For the past two years we have been tracking and reporting on an enforcement proceeding brought by the Federal Energy Regulatory Commission (“FERC”) against Barclays Bank PLC (“Barclays”), Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith (collectively, the “Traders” and together with Barclays, “Defendants”) for alleged manipulative trading in the western electricity markets from November 2006 to December 2008. Yesterday, the United States District Court for the Eastern District of California denied a motion by the Defendants to dismiss the manipulation action. Although the court’s order did not address the merits of the manipulation charge, the court’s order is significant because it is the first judicial ruling on the scope of FERC’s enforcement authority over the physical electricity markets and the court found that FERC can pursue civil penalty actions against individuals as well as companies. (more…)
WE KNOW ENERGY®
Federal District Court Denies Barclays Motion to Dismiss FERC Petition Which Alleges Manipulation and Assesses Significant PenaltiesThursday, May 21, 2015 2:02 pm by Jennifer Lias, Robert E. Pease, David Perlman and Michael Brooks
Robert E. Pease and Catherine McCarthy
The Federal Energy Regulatory Commission’s (FERC’s) Office of Enforcement (Enforcement) recently released its annual report on enforcement activities for 2014. As is typical, Enforcement identified its primary concerns as detecting and deterring fraud and manipulation in its markets and ensuring the safety and reliability of the grid. Enforcement also released statistics on its 2014 settlements ($25 million in civil penalties, $4 million in disgorgement) but those statistics concern cases that began years earlier and shed little light on what market participants should expect in 2015. In order to predict what we are likely to see in 2015, and the potential risks that companies may face from Enforcement actions, it is helpful to examine the currently pending cases and to understand the most recent internal changes within Enforcement. Also relevant to predicting what market participants can expect in 2015 are the following: the reach of FERC’s manipulation authority is being challenged in the courts, the Department of Energy’s Inspector General (IG) is examining FERC’s enforcement process and FERC will have a new Chairman and head of Enforcement in 2015. The current pending cases and these developments shed more light on what to expect in 2015 than the statistics FERC released concerning 2014.
In 2014, market participants, for the first time, showed a willingness to challenge Enforcement actions instead of settling. Five companies have refused to pay assessed civil penalties and settle thereby causing Enforcement to go to Federal court or to an administrative law judge to enforce the penalty and manipulation claims. These cases present the first court challenges to the reach of FERC’s anti-manipulation authority. We should expect more challenges in 2015 because another company has publicly vowed to challenge FERC should FERC proceed with a charge of manipulation. However, unless and until the courts narrow Enforcement’s reach, we should expect that Enforcement will continue to be aggressive in its prosecutions. (more…)
With most of its rules implementing the swap regulatory provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in place, the Commodity Futures Trading Commission (“CFTC”) is seeking new public input on several aspects of its Dodd-Frank rules that directly affect energy markets participants who use swaps to hedge risk or who transact physical agreements containing options that are subject to the swap regulations. Entities that utilize swaps and options in this manner, but are not otherwise required to register with the CFTC as “swap dealers” or other regulated entities, are referred to as “end-users.”
In the first such initiative, on April 3, 2014 the CFTC’s staff will host a public roundtable to discuss issues concerning end-users with respect to Dodd-Frank regulations that have raised questions and requests for clarification with the CFTC and its staff. In particular, this roundtable will cover the scope of the CFTC’s definition of the term “swap,” which was defined in a lengthy interpretation issued in August 2012. (more…)
David Perlman and Kaleb Lockwood
As the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight recently reminded market participants in a Staff Advisory, entities that meet the definition of a commodity trading advisor (“CTA”) are subject to various regulatory requirements and may be required to register as a CTA with the National Futures Association (“NFA”). The Staff Advisory is an indication that the CFTC is turning to compliance with its regulatory and registration requirements now that the rulemaking process of the Dodd-Frank Act is finishing. Given this transition, as well as the recently expanded scope of the CFTC’s regulatory oversight over CTAs and commodity pool operators (“CPOs”), entities that advise others or are pooled investment vehicles for futures, options, or swaps should consider whether they might be subject to the CFTC’s CTA and CPO regulatory requirements. (more…)
Robert E. Pease, David Perlman and Jennifer Lias
After an investigation of actions in the western electricity markets by Barclays Bank PLC (“Barclays”), Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith (collectively, the “Traders” and together with Barclays, “Defendants”), the Federal Energy Regulatory Commission (“FERC”) issued an order finding the Defendants in violation of FERC’s anti-manipulation regulations and assessing Barclays a $435 million civil penalty, assessing each Trader an individual civil penalty, and requiring disgorgement of $34.9 million plus interest in unjust profits.[i] In accordance with the Defendants’ election of a trial de novo in federal district court, on October 9, 2013 FERC filed a petition in the United States District Court for the Eastern District of California requesting an order affirming its assessment of penalties.
In response to FERC’s petition, on December 16, 2013, the Defendants filed a motion to dismiss the complaint.[ii] The Defendants moved to dismiss the complaint, as a matter of law, on the grounds that venue is not proper and that FERC has failed to state a claim upon which relief can be granted. (more…)
Robert E. Pease and David Perlman
By order dated July 22, 2013, the Commodity Futures Trading Commission (“CFTC” or “Commission”) settled charges against Panther Energy Trading LLC and its principal Michael Coscia for engaging in the disruptive trading practice known as “spoofing.” The CFTC charged that Panther and Coscia used a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts. The CFTC ordered Panther and Coscia to pay civil penalties of $1.4 million and to disgorge an additional $1.4 million in illegal profits. Coscia was also given a one year ban on trading in any CFTC regulated markets. This case is significant because it is the first action the CFTC has brought using its new Dodd-Frank disruptive trading authority.
Panther and Coscia used a computer algorithm that was designed to place a small order which was then followed with several large buy orders. The large orders were intended to give the market the impression that there was buy side pressure. The small order would then be executed at the manipulated price and Panther’s algorithm would then immediately cancel the large orders. These transactions occurred in milliseconds. Panther and Coscia profited on the executions of the small orders many times over the time period under review. The order stated that “although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be cancelled before these orders were actually executed.” (more…)