This Sidley Energy Enforcement update covers:
- Federal Energy Regulatory Commission (FERC) approves settlement between Enforcement staff and Coaltrain
- Both FERC and Commodity Futures Trading Commission (CFTC) enforcement reports highlight the respective agency’s continued commitment to strong enforcement
- U.S. Court of Appeals for the Fifth Circuit upholds FERC’s finding that BP manipulated the natural gas market but remands to FERC to recalculate its $20 million penalty
- CFTC orders Glencore to pay a record-setting penalty of $1.186 billion
- CFTC and Securities and Exchange Commission (SEC) orders over $1.8 billion in fines against 11 firms for recordkeeping failure — employees using unapproved method of communications such as texts and WhatsApp on personal devices
FERC approves settlement between Enforcement staff and Coaltrain. On October 11, FERC approved a settlement between FERC’s Office of Enforcement and Coaltrain Energy, L.P. (Coaltrain). This settlement resolved Enforcement staff’s claims that Coaltrain had engaged in market manipulation by placing up to congestion trades that were not intended to profit from price changes but rather to collect its resulting allocation of marginal loss payments. As you may recall, in 2016 FERC issued an order assessing civil penalties against Coaltrain, which included a disgorgement of approximately $4.1 million and penalty of $38 million and filed in the U.S. District Court for the Southern District of Ohio seeking affirmation of its penalty order. During the six years of federal litigation, the district court found it lacked jurisdiction to review FERC’s assessment of disgorgement and joint and several liability under the Federal Power Act. Notably, the district court specifically noted that Congress limited the district courts’ power when reviewing FERC orders to civil liabilities and declined to extend its powers to craft remedies beyond the borders Congress drew. Coaltrain neither admitted nor denied the alleged violations and agreed to pay $4 million under the settlement. The federal lawsuit was dismissed on October 26. Sidley represented Coaltrain in this proceeding.
CFTC’s Annual Enforcement Results show a focus of enforcement on digital assets and fraud. On October 20, CFTC released its enforcement results for FY2022. The 2022 report demonstrated CFTC’s continued commitment to ensuring market integrity — CFTC filed 82 enforcement actions and obtained orders that imposed over $2.5 billion in restitution, disgorgement, and civil monetary penalties.
Highlights of the 2022 CFTC Annual Enforcement Results include:
- 18 of the 82 actions were related to digital assets. 53 were administrative cases and 29 were civil injunctive cases.
- Most of the enforcement actions involved multiple types of violation. The top three categories of violations were Fraud (31); Reporting, Recordkeeping (18); and Illegal Off-Exchange Contracts, Failure to Register (12).
FERC Report on Enforcement highlights increased enforcement activity in 2022. On November 17, FERC’s Office of Enforcement released its 2022 Report on Enforcement. The 2022 Report on Enforcement highlighted FERC Enforcement staff’s continued focus on fraud and market manipulation, serious violations of Reliability Standards, anticompetitive conduct, threats to the nation’s energy infrastructure and associated effects on the environment and surrounding communities, and conduct that threatens the transparency of regulated markets.
Highlights of the 2022 FERC Report on Enforcement include:
- Division of Investigation (DOI): In FY2022, DOI staff opened 21 new investigations, compared with 12 investigations opened in FY2021. In addition to cases closed through settlement, staff closed seven investigations without further action in FY2022, compared with four investigations closed without further action in FY2021. Enforcement staff continued litigating four matters in U.S. district courts. There is also one matter on appeal from FERC final order pending in the U.S. Court of Appeals for the Fifth Circuit. DOI staff negotiated eight settlements that resulted in approximately $23.59 million in civil penalties and $31.95 million in disgorgement. Five of those settlements included compliance monitoring requirements. There were also three FERC-approved settlements that resolved two federal district court litigation matters that resulted in $1.975 million in disgorgement.
- Division of Analytics and Surveillance (DAS): DAS staff worked on approximately 50 investigations and 15 other matters involving inquiries or litigation. Natural gas surveillance screens produced approximately 16,766 screen trips, which resulted in 26 natural gas surveillance inquiries but no referrals to DOI for investigation. Electric surveillance screens produced approximately 525,865 screen trips which resulted in 32 electric surveillance inquiries and two referrals to DOI for investigation. Each month DAS staff ran and reviewed 96 electric surveillance screens; monthly, hourly, and intra-hour sub-screens, and reports for more than 41,000 hubs and pricing nodes within the organized wholesale electricity markets.
- Division of Audits and Accounting (DAA): DAA staff completed 12 audits resulting in 51 findings of noncompliance and 258 recommendations for corrective action, the majority of which were implemented within six months. They also directed $158 million in refunds and other recoveries. In addition, DAA advised and acted on 427 proceedings at FERC covering various accounting matters with cost-of-service rate implications.
