This week’s enforcement update covers:
- CFTC announces Insider Trading & Information Protection Task Force;
- FERC approves settlement with Wheelabrator Technologies Inc. related to capacity payments;
- Second Circuit upholds New York zero emission credits for nuclear facilities;
- Petrobras pays over $1.7 billion to settle corruption charges with U.S. and Brazilian authorities;
- Judge denies Powhatan and Chen motion to dismiss on statute of limitations grounds;
- CFTC finds Mizuho Bank, Ltd. engaged in spoofing of Treasury futures and Eurodollar futures;
- CFTC finds that proprietary trading firm Geneva Trading USA, LLC engaged in spoofing;
- FERC Enforcement requests that Commission vacate Order to Show Cause to Footprint; and
- CFTC orders futures trader and trading firm to pay $2.3 million in penalties for spoofing and manipulative scheme.
CFTC announces Insider Trading & Information Protection Task Force. On September 28, the CFTC announced that it was creating the Insider Trading & Information Protection Task Force, a coordinated effort across the Division of Enforcement to identify and charge those who engage in insider trading or otherwise improperly use confidential information in connection with markets regulated by the CFTC. According to the release, the CFTC will thoroughly investigate and, where appropriate, prosecute instances in which individuals have abused access to confidential information—for example, by misappropriating confidential information, improperly disclosing a client’s trading information, front running, or using confidential information to unlawfully prearrange trades. In addition, the CFTC will ensure that its registrants develop and enforce policies prohibiting the misuse of confidential information, as they are required to do under the law. As part of the release, the CFTC also charged a block trade broker with insider trading and the broker’s firm with supervisory and recordkeeping failures. CFTC Director of Enforcement James McDonald, stated: “Illegal use of inside or otherwise confidential information significantly undermines market integrity and harms customers in our markets. Today’s enforcement action shows that the Commission will vigorously pursue this type of misconduct. To that end, we are also announcing an Insider Trading and Information Protection Task Force—with members from our offices in Chicago, Kansas City, New York, and Washington, DC—to root out this nefarious conduct from our markets.”
FERC approves settlement with Wheelabrator Technologies Inc. related to capacity payments. On September 28, FERC issued an order approving a Stipulation and Consent Agreement between FERC’s Office of Enforcement and Wheelabrator Technologies Inc. (WTI) on behalf of itself and its subsidiary, Wheelabrator Claremont Company, L.P. (Claremont). The order resolves FERC’s investigation into whether the collection of certain ISO-NE capacity payments associated with Capacity Supply Obligations held by Claremont violated ISO-NE Tariff, at Market Rule 1, § III.13. According to FERC’s order, from October 2013 to October 2014, Claremont received ISO-NE capacity payments while the Claremont facility was inoperable and unable to meet its CSOs. Claremont admitted the violations and agreed to (a) pay a civil penalty of $250,000; (b) disgorge to ISO-NE $107,231.34 in capacity payments and interest; and (c) for two years, submit annual reports on the progress of WTI’s recently-implemented compliance measures and any new incidents of non-compliance.
Second Circuit upholds New York zero emission credits for nuclear facilities. On September 27, the U.S. Court of Appeals for the Second Circuit issued a decision affirming the district court in upholding the New York zero emission credit (ZEC) program for the state’s nuclear generation facilities. The Second Circuit rejected the Plaintiffs‐Appellants’ claims that the program is preempted under the Federal Power Act (FPA) and that it violates the dormant Commerce Clause. The Second Circuit concluded that the ZEC program is not field preempted because Plaintiffs have failed to identify an impermissible “tether” under Hughes v. Talen Energy Marketing, LLC, 136 S. Ct. 1288, 1293 (2016), between the ZEC program and wholesale market participation. In addition, the Second Circuit ruled that the ZEC program is not conflict preempted because the Plaintiffs‐Appellants failed to identify any clear damage to federal goals. Finally, the Second Circuit concluded that the Plaintiffs‐Appellants lack Article III standing to raise a dormant Commerce Clause claim.
Petrobras pays over $1.7 billion to settle corruption charges with U.S. and Brazilian authorities. On September 27, Petrobras, a Brazilian government-controlled oil and gas company, agreed to pay over $832 million in penalties plus $933 million in disgorgement and prejudgment interest to resolve U.S. government investigations into FCPA violations and a related Brazilian investigation. The company also agreed to enhance its compliance program and cooperate with the DOJ in ongoing investigations against individuals. In the U.S. proceedings, Petrobras acknowledged that members of its Executive Board facilitated paying corrupt payments to politicians and political parties in Brazil through contractors and suppliers in order to secure favorable legislative and political treatment. For example, executives conspired with contractors to inflate infrastructure projects by billions of dollars in return for kickbacks to themselves and politicians. Petrobras disguised the corrupt payments on its books by improperly inflating assets and other misstatements and omissions, causing materially false and misleading SEC filings during the time it issued ADSs and a registered equity offering in the U.S. The company will pay 10% each of the penalty to the DOJ and SEC, with the remaining 80% credited for amounts paid to Brazilian authorities. The SEC will reduce the $933 million disgorgement by payments to a related class action settlement fund. This settlement serves as an important reminder that companies with U.S. operations or that raise capital in U.S. markets must follow U.S. anti-corruption laws, and should remain cognizant that U.S. agencies increasingly work with their international counterparts to investigate and bring charges against persons who engage in corrupt conduct worldwide.
