis led him to believe that natural gas during the winter of 2006-07 would be very expensive relative to the price in the summer and fall. To capitalize on that, he employed trading strategies that involved going long natural gas that would be delivered that winter, while shorting natural gas that would be delivered in the fall of 2006. And as the PSI put it in its report, he "pursued these strategies to an extreme." But in late August the market moved sharply against Amaranth, and its margin requirements - the amount of cash required to back its positions - skyrocketed, hitting $3 billion by early September. Amaranth began selling positions at a loss to raise money. On Sept. 20, J.P. Morgan (JPM, Fortune 500), which had served as Amaranth's clearing firm, and Citadel took Amaranth's positions in exchange for a $2.5 billion payment, which left investors with about a third of the money they'd once had.

Hunter can't discuss this part in detail because Amaranth is suing J.P. Morgan (which is a story in itself), but he was not particularly chagrined. He says that huge swings aren't uncommon in natural-gas trading and characterizes the losses as a "giveback" of profits he had made earlier in the year. (It's true that Citadel and J.P. Morgan made a fortune on Hunter's positions.) By March 2007, Hunter had sent out offering documents for a new fund named Solengo, hired four former Amaranth people, raised almost $1 billion, and built his new office with a state-of-the-art trading floor.

The notion that Hunter would simply be able to go back to doing what he had done, without suffering any kind of remorse or retribution, has been met with something akin to rage in many quarters. In a recent Bloomberg column, Michael Lewis ranted about the "near total absence of stigma attached to risk takers who lose large sums of money." Wrote Lewis: "Brian Hunter breaks a world record, blowing through $6.8 billion betting on the direction of natural-gas prices at Amaranth, then turns up a few months later, inside his new hedge fund, running other people's money."

But that isn't exactly the way it turned out. Today Hunter's Calgary office is virtually empty. Most of the money he raised disappeared. The directors of his new fund all resigned. Hunter's problem wasn't his track record; it was that the regulators filed market-manipulation charges against him. Says Hunter: "Lost money is a black mark, but just the allegation that you did something illegal is a nonstarter."

There are two remarkable things about Hunter's current legal predicament. The first is that the charges against him aren't about Amaranth's collapse. In fact, losing other people's money isn't necessarily a crime. For all the labels slapped on Hunter, he really isn't a rogue trader. The FERC complains that Amaranth senior management and risk and compliance personnel were "notably absent" from Calgary, but it's hard to blame that on Hunter alone. The regulators probably didn't know as much as they should have about Hunter's trading, but that's because Congress exempted some areas of commodity trading from regulation, not because Hunter was hiding things.

The second remarkable thing is the Keystone Kops-like quality to the proceedings against Hunter. The first public indication that Hunter was going to have a problem came in June 2006, when the Senate PSI held two days of hearings about Amaranth. The committee concluded that because of the size of Hunter's positions, his trading had caused a dramatic increase in the price of natural gas. Said Senator Carl Levin (D-Michigan): "Excessive speculation by a single hedge fund, Amaranth Advisors, altered natural-gas prices, caused wild price swings, and socked consumers with high prices." One witness at the hearing, Paul Cicio, president of the Industrial Energy Consumers of America, calculated that Amaranth cost consumers $9 billion between April and August 2006.

On the second day of the hearings, CFTC acting chairman Walter Lukken testified that the agency's internal analysis had "failed to conclude that Amaranth's trading was responsible" for the high price of gas in 2006.

On July 25 the CFTC filed charges against both Hunter and Amaranth. But it did not accuse Hunter of increasing prices. Instead it accused him and the fund of trying to push prices lower by selling large numbers of natural-gas futures contracts. (He did so, the CFTC alleged, because he held short positions on a less-regulated exchange that would benefit from a decline in prices.) The CFTC did not argue that the manipulation attempt was successful.

The next day the FERC filed its own set of charges. They mostly mirrored the CFTC's allegations, except the FERC contended that Hunter's manipulation attempt was successful. The FERC ordered Amaranth to pay a stunning $259 million, and Hunter himself to pay $30 million, in restitution. Said Kelliher: "The Commission is right to propose close to the maximum in penalties for actions that harmed millions of consumers and the natural-gas markets they depend on for their energy needs." Of course, if he had caused a decrease in the price of natural gas, most of us might wish for more Hunters. As he says, in a somewhat mystified tone, "The premise of action is contradictory to what was described to Congress."

There's a reason the CFTC can say Hunter only tried to manipulate the market while the FERC can say he actually did it. It's because the two agencies define manipulation differently. Hunter describes the notion of having two agencies with two sets of rules policing the same market this way: "It's like driving 60 miles per hour when the speed limit is 65 miles per hour. A different highway patrol stops you and says, 'Our rule is 45 miles per hour.' So you get a ticket."

The FERC and the CFTC are now battling each other over which agency has jurisdiction over Amaranth's trading. As three senators wrote in a letter to the heads of both agencies last fall, "The American people need both FERC and CFTC to fight market manipulators, not each other."

After both agencies' charges came the class action lawsuits, which basically copy the market-manipulation allegations. "They came out of the woodwork," says Hunter. (They have been consolidated into one case.)

Is Hunter guilty? Proving (or disproving) market manipulation can be exceedingly complicated. But no one argues that Hunter tried to deceive anyone. He didn't trade under a false name or hide his trades or cover his tracks in any way. "The law is clear," he says. "You have to have an element of fraud or deceit, because anyone who trades a large position is going to move the price. The price moves because of large sellers and buyers! It's ridiculous to say that if a person trades believing he's going to move the price, that's illegal." (Suffice it to say that the FERC and the CFTC argue that it's more complicated than that.)

When it became apparent the FERC's allegations would prevent him from starting his own fund, Hunter found work as a consultant, devising trading models and strategies for a fund called Peak Ridge Capital Group. This suits him, he says: "I never enjoyed the trading. I liked the design. This allows me to do what I like to do. I don't have to deal with investors - or risk management." (Amen.) Peak Ridge is up over 200% since its founding in November.  

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