Or so says one dissenting FERC Commissioner in the recent Maxim Power enforcement proceeding.1 On May 1, 2015, FERC issued an order assessing civil penalties (the “Order”) of $5 million against Maxim Power Corporation and its named subsidiaries (“Maxim”),2 as well as $50,000 against Maxim Energy Marketing Analyst, Kyle Mitton (together, the “Respondents”), for violating the Commission’s Anti-Manipulation and Market Behavior rules. The Commission did not order disgorgement of profits because the overpayments at issue in the matter were returned through ISO-NE tariff processes. Nor did the Commission impose compliance obligations or other penalties.
The Commission’s Order largely followed the facts and reasoning articulated by FERC Enforcement Staff (“Staff”) in its Order to Show Cause and reply to Respondents’ answer, which we have described in recent Clients and Friends Memos.3 The Commission found,4 with the exception of dissenting Commissioner Clark, that Respondents engaged in a fraudulent “offer oil, burn gas” scheme that involved misleading the ISO-NE independent market monitor (“IMM”). Primarily through senior analyst Mr. Mitton, the Commission asserted that Maxim engaged in a series of transactions with ISO-NE to obtain payments for “reliability dispatches based on the price of expensive fuel oil when Maxim[’s Pittsfield plant] in fact burned much less costly natural gas.”5 The Commission further found that in executing the scheme, Respondents omitted material information from communications with the ISO-NE IMM in order to retain inflated reliability payments, thereby violating the Commission’s Market Behavior and Anti-Manipulation rules.6
As we discuss further below, the Commission’s penalty assessment against Maxim Power is significant because it injects uncertainty regarding what information market participants must volunteer when they communicate with the Commission, RTOs/ISOs, and market monitors. The result of the Maxim proceeding appears to indicate that at least in some circumstances responding in a technically accurate manner to a poorly phrased question posed by a market monitor is insufficient to protect oneself from liability under the Anti-Manipulation Rule. Furthermore, Commissioner Clark’s dissent reveals a significant rift among the Commissioners with respect to what facts sufficiently evidence market manipulation to merit a multi-million dollar civil penalty assessment.
Does Maxim Create a Duty of Disclosure?
The majority of FERC Commissioners found that Maxim executed its scheme to retain inflated make-whole payments through the use of material omissions and misleading statements in its communications with the ISO-NE IMM. Commissioner Clark, however, pointed out in his dissent a few “undisputed facts” that call into question the Commission’s conclusions. Principally, Clark points out that the IMM asked a question that Maxim answered in what “could have easily been interpreted by the [IMM] as a truthful response.” In short, Maxim was typically burning gas but offering in on oil as a way to “play it safe” given pipeline restrictions. As Clark observed, “[t]his is not, on its face, an implausible business reason for structuring a supply offer in such a way.” He faults the IMM for its failure to ask “the next logical question,” which was “what fuel are you burning in real time?” Instead, the IMM appeared satisfied by Maxim’s response and only one month later asked about the real time fuel burn. When asked, Maxim answered truthfully and the IMM mitigated Maxim prior to settlement, which is why there was no disgorgement ordered. Ultimately, Commissioner Clark is uncomfortable with the precedent Maxim may have set where market participants must disclose information not asked by the IMM by anticipating “what information the [IMM] [is] really seeking.”7
Sufficient Intent to Show Anti-Manipulation Rule Violation?
The Commission’s assessment against Maxim for an Anti-Manipulation Rule violation indicates that the bar for showing the deception necessary to establish a violation is lower than many had perhaps assumed. By way of reminder, the Anti-Manipulation Rule’s prohibitions include the making of “any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading” when “in connection with the purchase or sale of electric energy.”8 As discussed by Commissioner Clark in his dissent, to meet its burden in an Anti-Manipulation Rule case, Enforcement staff must develop a record showing “clear intent and actions” that demonstrate by a preponderance of the evidence that the respondent intended to engage in deceptive conduct in connection with the purchase or sale of energy.9 To meet that burden, the Commission pointed to what it called, without facts supporting its characterization, Maxim’s “careful omission” of the fact that Maxim had already contracted for natural gas, which intentionally conveyed the “false impression” that Maxim needed to submit oil-based offers.10 In other words, the Commission found that a truthful and responsive communication, supported by a plausible business rationale, was sufficient to demonstrate such clear intent to engage in deceptive conduct. By relying upon “conveyed impressions” (Staff and the Commission’s phrase) and subjective inferences to show manipulative intent, the Commission muddied the waters regarding the type of evidentiary record that Staff must develop in order to show clear intent under the Anti-Manipulation rule.
If subjective impressions, even when accompanied by a plausible business rationale, constitute sufficient evidence of intent under the Anti-Manipulation Rule, then where is the line drawn between market manipulation and ordinary business conduct? Furthermore, the Commission’s findings in Maxim suggest caution for market participants that routinely communicate with the Commission, RTOs/ISOs and market monitors. Although every interaction must be evaluated on its own facts, disclaimers and waivers about the scope of the representations being made in such communications may also be warranted.