Judge denies Powhatan and Chen motion to dismiss on statute of limitations grounds. On September 24, Judge M. Hannah Lauck denied the motion to dismiss filed by Powhatan/Chen in the case pending in the U.S. District Court for the Eastern District of Virginia. The Memorandum Opinion focuses on the Defendants’ statute of limitations defense. The Court ruled that FERC timely filed its action in district court. According to the Memorandum Opinion, the cause of action “accrued” for purposes of the statute of limitations when the Defendants failed to pay the penalty assessment within 60 days of FERC’s order (though acknowledging that the Defendants arguments “seem more consistent with the overall statutory scheme of § 823b and the purposes of statutes of limitations”). In addition, Judge Lauck issued an accompanying order finding that the order involves a controlling question of law as to which there is substantial ground for difference of opinion, and that an immediate appeal would materially advance the ultimate termination of the litigation. Therefore, the Court further stayed the proceedings until seven days after the expiration of the time in which parties may take action in the U.S. Court of Appeals for the Fourth Circuit.
CFTC finds Mizuho Bank, Ltd. engaged in spoofing of Treasury futures and Eurodollar futures. On September 21, the CFTC issued an order filing and settling charges against Mizuho Bank, Ltd. (Mizuho) for engaging in multiple acts of spoofing in a variety of futures contracts on the Chicago Mercantile Exchange and the Chicago Board of Trade, including futures contracts based on United States Treasury notes and Eurodollars. The order finds that Mizuho engaged in this activity through one of its employees (Trader A) who accessed these markets through a trading platform from Mizuho’s Singapore office. The CFTC’s order finds that during the period starting at least May 2016 through May 2017, Trader A placed multiple orders for futures contracts with intent to cancel the orders before their execution. Specifically, Trader A placed large buy and sell orders and then cancelled them. Trader A engaged in this spoofing strategy to test the market’s reaction to his spoof orders. The order requires Mizuho to pay a $250,000 civil monetary penalty. According to the CFTC, Mizuho’s cooperation and remediation resulted in a significantly reduced civil monetary penalty.
CFTC finds that proprietary trading firm Geneva Trading USA, LLC engaged in spoofing. On September 20, the issued an order filing and settling charges against Geneva Trading USA, LLC (Geneva) for engaging in the disruptive trading practice of spoofing. The CFTC’s order finds that Geneva engaged in this activity through three of its employees identified in the order as Trader A, Trader B, and Trader C. The Order finds that generally, all three traders used the same spoofing pattern: the trader manually placed a smaller order on one side of the market at or near the best price while placing a larger order or series of orders on the opposite side of the market. According to the CFTC, the large orders were often modified to avoid getting filled before they were ultimately cancelled. The CFTC alleges that the traders traded in this manner to create — or sometimes exacerbate — an imbalance in the order book and to induce other market participants to transact on the smaller order. The order requires Geneva to pay a $1.5 million civil monetary penalty.
FERC Enforcement requests that Commission vacate Order to Show Cause to Footprint. On September 19, FERC’s Office of Enforcement its reply to Footprint’s answer to the Order to Show Cause in Docket No. IN18-7. Notably, Enforcement Staff recommends that the Commission vacate the Order to Show Cause. Although Staff disagrees with most of the arguments that Footprint raises, Enforcement Staff finds merit in Footprint’s new defense relating to the start-up requirements of the unit at issue, Salem Harbor Unit 4. In consideration of that argument – one which Enforcement Staff alleges Footprint had not fully raised in prior responses– Staff agrees with Footprint that its conduct during the June 27 through July 17, 2013 portion does not violate the four tariff provisions and regulations at issue. Enforcement Staff still believes that Footprint violated those four tariff provisions and regulations during the remaining portion of the relevant period, when Footprint submitted Day-Ahead Limited Energy Generator offers from July 18 to July 25, because the start-up requirements comprising Footprint’s new defense do not apply then. As a result, the supply offers during this latter period were inaccurate and violate the cited tariff provisions and regulations. Nonetheless, in light of the now more limited scope and nature of the violations, Staff reevaluated its position and recommended that the Commission vacate the Order to Show Cause.
CFTC orders futures trader and trading firm to pay $2.3 million in penalties for spoofing and manipulative scheme. On September 19, the CFTC issued two orders filing and settling charges against Victory Asset, Inc. (Victory) and Michael D. Franko for spoofing—bidding or offering with the intent to cancel the bid or offer before execution—and for the use of a manipulative scheme. The scheme involved both domestic and international markets and occurred from at least May 2013 to July 2014. One aspect of scheme involved cross-market spoofing—i.e., spoofing in one market to benefit a position in another market, where the price of the two markets is generally correlated, particularly in the short term. The two CFTC orders require Victory and Franko to pay civil monetary penalties of $1.8 million and $500,000, respectively.