On this special Saturday edition, we cover 5 new developments, including:
- FERC issues Order to Show Cause to ETRACOM and trader.
- Judge holds hearing on Maxim Power motion to dismiss.
- Judge Nunley denies Barclays’ motion for discovery.
- Judge Blakey denies Kraft’s motion to dismiss.
- FERC Enforcement issues third party subpoenas in Total investigation
On this edition, we cover 5 new developments, including the court’s ruling in CFTC’s case against Kraft. And the latest Order to Show Cause from FERC, oral argument in Maxim Power motion to dismiss hearing, and judicial denials of key motions in two pending cases.
FERC issues Order to Show Cause to ETRACOM and trader. On December 16, FERC ordered ETRACOM LLC (ETRACOM) and its principal member and primary trader Michael Rosenberg to show cause why they should not be found to have violated FERC’s anti-manipulation rule by submitting virtual supply transactions at the New Melones intertie at the border of the CAISO market in order to affect power prices and economically benefit ETRACOM’s Congestion Revenue Rights (CRRs) sourced at that location. The Enforcement Staff Report, which is attached to FERC’s order, alleges that in May 2011, ETRACOM submitted and cleared uneconomic virtual supply transactions intended to artificially lower the day-ahead LMP and create import congestion at New Melones, which greatly benefited ETRACOM’s CRR positions sourced at New Melones. Enforcement alleges that Rosenberg developed and implemented both the CRR and the virtual trading strategies for ETRACOM.
According to the Enforcement report, ETRACOM’s virtual supply offers resulted in a $42,481 loss between May 14-31, during which period ETRACOM earned $315,072 in unjust profits related to its CRR positions. Staff also estimates that ETRACOM harmed the market by $1,514,207. The order proposes the following penalties: (i) a civil penalty of $2,400,000 against ETRACOM; (ii) a civil penalty of $100,000 against Rosenberg and (iii) disgorgement of $315,072 plus interest in unjust profits.
As part of their answer to the Order to Show Cause, the respondents have the option under the Federal Power Act to choose between either an administrative hearing before an ALJ at the Commission prior to the assessment of a penalty, or a penalty assessment by the Commission with de novo review of the law and facts in federal district court. The respondents have 30 days to file an answer.
Judge holds hearing on Maxim Power motion to dismiss. On December 17, Judge Mastroianni of the U.S. District Court for the District of Massachusetts, who is presiding over FERC’s action against Maxim Power, held a hearing on Maxim Power’s motion to dismiss.
The judge heard argument by FERC on the merits of the case, including whether the tariff in 2010 prohibited Maxim from offering on oil, while burning gas. FERC confirmed that the tariff did not prohibit this conduct, but claimed that Maxim had a duty to disclose its strategy to the market monitor and that by not doing so, had committed a violation. The judge was most interested, however, in FERC’s position with respect to de novo review. FERC’s position was similar to that taken in the Barclays case – that FERC is petitioning the Court to affirm its decision based on the investigative record. When counsel for Maxim stood, the judge requested that he begin by addressing the de novo issue point. Maxim’s counsel argued that FERC’s petition should be considered a new civil case – similar to those filed by the SEC – and receive a trial de novo subject to Federal rules. Recognizing the near-opposite positions, the judge determined that he wanted to address the de novo issue before considering the pending motion to dismiss. The judge ordered supplemental briefing on the de novo issue, which is due by January 20. A further status hearing is scheduled for February 24 to determine if further argument or briefing is needed. The judge’s decision to address the de novo issue before considering the motion to dismiss contrasts with Judge Woodlock’s path in the Lincoln case, which is also pending in D.MA. In that case, Judge Woodlock first wants to rule on the pending motion to dismiss before considering de novo review.
Judge Nunley denies Barclays’ motion for discovery. On December 18, 2015, Judge Nunley issued an order denying Barclays’ November 9th motion for leave to serve limited discovery. FERC filed in opposition to Barclays on December 3rd. The Court does not agree that discovery is warranted at this time, but instead must first review the record already submitted, which includes approximately 8,500 pages, trade data, communications, testimony, and data analyses, before determining if the record is sufficient for de novo review. Barclays is invited to reiterate its argument in its opposition that the submitted record is insufficient. The Court will consider whether the record should be supplemented and/or additional discovery is needed following the briefing required by the October 2nd scheduling order.
Judge Blakey denies Kraft’s motion to dismiss. On December 18, 2015, Judge Blakey in the Northern District of Illinois denied Kraft’s motion to dismiss two counts in the CFTC’s complaint for alleged manipulation of the cash wheat and wheat futures markets in violation of the Commodity Exchange Act §§ 6(c)(1), 6(c)(3), and 9(a)(2) and CFTC Regulations 180.1 and 180.2.
The Court penned several pages disagreeing with the CFTC’s argument that Rule 180.1 poses two distinct causes of action, one for “manipulation” that would not require a showing of fraudulent conduct, and a separate action for “fraud.” Judge Blake interpreted § 6(c)(1) and Regulation 180.1 in line with the robust body of case law interpreting Securities Exchange Act § 10(b) and Rule 10b-5, finding that the CEA statute and related rule indeed prohibits only fraudulent manipulations, and therefore must meet the heightened pleading standards for fraud allegations.
Ultimately, however, the Court found that CFTC Staff had adequately pled the required elements to state a claim for fraudulent manipulation. Further, the Court determined Staff had sufficiently alleged facts to support a finding of intentional conduct under the CFTC rule, which can be met by showing reckless conduct. As to the CFTC’s allegations under § 9(a)(2) and Rule 180.2, the Court found Staff had adequately alleged that Kraft had the ability to influence prices, that an artificial price existed, that Kraft caused and specifically intended to cause the artificial price.
FERC Enforcement issues third party subpoenas in Total investigation. Following CFTC’s settlement with Total, FERC’s investigation remains. Recently FERC Enforcement Staff has begun issuing subpoenas to counterparties that transacted with Total Gas & Power NA, Inc. as part of the ongoing investigation of Total. The subpoenas request information related to the counterparties’ natural gas transactions with Total. As we previously highlighted, FERC issued a Notice of Alleged Violations on September 21 naming Total and two traders. In FERC’s public notice, Staff alleges that Total’s scheme involved making largely uneconomic trades for physical natural gas during bid week designed to move indexed market prices in a way that benefited the company’s related positions. FERC alleges that this scheme was implemented on at least 38 occasions during June 2009 through June 2012.