In this enforcement update, we cover:
- CFTC’s enforcement division issues new advisories on cooperation;
- FERC and ETRACOM file briefs regarding scope of review in district court;
- FERC revises PJM FTR forfeiture rule and discusses cross-product manipulation;
- Citigroup Global Markets Inc. settles spoofing charges with the CFTC;
- DOJ settles with Duke Energy for violating premerger notification and waiting period requirements; and
- TOTAL files motion for leave to respond and response in FERC proceeding.
This week at FERC:
- Coaltrain’s reply in support of its motion to dismiss FERC’s complaint in district court;
- Administrative law professors file amicus brief on de novo review in Barclays case;
- City Power replies to FERC regarding discovery in district court proceeding;
- FERC to hold second technical workshop on data collection NOPR.
Trader pleads guilty to spoofing and wire fraud, and settles manipulation and spoofing case with CFTC. On November 9, Navinder Singh Sarao pled guilty in the U.S. District Court for the Northern District of Illinois to one count of spoofing and one count of wire fraud related to the “flash crash” in 2010. On the same day, the CFTC announced that it submitted a proposed Consent Order that would resolve its civil enforcement action in the U.S. District Court for the Northern District of Illinois against Sarao. The CFTC’s complaint charged Sarao, along with his company Nav Sarao Futures Limited PLC, with unlawfully manipulating and spoofing with regard to the E-mini S&P 500 near month futures contract (E-mini S&P). In the proposed Consent Order, Sarao admits to the allegations in the CFTC complaint that Sarao: (a) successfully manipulated the E-mini S&P on at least 12 days between April 27, 2010 and March 10, 2014 (including the May 6, 2010 “flash crash” day); (b) attempted to manipulate the E-mini S&P tens of thousands of times between April 2010 and April 17, 2015; (c) placed tens of thousands of bids and offers that he intended to cancel before execution (i.e., spoof orders) between July 16, 2011 and April 17, 2015; and (d) employed or attempted to employ a manipulative device, scheme, or artifice to defraud in connection with his spoof orders between August 15, 2011 and April 17, 2015. On November 17, Judge Andrea R. Wood approved the Consent Order against Sarao, which requires him to pay a $25,743.174.52 civil monetary penalty and $12,871,587.26 in disgorgement. The Court’s order also imposes permanent trading and registration bans against Sarao.
On November 17, FERC’s Office of Enforcement released its 2016 Report on Enforcement. The Report shows continued focus on fraud and market manipulation, serious violations of mandatory Reliability Standards, anticompetitive conduct and conduct that threatens the transparency of regulated markets.
On October 24, FERC and ETRACOM filed a joint status report in the U.S. District Court for the Eastern District of California. FERC argues that the court need not address discovery at this time because the proper and best mechanism for resolving this case is a motion to affirm designed to allow the court to review the administrative record supporting the FERC’s Order Assessing Penalties. According to FERC, this approach is similar to the procedures adopted by Judge Nunley in the Barclays case before the same court. On the other hand, ETRACOM argues that the “de novo” review proceeding is governed by the Federal Rules of Civil Procedure, so it is entitled to discovery and a trial as judges have ruled in FERC’s enforcement cases against Maxim Power and City Power. ETRACOM attached as an exhibit its first request to FERC for production of documents, which it served to FERC on October 7.
On October 25, the DC Circuit ruled that it lacked jurisdiction to take up a lawsuit brought against FERC for inaction on ISO-NE’s controversial capacity auction conducted in 2014. Public Citizen and Connecticut sued FERC after FERC deadlocked 2-2 on a vote over whether it should block or investigate the results of the ISO-NE annual forward capacity auction (FCA 8). The tie vote at FERC, with one Commissioner vacancy at the time, allowed the auction results to stand. In reviewing FERC’s inaction, the DC Circuit held, “In sum, we hold FERC’s deadlock does not constitute agency action, and the Notices describing the effects of the deadlock are not reviewable orders under the FPA.” The DC Circuit’s opinion suggests that the challengers should take their complaints to Congress: “Any unfairness associated with this outcome inheres in the very text of the FPA. Accordingly, it lies with Congress, not this Court, to provide the remedy.”
On October 25, TOTAL filed its opening brief in the Fifth Circuit in its declaratory judgment action against FERC. As it argued before the district court, TOTAL argues that FERC must go to federal court to prove its allegations of market manipulation under the Natural Gas Act (NGA). TOTAL claims that FERC cannot force respondents in such cases to defend themselves in an in-house agency proceeding before a FERC administrative law judge, subject only to deferential review in a federal appellate court. According to TOTAL, Section 24 of the NGA declares that federal district courts have “exclusive jurisdiction of violations” of the NGA and of “all” suits and actions to “enforce any liability or duty created by” the NGA.
On October 27, the CFTC filed an opposition to defendants DRW Investments, LLC and Donald R. Wilson’s motion for reconsideration of the September 30 decision denying summary judgment in the U.S. District Court for the Southern District of New York. In its opposition, the CFTC argues that the defendants’ motion does not meet the high standard for reconsideration. According to the CFTC, the defendants do not identify any new law or new evidence in support of their motion, nor do they identify any decisions or matters that the court actually overlooked. Therefore, the CFTC requests that the court reject the defendants’ attempt to repeat the same arguments they made in their summary judgment briefings (i.e., that the alleged bidding strategy based on the defendants own subjective estimate of fair value is per se legitimate and thus insulates them from liability for manipulation as a matter of law).
On October 26, FERC filed an opposition to City Power’s motion for discovery under Rule 56(d) of the Federal Rules of Civil Procedure in the U.S. District Court for the District of Columbia. According to FERC, City Power has failed to provide any persuasive reason for needing discovery. In particular, FERC claims that City Power does not need discovery about the legitimate purposes of virtual trading in PJM, evidence of intent, or City Power’s allegedly untruthful statements about instant messages. According to FERC, City Power already has much of the requested information. Thus, FERC requests that the court deny City Power’s motion for discovery and grant FERC’s motion for summary judgment.
At Platts Nodal Trader on Thursday, October 27, Director Collins gave a presentation about how FERC Enforcement’s Division of Analytics and Surveillance monitors markets. Collins described his staff and explained how they screen trade data. As the accompanying presentation shows, FERC uses masked and unmasked data, as well as the larger trader position reports now shared by CFTC to screen for concerns warranting further inquiry. Collins observed that persistence – the repeated occurrence of trader activities, especially seemingly uneconomic activity – is a key issue for his team of analysts. When their screens are tripped, Collins explained, they use a peer based evaluation decision process on whether to advance their surveillance through direct inquiry to the company or trader responsible for the suspicious trading. After that, DAS management decides whether to refer the matter to Enforcement Division of Investigation (i.e., the prosecutors). On compliance, Collins shared that if DAS can discern patterns or conduct in the data, then company compliance programs surely should as well. Despite a flurry of probing questions, Collins would not detail what they screen for beyond uneconomic and persistent activity. It was clear, however, that DAS is actively monitoring the markets and provides a strong prong for the triad defending against market manipulation (RTOs and their market monitors, whistleblowers, and FERC DAS).