First published in Law360, New York (May 25, 2011)

President Obama recently directed U.S. Attorney General Eric Holder to investigate possible gasoline price-gouging and manipulation of oil futures markets. The probe was ordered as retail gas prices reached a national average of nearly four dollars per gallon and crude futures held above 100 dollars per barrel.

In light of the growing attention, companies that participate in these markets should be prepared for increased government scrutiny of their business practices. What’s more, companies face a heightened risk of private lawsuits alleging antitrust violations, which frequently follow government inquiries into energy industry prices and practices.

New Government Working Group

President Obama tasked Attorney General Holder to collaborate with relevant federal and state enforcement agencies, describing the group as “a team whose job it is to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators.”[1]

Holder echoed President Obama’s concerns, commenting that there are “disturbing”[2] aspects to oil and gasoline markets and assuring the government “will help protect American consumers from unnecessary pain at the pump due to illegal activity.”[3]

In late April, