In our first enforcement update for 2019, we cover a range of issues (including some news from the end of 2018):
- FERC opens investigations into rates charged by three interstate natural gas companies;
- Powhatan and Chen file opening appellate brief;
- Judge suspends CFTC case against Kraft because of the partial government shutdown;
- FERC increases maximum civil penalties for violations;
- FERC approves settlement between FERC Enforcement and Algonquin;
- Judge rules that FERC action against Silkman/CES is not time-barred by statute of limitations; and
- Judge finds CFTC fails to meet burden on manipulation claims against DRW and Wilson.
FERC opens investigations into rates charged by three interstate natural gas companies. On January 16, FERC opened investigations and ordered hearings to determine if three natural gas companies are charging just and reasonable rates in accordance with section 5 of the Natural Gas Act. The investigation is examining whether Bear Creek Storage Company, Northern Natural Gas Company, and Panhandle Eastern Pipe Line Company, LP, are over-recovering their costs of service after the passage of the Tax Cuts and Jobs Act of 2017. On July 18, 2018, FERC issued Order 849, which ordered pipeline companies to file a one-time report known as FERC Form No. 501-G estimating their returns on equity while taking into account the lower corporate tax rate. According to the news release announcing the investigations, FERC is “concerned that the level of earnings for each company may exceed their actual costs of service, including a reasonable rate of return on equity.” FERC also announced that it terminated similar investigations into nine other companies, finding that those companies’ filings showed compliance with FERC orders and the law.
Powhatan and Chen file opening appellate brief. On January 15, Powhatan Energy Fund, Alan Chen, and other appellants filed their opening brief in the Fourth Circuit challenging the denial of their motion to dismiss FERC’s amended complaint. As we previously reported, appellants sought to dismiss FERC’s complaint on statute of limitations grounds. In the opening brief, appellants argue that FERC’s claim should have begun accruing at the time of the alleged violations, not when FERC issued an order assessing penalties as the district court concluded. Appellants contend that the district court’s interpretation would allow the federal government to control when the statute of limitations begins accruing, leaving both people and companies perpetually liable to civil forfeiture. According to the brief, upholding the trial court’s decision would allow the government to seek penalties against a defendant in perpetuity, which would inflict significant damage on the electric industry and beyond.
Judge suspends CFTC case against Kraft because of the partial government shutdown. On January 9, Judge John Robert Blakey of the U.S. District Court for the Northern District of Illinois suspended proceedings in the CFTC’s enforcement action for price manipulation against Kraft Foods Group, Inc. because of the partial government shutdown. Judge Blakey held the matter in abeyance until further notice, and required Plaintiff’s counsel to inform the Court when their employment status is fully restored.
FERC increases maximum civil penalties for violations. On January 8, FERC issued a final rule to amend its regulations governing the maximum civil monetary penalties assessable for violations of statutes, rules, and orders within FERC’s jurisdiction, which is required by the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended most recently by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The new adjusted maximum civil penalty for many Federal Power Act and Natural Gas Act violations, including manipulation violations, has increased to $1,269,500 per violation, per day (up from $1,238,271 per violation, per day). The rule will not take effect until it is published in the Federal Register, which likely will not occur until after the partial government shutdown ends since the Office of the Federal Register is currently only publishing documents necessary for the protection of life and property.
FERC approves settlement between FERC Enforcement and Algonquin. On January 7, FERC issued an order approving a settlement between the FERC Office of Enforcement (Enforcement) and Algonquin Gas Transmission, LLC (Algonquin), which resolves Enforcement’s investigation into whether Algonquin violated the express terms of the FERC-issued Algonquin Incremental Market (AIM) Project Certificate, when it entered wetlands on the banks of the Hudson River outside the AIM Project’s right of way with construction equipment in an attempt to retrieve a broken drill stem without obtaining a variance from the Commission as required. Algonquin admitted to the facts set forth in the settlement agreement, but neither admitted nor denied the violations. Algonquin agreed to pay a civil penalty of $400,000 to the United States Treasury, and to submit semi-annual environmental compliance monitoring reports for at least one year and up to two years.
Judge rules that FERC action against Silkman/CES is not time-barred by statute of limitations. On January 4, Judge John A. Woodcock, Jr. of the U.S. District Court for the District of Maine ruled that FERC’s enforcement action against Richard Silkman and Competitive Energy Services, LLC (CES) is not time-barred by the statute of limitations. As we previously reported, the parties filed cross-motions for summary judgment on one discrete issue: whether the five-year statute of limitations expired before the case was filed. After determining that Silkman and CES did not waive their statute of limitations argument, Judge Woodcock concluded that FERC’s disgorgement order is not subject to a separate accrual date for purposes of the statute of limitations. In addition, Judge Woodcock rejected the Silkman and CES argument that Gabelli v. SEC, 568 U.S. 442 (2013) and Kokesh v. SEC, 137 S. Ct. 1635 (2017) eclipsed United States v. Meyer, 808 F.2d 912 (1st Cir. 1987). Based on Meyer, which the court viewed as binding, Judge Woodcock determined that the FERC enforcement action is not time-barred.
Judge finds CFTC fails to meet burden on manipulation claims against DRW and Wilson. On November 30, Judge Richard J. Sullivan issued an order finding that the CFTC failed to meet its burden of proof with respect to its market manipulation, attempted market manipulation, and control person liability claims against Defendants Donald R. Wilson (Wilson) and his company DRW Investments, LLC (DRW). Judge Sullivan ruled that “[i]t is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product.” According to the order, in the summer and fall of 2010, Wilson developed a trading strategy based on his conviction, and put his firm’s money at risk to test it. Judge Sullivan determined that Wilson did not need to manipulate the market to capitalize on that superior knowledge, and there is absolutely no evidence to suggest that he ever did so in the months that followed. Judge Sullivan concluded, “It is only the CFTC’s Enforcement Division that has persisted in its cry of market manipulation, based on little more than an ‘earth is flat’-style conviction that such manipulation must have happened because the market remained illiquid. Clearly, that is not enough to prove market manipulation or attempted market manipulation, and the CFTC has simply failed to meet its burden on any cause of action.”