This week’s enforcement update covers:
- Judge grants Smith motion for judgment on pleadings and dismisses Smith in Barclays case;
- DOE urges FERC to take action to address electric grid resiliency;
- CFTC Director of Enforcement emphasizes self-reporting and cooperation in speech;
- CFTC Division of Enforcement issues Updated Advisory on Self Reporting and Cooperation;
- CFTC orders Logista Advisors LLC to pay $250,000 for supervision failures related to spoofing;
- CFTC orders Morgan Stanley & Co. LLC to pay $500,000 for supervision failures;
- CFTC issues no-action relief regarding CPO and CTA registration;
- CFTC orders Citibank, N.A. and Citigroup Global Markets Limited to pay a $550,000 penalty for swap data reporting violations;
- CFTC orders Merrill Lynch to pay $2.5 million to settle charges of supervision failures and recordkeeping violations;
- Silkman and CES file partial objection to magistrate’s discovery rulings in district court; and
- FERC Staff presents on enforcement activities during the no-quorum period.
Judge grants Smith motion for judgment on pleadings and dismisses Smith in Barclays case. On September 29, Judge Nunley granted Ryan Smith’s motion for judgment on the pleadings and dismissed Smith from the case in the U.S. District Court for the Eastern District of California in FERC’s case against Barclays and four former traders. Smith argued that FERC’s action as it relates to him is time-barred by 28 U.S.C. § 2462, which requires that “an action, suit or proceeding” be “commenced within five years from the date when the claim first accrued.” Judge Nunley agreed with Smith that FERC’s October 31, 2012 Order to Show Cause constituted “written notice” to Smith that FERC’s investigation into his conduct in this case “terminated,” which terminated the tolling agreement between FERC Enforcement and Smith as of that date. In addition, Judge Nunley ruled that more than five years passed from the last date of Smith’s alleged misconduct before FERC filed an action in district court, after giving effect to the period of time the statute of limitations was tolled by the tolling agreement. Accordingly, Judge Nunley entered judgment in favor of Smith and dismissed him from the case.
DOE urges FERC to take action to address electric grid resiliency. On September 29, U.S. Secretary of Energy Rick Perry formally proposed that FERC take swift action to address “threats to U.S. electrical grid resiliency.” Pursuant to his authority under Section 403 of the Department of Energy Organization Act, Secretary Perry urged FERC to issue a final rule requiring its organized wholesale power markets to develop and implement reforms involving generation resources necessary to maintain the reliability and resiliency of the power grid. DOE’s proposed rule follows the DOE grid reliability study released in August, which requested FERC to expedite efforts to improve price formation in the wholesale power markets. Among other things, the proposed rule would allow full recovery of costs and a return on equity for “eligible grid reliability and resiliency resources” in RTOs/ISOs that have a 90-day fuel supply on site in the event of supply disruptions caused by emergencies, extreme weather, or natural or man-made disasters. Secretary Perry also sent a letter to the FERC Commissioners, which stated that “the resiliency of the electric grid is threatened by the premature retirements of … fuel-secure traditional baseload resources.” Secretary Perry request that FERC consider and complete final action on the rule within 60 days of publication in the Federal Register, or alternatively, issue a proposed rule effective immediately with provision for later modifications after consideration of public comment.
CFTC Director of Enforcement emphasizes self-reporting and cooperation in speech. On September 25, the CFTC’s Director of the Division of Enforcement James McDonald gave a speech regarding self-reporting and cooperation to the NYU Program on Corporate Compliance & Enforcement / Institute for Corporate Governance & Finance. In the speech, Director McDonald highlighted the value of self-reporting potential misconduct to the CFTC, including significantly reduced penalties for companies and individuals that self-report. Director McDonald emphasized three points regarding the CFTC’s expectations for companies that want to receive the benefits of self-reporting. First, the CFTC expects the company to voluntarily and timely report wrongdoing to the Division of Enforcement. In order to be voluntary, the self-report must be made before an imminent threat of disclosure or a government investigation, as well as independent of any other legal obligation. In addition, the company must disclose the misconduct to the CFTC within a “reasonably prompt time” after becoming aware of it. Second, the company must fully cooperate with the Division of Enforcement throughout the investigation. Third, the company must timely and appropriately remediate to ensure the misconduct does not happen again, including correcting the flaws in compliance and internal controls programs that allowed the misconduct in the first place.
