This week’s enforcement update covers:
- Fifth Circuit schedules oral argument, and FERC and TOTAL file pleadings regarding Appointments Clause;
- Plaintiffs in class action against TOTAL file response related to oral argument;
- CME Group Exchanges expand reach of manipulation and fraud rules;
- FERC and Silkman file joint discovery plan in district court, and court sets scheduling conference; and
- Judge holds motion hearing in FERC district court case against Barclays.
Fifth Circuit schedules oral argument, and FERC and TOTAL file pleadings regarding Appointments Clause. On February 17, the Fifth Circuit issued a notice scheduling oral argument in TOTAL’s declaratory judgment action against FERC. As you may recall, TOTAL argues that FERC must go to federal court—as opposed to the FERC administrative process—to prove FERC’s allegations of market manipulation against TOTAL under the Natural Gas Act. The oral argument is scheduled for April 5 in New Orleans.
On February 18, TOTAL filed a notice of supplemental authority in the Fifth Circuit. According to the filing, the DC Circuit granted rehearing en banc and vacated its judgment in Raymond J. Lucia Companies, Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016), which FERC cites in support of its arguments that its administrative law judges (ALJs) are not inferior officers whose appointments are governed by the Appointments Clause. The vacated judgment denied review of an SEC order based on the court’s conclusion that the SEC’s ALJs are not inferior officers. The DC Circuit’s order granting rehearing en banc asks the parties to brief that issue and whether the court should overrule Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), which formed the basis of the now-vacated decision in Lucia. According to TOTAL, the en banc order calls into doubt the continued validity of the holdings in Lucia and Landry.
On February 23, the DOJ (arguing the case with FERC) filed a reply to TOTAL’s supplemental authority filing in the Fifth Circuit. The DOJ argues that the Lucia decision addresses whether the SEC’s ALJs are “Officers” for purposes of the Constitution’s Appointments Clause, which issue is not presented in this case concerning only the scope of district court jurisdiction. According to the DOJ, the district court properly declined to rule upon TOTAL’s Appointments Clause claim because the court lacked jurisdiction. In the event that FERC sets the proceedings for a hearing before an ALJ, and if FERC ultimately issues an order that aggrieves TOTAL, the court can at that time consider TOTAL’s constitutional challenge to FERC’s ALJs.
Also on February 23, FERC Enforcement filed a motion to submit additional authority in the FERC proceeding against TOTAL in FERC Docket No. IN12-17. FERC Enforcement made this filing to “update the Commission on recent developments in Appointments Clause case law,” namely the rehearing en banc granted in Lucia, and issuance of Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016). According to the filing, Enforcement Staff has already addressed at length why FERC’s ALJs are not inferior officers. But even if a court were to find that FERC ALJs are inferior officers, FERC Enforcement claims that FERC ALJs have been constitutionally appointed by FERC’s “head of department”—its Chairman—as required by the Appointments Clause. FERC Enforcement argues that, unlike with the SEC, FERC’s governing statute (42 U.S.C. § 7171(c)) makes clear that FERC’s Chairman, acting “on behalf of the Commission,” is responsible for appointing FERC ALJs.
Plaintiffs in class action against TOTAL file response related to oral argument. On February 22, the plaintiffs in the related class action against TOTAL filed a letter and exhibits in the U.S. District Court for the Southern District of New York to address issues raised at the February 17 oral argument. The letter and exhibits address the weight given to an anonymous consulting expert’s conclusions and the connection between prices changes at regional hubs and Henry Hub in the natural gas market. According to the plaintiffs, courts frequently credit unnamed consulting expert analyses of market manipulation at the pleading stage. In addition, the plaintiffs include articles supporting their claims that the regional hubs and Henry Hub constitute a single integrated market, so an entity could engage in manipulation in the regional hubs with an impact on Henry Hub and futures prices based on Henry Hub.
CME Group Exchanges expand reach of manipulation and fraud rules. On February 1, the CME Group submitted to the CFTC rule changes for all of its exchanges – CME, CBOT, NYMEX and COMEX as well as the CME Swaps Execution Facility – that may significantly expand the self regulatory organizations’ enforcement activity involving manipulation and fraud claims. Effective on February 16, the rule changes essentially add “attempted” violations of existing exchange rules prohibiting manipulation, false reporting and fraud. They also expand the scienter standard to include not only “intentional” violations, but also “reckless” violations. Moreover, the exchanges adopted language directly from the CFTC’s anti-manipulation rule, making it a violation “to intentionally or recklessly use or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud.” These rule changes are being made at the behest of the CFTC, suggesting that the CFTC may be looking to the exchanges to fill the gap left by the resource constraints and legal hurdles the CFTC faces in pursuing manipulation and fraud cases itself.
For more information, please see this Sidley Securities & Derivatives Enforcement and Regulatory Update.
FERC and Silkman file joint proposed discovery plan in district court, and court schedules settlement conference. On February 8, FERC and defendants Richard Silkman and Silkman’s firm Competitive Energy Services filed a Joint Proposed Discovery Plan in the U.S. District Court for the District of Maine. As we previously reported, Judge John A. Woodcock, Jr. determined that “de novo review” means an ordinary civil action including discovery rights, and ordered the parties to submit a discovery plan. The discovery plan contemplates depositions, document discovery, expert discovery, etc. like a normal civil case, which must be completed within 150 days of the court’s order approving the discovery plan.
On February 15, Judge Woodcock held telephone conference and issued an order staying the case pending settlement conference. On February 16, Magistrate Judge John H. Rich III issued an order scheduling the settlement conference for March 31. By March 24, the parties must file a written in camera statement setting forth the settlement position of each party and the reasons for each aspect of that settlement position. In addition, this statement must provide the court with a realistic estimate of anticipated attorney fees and costs in the event of trial to final judgment.
District court judge holds motion hearing in FERC case against Barclays. On February 9, Judge Troy L. Nunley held a hearing on FERC’s motion to affirm civil penalties in the U.S. District Court for the Eastern District of California. At the hearing, the court heard oral arguments. The matter stands submitted, and Judge Nunley will issue a written order.