Plains All American Pipeline is a midstream energy company that transports and stores crude oil. In the late 1990s, crude oil trader James M. Stewart began making unauthorized short-sell trades — betting that oil prices would fall. When oil prices instead rose sharply from roughly $10 per barrel in late 1998 to over $27 per barrel by November 1999, the company was forced to deliver oil at far below market prices.
Stewart concealed the losses by making false entries in the company's record-keeping system, inaccurately recording purchase prices to hide the growing gap. He also sent letters bearing the forged signature of the company's president to make it appear he was authorized to execute the trades. The unauthorized trading spanned from January 1998 to November 1999, when the company finally discovered the losses.
The $162 million loss was disclosed in late November 1999. Plains All American's shares and partnership units lost roughly half their value. The company defaulted on some debt agreements and faced shareholder lawsuits, though it eventually recovered with new credit agreements. Stewart was indicted on three counts of wire fraud in September 2002 and pleaded guilty in 2003.
When oil prices doubled from $10 to $27, the $162M loss surfaced; forgery turned trading loss into fraud, undetected for two years.
Stewart made unauthorized short-sell bets on crude oil, betting prices would fall. When oil prices doubled from $10 to $27, the loss was inevitable — the only question was how long he could hide it.
He concealed the losses by forging the president's signature on authorization letters and falsifying trading records. The forgery turned a trading loss into a fraud case.
Plains All American's risk controls did not detect the unauthorized positions or the forged documents for nearly two years. The system relied on trust in a single trader.
A trader who controls both the position and record can hide any loss as long as the market moves against him. The forgery is the second crime — the first is the absence of independent verification.
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