On December 6, the Supreme Court unanimously affirmed a Ninth Circuit decision involving the scope of “personal benefit” required to find insider trading under the securities laws. Salman involved an investment banker who provided inside information about pending mergers to his brother, intending that the brother would benefit from the information. The brother traded on the tips and (without his brother’s knowledge) tipped additional friends – including Salman – who also traded. The Court determined the facts of this case fell within the language of the 1983 Dirks decision, which found that a tipper breaches a fiduciary duty by making a gift of confidential information to a “trading relative.” The Court did not agree with Salman’s position that only a clear pecuniary benefit to the tipper should trigger liability.
On December 7, a group of ten administrative law professors filed a brief of amici curiae in the Powhatan/Chen proceeding in the U.S. District Court for the Eastern District of Virginia, which criticizes FERC’s position on what constitutes de novo review under Section 31(d) of the Federal Power Act (FPA). The brief is substantially similar to the brief filed last month on behalf of Barclays in the U.S. District Court for the Eastern District of California, which was denied by Judge Nunley. According to the brief, “Amici have grave concerns about the legal and policy implications of FERC’s apparent view of what constitutes a district court’s ‘de novo review’ of an agency’s civil penalty assessment.” The professors argue that FERC’s position runs counter to the traditional understanding of court enforcement actions for civil penalties and cannot be squared with the FPA’s civil penalty assessment mechanism, which gives a defendant the choice of challenging FERC’s penalty assessment in a full trial-type proceeding before either an administrative law judge or a federal district court.
In our final enforcement update for 2016, we cover:
- TOTAL files reply brief in declaratory judgment action against FERC in Fifth Circuit;
- Trial concludes in the CFTC’s case against DRW and Wilson; and
- Judge holds scheduling conference and orders briefing in ETRACOM proceeding.
This week’s enforcement update covers the following:
- FERC Staff issues notice of alleged violations against GDF SUEZ;
- FERC files motion to affirm civil penalties against ETRACOM; and
- FERC files brief in TOTAL appeal proceeding in Fifth Circuit.
The bench trial in the CFTC’s case against DRW is underway. On November 28, Judge Richard Sullivan denied the motions to strike testimony filed by the CFTC in its market manipulation case against defendants DRW Investments, LLC and Donald R. Wilson pending in the U.S. District Court for the Southern District of New York. In denying the motion, Judge Sullivan noted that the CFTC failed to submit its motion by the November 4 deadline to file motions in limine and failed to request leave to file this motion at the pretrial conference. In addition, on November 29, the CFTC filed its response to the defendants’ motion to exclude portions of a CFTC expert declaration, which Judge Sullivan granted in part. The trial in this proceeding began on December 1. The parties gave opening statements, and the court heard testimony from a number of DRW traders, including Wilson.
On November 22, PJM’s Independent Market Monitor (IMM) filed a complaint regarding a rule change to PJM’s capacity market approved by the PJM Markets and Reliability Committee (MRC). At the November 17 MRC meeting, the MRC approved—over objections from the IMM—changes to PJM’s Manual 18 to delete language that imposed conditions on early replacement transactions. In response, the IMM filed a complaint at FERC arguing that the modified rules are unjust and unreasonable, inconsistent with competitive markets, and allow behavior that defeats a well-functioning market. The IMM argues that the modified rules “provide incentives to offer paper capacity in the PJM capacity market and to suppress market prices for actual physical capacity in the PJM market.” According to the IMM, “The modified rules allow behavior that would otherwise be considered prohibited market manipulation because behavior permitted under the modified rules defeats PJM’s well functioning market for physical capacity.”
Also on November 22, PJM’s IMM filed a complaint requesting a market participant, American Electric Power Service Corp. (AEP), to provide the IMM with certain information that AEP allegedly refused to provide in response to information requests. According to the complaint, the IMM requested that AEP provide the data from which AEP calculates the variable operations and maintenance expense component of its cost-based offers, which was requested in order to determine whether the level of AEP’s cost inputs for cost-based offers raise market power concerns. The IMM claims that it is unable to obtain such information from an alternative source, so the IMM requests that FERC require AEP to provide the requested information within two weeks.
On November 21, FERC approved CAISO’s proposal to keep in place a number of tariff revisions related to the limited operability of the Aliso Canyon natural gas storage facility. The filing makes permanent three CAISO tariff provisions that would otherwise have expired on November 30: (1) allowing scheduling coordinators to rebid commitment costs in CAISO’s real-time market if they were not committed in the day-ahead market or residual unit commitment process; (2) ensuring that CAISO’s short-term unit commitment process does not commit resources that did not submit bids into the real-time market unless they were scheduled or committed in the day-ahead market or had a real-time must-offer obligation; and (3) allowing scheduling coordinators to seek after-the-fact recovery of unrecovered commitment costs that exceed the commitment cost bid cap as a result of actual marginal fuel procurement costs, pursuant to a FPA section 205 filing at FERC. FERC found that CAISO’s proposed revisions are just and reasonable because they constitute appropriate improvements upon CAISO’s current tariff provisions that should result in a more efficient unit commitment process and enhance cost recovery.
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.