On November 30, the Director of the Office of Enforcement presented an enforcement update on energy trading compliance. The Director highlighted the following areas as concern for enforcement:
- Market participants that fail to fulfill capacity award obligations
- Demand response resource capacity that is inaccurately measured or not actually available or provided
- Market participants who target out-of-market payments
- Inaccurate reporting of physical and economic parameters in energy offers
- Improper accounting for lobbying costs, industry dues, and other non-operating expenses
- Natural gas market manipulation, particularly during periods of market stress
- Cross-product manipulation in both the organized and bilateral markets
Fifth Circuit upholds FERC’s finding that BP manipulated the natural gas market but remands to FERC to recalculate its $20 million penalty. On October 20, the U.S. Court of Appeals for the Fifth Circuit upheld FERC’s order finding BP to have engaged in market manipulation in its natural gas trades during Hurricane Ike, but granted in part BP’s petition for review that FERC did not have jurisdiction over all of BP’s transactions, which resulted in a remand to FERC to reassess the $20 million penalty. In particular, FERC alleged BP incurred losses in its physical trading between Katy and Houston Ship Channel to benefit the value of BP’s financial position. The Fifth Circuit found FERC did not act arbitrarily and capriciously or without the support of substantial evidence that BP engaged in market manipulation. The Fifth Circuit found it was reasonable for FERC to accept FERC’s expert testimony and to use the phone calls between the two BP employees to conclude that BP had awareness of the illicit nature of the trades. The Fifth Circuit also affirmed FERC’s position that once gas is sold or transported in interstate commerce it remains in interstate commerce; hence trades could be subject to FERC jurisdiction if they concerned gas transported under a contract “under subpart G of Part 284 of the FERC’s regulations.” The Fifth Circuit further rejected BP’s argument that FERC violated the Administrative Procedures Act by intermixing FERC’s investigatory and adjudicatory roles. The Fifth Circuit, however, remanded the proceeding back to FERC for a recalculation of its penalty because it rejected FERC’s argument that FERC can exercise jurisdiction over otherwise non-jurisdictional intrastate transactions merely because a manipulative scheme may affect the prices of jurisdictional interstate transactions. In light of this decision, on December 15, Total Gas & Power North America Inc., Aaron Hall, and Therese Tran (Total) filed a motion to dismiss an ongoing market manipulation investigation against them at FERC. Total argued that FERC Enforcement staff cannot demonstrate that any of the alleged transactions fall within FERC jurisdiction based on the current record. Total further argued that if the dismissal is rejected, FERC Enforcement staff should bear the burden to produce a report showing exactly which transactions FERC Enforcement staff believe are jurisdictional and vacate the current order establishing hearing.
CFTC orders Glencore to pay a record-setting penalty of $1.186 billion. On May 24, CFTC approved a settlement offer proposed by Glencore International AG, Glencore Ltd., and Chemoil Corporation (Glencore). This settlement resolved CFTC’s investigation over Glencore’s manipulative and fraudulent conduct spanning from at least 2007 to 2018 on U.S. based and global physical oil benchmarks and related derivatives. In particular, the investigation related to Glencore’s illicit conducts that affected Glencore’s trading positions that depended on various oil benchmarks. Glencore neither admitted or denied the alleged violations except to those already admitted in related actions by the U.S. Department of Justice (DOJ) or any other government agency. Glencore will pay a civil penalty of $865,630,784, a disgorgement of $320,715,066, and agreed to retain an independent compliance monitor. Glencore concurrently pleaded guilty with the U.S. DOJ; the CFTC will offset certain payments made to the U.S. DOJ. On November 3, the U.K. Serious Fraud Office ordered Glencore to pay £280 million — a record-setting monetary penalty in a corporate criminal conviction for the U.K. Serious Fraud Office.
CFTC and SEC order over $1.8 billion in fines against 11 financial institutions for recordkeeping failure — employees using unapproved methods of communications such as texts and WhatsApp on personal devices. On September 27, CFTC and SEC simultaneously filed and settled charges against 11 financial institutions and affiliates for failing to maintain, preserve, or produce records that were required under CFTC and SEC regulations. Swap dealers and futures commission merchant are subject to CFTC recordkeeping regulations. Broker-dealers and investment advisers are subject to SEC recordkeeping regulations. The CFTC and SEC found that the identified institutions had widespread failure to ensure that their employees, including supervisors and senior employees, to only use approved methods of communication. As a result, the identified institutions failed to properly maintain and preserve the records, which likely deprived SEC and CFTC of those communications in various investigations and inquires. In addition to the significant financial penalties, the identified institutions were ordered to retain compliance consultants, conduct comprehensive reviews of their recordkeeping policies, and update the CFTC and SEC of their new policies that are subject to CFTC and SEC staff review.