This update covers:
- FERC rescinds policy on Notices of Alleged Violations.
- Judge denies motion for new trial for first trader convicted of spoofing.
- CFTC charges former natural gas trader with fraudulently mismarking trades.
- CFTC’s Division of Enforcement issues first Public Enforcement Manual.
- FERC approves settlement with Dominion Energy.
- DOJ publishes new guidance on evaluating corporate compliance programs.
- CFTC staff issues research report on impact of automated orders in futures markets.
- CFTC settles case against Kraft Heinz and Mondelez International.
- Powhatan and FERC file appellate briefs on statute of limitations.
FERC rescinds policy on Notices of Alleged Violations. On May 16, 2019, the FERC rescinded its policy on issuing Notices of Alleged Violations (“NAVs”) regarding investigations. The policy was implemented in 2009 to increase the transparency of non-public investigations by establishing a way for other market participants to provide information related to the subject’s conduct and to help market participants evaluate their own activities against the conduct alleged in the NAVs. After experience, FERC has concluded that the benefits of the NAV policy have not materialized and better tools can be used to provide transparency.
Judge denies motion for new trial for first trader convicted of spoofing. On May 15, 2019, Judge Harry D. Leinenweber of the U.S. District Court for the Northern District of Illinois issued an order denying Defendant Michael Coscia’s second motion for a new trial. In 2015, Coscia was the first person to be convicted for spoofing the commodities markets as a result of his trading scheme as the principal of a future trading firm. Coscia moved for a new trial based on newly discovered evidence, including that other traders employed more extreme strategies than he had, and that the prosecutors painted an incomplete and unfair picture of his trading activities. The court ruled that the evidence presented by Coscia would have not have made a difference in the ultimate outcome, and that evidence of other traders’ criminality does not constitute a defense.
CFTC charges former natural gas trader with fraudulently mismarking trades. On May 9, 2019, the CFTC filed a civil enforcement action in the U.S. District Court for the Southern District of New York against David Smothermon, charging him with defrauding the commodities-trading company where he was an executive by falsifying entries to the company’s accounting system to conceal over $100 million in losses. Smothermon already faces a criminal charge of wire fraud in a related case in the Southern District of New York. Specifically, the civil complaint alleges Smothermon entered misleading numbers into the company’s natural gas trading and traffic recordkeeping system, including mismarking the daily mark-to-market value of his NYMEX futures positions, and directed employees to change the values and terms of physical trades in the recordkeeping system. The CFTC is seeking to block Smothermon from commodities trading and to obtain monetary penalties, restitution, disgorgement and other relief. Previously, the U.S. Department of Justice had brought criminal charges against him (wire fraud, in connection with a scheme to hide from his employer trading losses). See our November 2018 update. Our colleague Michael Sackheim explained “This shows the CFTC is watching our energy markets closely, and reminds us all that when the DOJ or FERC move against you, the CFTC will be lurking around seeking its own pound of flesh.”
CFTC’s Division of Enforcement issues first Public Enforcement Manual. On May 8, 2019, the CFTC Division of Enforcement (“DOE”) published its first Enforcement Manual, providing an overview of the CFTC and the DOE and establishing policies and procedures that guide the DOE in detecting, investigating, and prosecuting violations of the Commodity Exchange Act (CEA) and the CFTC Regulations. The CFTC envisions that the manual will serve as a reference for DOE staff during investigations while also providing the public with transparency about how the CFTC and the DOE operate. The manual, which creates no private rights and is not enforceable in court, will be continuously updated going forward.
FERC approves settlement with Dominion Energy. On May 3, 2019, FERC approved a settlement between FERC’s Office of Enforcement and Virginia Electric and Power Company (doing business as Dominion Energy Virginia) (Dominion) to resolve allegations of market manipulation related to Dominion’s receipt of lost opportunity cost credits (“LOCs”) in the PJM market from April 2010 to March 2011. FERC’s investigation centered on Dominion structuring its offers to maximize the LOCs it would obtain by increasing the likelihood that its combustion turbine units would be committed in the day-ahead market while decreasing the chance they would be dispatched in the real-time market. Dominion agreed to pay a $7 million civil penalty, $7 million in disgorgement to PJM, and to be subject to compliance monitoring. Dominion neither admitted nor denied the alleged violations.
DOJ publishes new guidance on evaluating corporate compliance programs. On April 30, 2019, the DOJ’s Criminal Division released a new guidance document, “The Evaluation of Corporate Compliance Programs,” which updates guidance the DOJ first issued in February 2017. The new guidance provides additional detail on how the DOJ will assess a company’s compliance program when investigating and resolving an enforcement action. The guidance focuses on three fundamental areas: 1) whether the program is well designed to prevent and detect wrongdoing; 2) whether the program is effectively implemented; and 3) the program’s effectiveness at the time of the offense and at the time of resolution. This release emphasizes the importance for companies to implement and maintain a robust compliance program, and regularly evaluate and update it, to ensure it prevents or detects wrongdoing that may occur.
CFTC staff issues research report on impact of automated orders in futures markets. On March 27, 2019, the CFTC Market Intelligence Branch issued a report analyzing the entering of orders manually and automatically in the commodity futures trading market to determine how technological changes are affecting futures trading. The research determined that the percentage of automatically placed orders has increased in every commodity futures market, the automated orders are smaller in size and have a shorter resting time than manual orders, the automated orders are almost always limit orders, and historical volatility of end-of-day prices has not increased along with the increase in automation.
CFTC agrees to settlement in case against Kraft Heinz and Mondelez International. On March 25, 2019, Judge John Robert Blakey of the U.S. District Court for the Northern District of Illinois announced that the CFTC and Defendants Kraft Heinz and Mondelez International reached an agreement to settle their four-year-long dispute over alleged manipulation in the wheat market. The CFTC had charged the Defendants under its statutory authority that prohibits the use of a “deceptive or manipulative device” in trading. Judge Blakey directed the parties to submit a proposed consent order before a hearing on May 28.
Powhatan and FERC file appellate briefs on statute of limitations. On March 18, 2019, FERC filed its brief in the Fourth Circuit regarding the applicability of the five-year statute of limitations under 28 U.S.C. § 2462 to FERC’s claims against Powhatan and Chen. FERC argued that district court correctly concluded that the claim did not begin accruing until FERC issued an order assessing penalties because FERC did not have statutory authority to file the action until it satisfied the statutory prerequisites under the Federal Power Act. Alternatively, FERC argues that it satisfied the statute of limitations by initiating a statutorily-mandated administrative proceeding within five years of the alleged misconduct.
On April 17, 2019, Powhatan and Chen filed their reply brief in the Fourth Circuit. Appellants argued 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 eviscerate the statute of limitations and leave individuals and companies perpetually liable to civil forfeiture. Appellants also argued that FERC’s alternative argument, that the statute of limitations is satisfied by initiating a statutorily-mandated administrative proceeding within five years, contradicts the plain language in the statute of limitations provision.