The Federal Trade Commission (FTC) voted 3-1 on August 6, 2009 to approve a rule prohibiting manipulation in wholesale petroleum markets. The rule applies to crude oil, gasoline, and petroleum distillates, including jet fuel, diesel, and fuel oils.

The FTC’s new rule prohibits any person from (1) engaging, directly or indirectly, in “fraudulent or deceptive conduct” that could harm wholesale petroleum markets or (2) making intentional omissions of material facts that are likely to distort petroleum markets. Such “fraudulent or deceptive conduct” could include entering into wash sales or matched orders (buy-sell transactions), or publishing misleading or false data or information about crude oil stockpiles and prices or crude and fuel output. The FTC has authority to assess violators civil penalties of up to $1 million per violation per day. Enacted pursuant to the Energy Independence and Security Act of 2007 (EISA), the rule will go into effect November 4, 2009. Specifically, the FTC’s rule prohibits any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline or petroleum distillates at wholesale, from:

  • (a) knowingly engaging in any act, practice, or course of business - including making any untrue statement of material fact - that operates or would operate as a fraud or deceit upon any person; or
  • (b) intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.

The FTC defined “knowingly” in this context to mean “that the person knew or must have known that his or her conduct was fraudulent or deceptive.” A showings of “extreme recklessness” could satisfy this intent requirement. “Extreme recklessness” requires a showing that “an actor knew or must have known that his conduct created a danger of misleading buyers or sellers.”

In issuing its rule, the FTC cited Securities and Exchange Commission (SEC) Rule 10b-5, which is based upon similar statutory language as is included in the EISA. The FTC’s rule also mirrors the anti-manipulation rule adopted by the Federal Energy Regulatory Commission (FERC) in 2006. Like the FTC, FERC may find even reckless behavior to be culpable (although FERC’s standard appears somewhat looser than the FTC’s, as FERC did not specifically adopt the “extreme recklessness” standard that the FTC embraced).

FTC Chairman Jon Lebowitz stated that the new rule “will allow us to crack down on fraud and manipulation that can drive up prices at the pump.” He vowed that the FTC will use its authority under the rule to “police the oil markets,” and if it finds companies manipulating those markets, it “will go after them.” The lone vote against the rule came from FTC Commissioner William Kovacic, who indicated his belief that the rule may cause unnecessary disruptions in energy transactions that ultimately benefit consumers.