CFTC Division of Enforcement issues Updated Advisory on Self Reporting and Cooperation. In conjunction with Director McDonald’s speech, the CFTC’s Division of Enforcement issued an Enforcement Advisory entitled “Updated Advisory on Self Reporting and Cooperation.” The Enforcement Advisory, which supplements the CFTC’s guidance on cooperation from earlier this year, memorializes the material in Director McDonald’s speech, including the following three requirements for full self-reporting and cooperation credit: (1) voluntary disclosure to the Division; (2) full cooperation; and (3) timely and appropriate remediation of flaws in compliance and control programs. According to the Enforcement Advisory, if the company or individual self-reports, fully cooperates, and remediates, the Division of Enforcement will recommend the most substantial reduction in the civil monetary penalty that otherwise would be applicable. In extraordinary circumstances, the Division may recommend a declination of prosecution, such as where misconduct is pervasive across an industry and the company or individual is the first to self-report. In all instances, the CFTC will require the company or individual to disgorge profits (and, where applicable, pay restitution) resulting from any violations.
CFTC orders Logista Advisors LLC to pay $250,000 for supervision failures related to spoofing. On September 29, the CFTC issued an order filing and simultaneously settling charges against Logista Advisors LLC (Logista), a crude-oil-trading firm based in Houston, Texas. According to the CFTC’s order, from approximately September 2013 through October 2014, Logista failed to diligently supervise the handling of commodity interest accounts and other activities relating to Logista’s business as a CFTC registrant, particularly in connection with its former employee’s improper crude oil futures trading on a foreign exchange and Logista’s response to the exchange’s inquiry into that trader’s misconduct. The order finds that Logista’s crude oil futures trader was given inadequate training and supervision, which resulted in him repeatedly engaging in spoofing while trading futures on a foreign futures exchange. After the trader’s misconduct was detected by the exchange’s compliance department, Logista failed to satisfy its obligation to supervise an appropriate investigation and provide accurate responses to the exchange’s inquiries, according to the CFTC. The CFTC’s order requires Logista to pay a $250,000 civil monetary penalty.
CFTC orders Morgan Stanley & Co. LLC to pay $500,000 for supervision failures. On September 28, the CFTC issued an order filing and simultaneously settling charges against Morgan Stanley & Co. LLC (MSCO) for failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on the CME Group, ICE Futures US, and other exchanges. According to the order, MSCO failed to implement and maintain adequate systems and procedures for reconciling exchange and clearing fees from at least 2009 through April 2016. The CFTC alleges that, for a substantial majority of the relevant period, MSCO had no automated system in place to detect instances where it may have overcharged customers for exchange fees. The CFTC’s order finds that MSCO overcharged U.S. customers $1,550,182, and customers of a MSCO affiliate were overcharged $1,439,047, in connection with transactions on various exchanges. According to the order, MSCO has refunded nearly all of the affected customers and has otherwise taken responsibility for the relevant remaining amounts. The CFTC order requires MSCO to pay a $500,000 civil penalty.
CFTC issues no-action relief regarding CPO and CTA registration. On September 26, the CFTC’s Division of Swap Dealer and Intermediary Oversight released a no-action letter related to an entity’s failure to register as commodity pool operator (“CPO”) or commodity trading advisor (“CTA”) with respect to its pool holding swaps to hedge commodity market price risk involved in the pool’s ownership of interests in crude oil and natural gas producing properties. The entity requested confirmation that the Division would not recommend enforcement action against A, the CPO of B and its subsidiaries, for failure to register as either a CPO or CTA with respect to its activities managing B. According to the facts presented to the CFTC, B owns working interests, mineral interests, and overriding royalty interests in crude oil and natural gas producing and non-producing properties in Montana, North Dakota, and Oklahoma. When B acquires crude oil and natural gas interests, B will concurrently enter into over-the-counter swap transactions with the intention of hedging its exposure to commodity price risk. In the letter, the Division states that it will not recommend that the CFTC take enforcement action against A for failure to register as a CPO, nor will it recommend that the CFTC take enforcement action against A for failure to register as a CTA with respect to the commodity trading advice that it provides to B and its subsidiaries, provided that B and its subsidiaries’ use of swaps satisfies certain conditions.
CFTC orders Citibank, N.A. and Citigroup Global Markets Limited to pay a $550,000 penalty for swap data reporting violations. On September 25, CFTC issued an order filing and simultaneously settling charges against Citibank, N.A. and Citigroup Global Markets Limited (collectively, Citi) for failing to properly report Legal Entity Identifier (LEI) information for swap transactions to a Swap Data Repository (SDR), failing to establish the electronic systems and procedures necessary to do so, failing to correct errors in LEI data previously reported to an SDR, and failing to perform supervisory duties diligently with respect to LEI swap data reporting. According to the order, from April 2015 to December 2016, Citi failed to report LEIs properly for tens of thousands of swaps. The CFTC’s order finds that many of Citi’s LEI reporting errors stemmed from a design flaw in its swap data reporting systems with respect to swap continuation data. Under the CFTC’s order, Citi is required to pay a $550,000 civil monetary penalty and make improvements to its LEI swap data reporting.
CFTC orders Merrill Lynch to pay $2.5 million to settle charges of supervision failures and recordkeeping violations. On September 22, the CFTC issued an order filing and simultaneously settling charges against Merrill, Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), a registered Futures Commission Merchant, for failing to supervise its employees’ and agents’ handling of the firm’s response to a CME Group Inc. investigation into futures block trade execution and recordkeeping practices at Bank of America, N.A. (BANA), a Merrill Lynch affiliate. The CFTC order finds that Merrill Lynch did not have adequate procedures to ensure that its employees and agents prepared and maintained accurate records of futures block trades executed by BANA, as well as that Merrill Lynch failed to maintain records of certain futures block trades executed by BANA as required by the CFTC’s regulations. The order requires Merrill Lynch to pay a $2.5 million civil monetary penalty and make improvements its procedures for preparing and maintaining records of futures block trades executed by its affiliates.
Silkman and CES file partial objection to magistrate’s discovery rulings in district court. On September 22, Richard Silkman and Competitive Energy Services, LLC (CES) filed a partial objection to the magistrate’s ruling on discovery issues in the U.S. District Court for the District of Maine. The Defendants object to the denial of their request for “documents regarding [FERC’s] decision not to pursue enforcement action against other individuals or entities.” The Defendants assert that FERC’s decision to drop its investigation of another entity is relevant to their defense in this case, given that other entity’s role as a “key player in this saga.” Defendants also argue that FERC’s decision not to pursue enforcement actions against other participants in a flawed program – the ISO-NE Day Ahead Load Response Program – that acted exactly the same as Defendants is relevant to the defense that “a flawed program, and not wrongdoing by Defendants, is the real culprit in this matter.” Thus, Silkman and CES request that the district court judge overturn the magistrate’s ruling denying the request for documents regarding FERC’s decision not to pursue enforcement action against other entities.
FERC Staff presents on enforcement activities during the no-quorum period. On September 20, at FERC’s open meeting, FERC Staff presented on activities during the no-quorum period. On the enforcement front, FERC Staff reports that the Office of Enforcement staff continued to perform its surveillance, investigative, oversight, auditing and accounting functions, including (a) opening surveillance inquiries into possible violations by participants in the electric and natural gas markets; (b) continuing work on investigations; (c) representing FERC in litigated matters in the courts; and (d) working on new and ongoing audits. According to the report, the Office of Enforcement opened 9 investigations, and continued work on over 50 investigations. In addition, FERC Enforcement opened 22 surveillance inquiries, of which Enforcement closed 16 and referred 3 for investigation. Enforcement also commenced 7 new audits, conducted site visits and continued work on 29 ongoing audits, and represented FERC in 7 litigated matters.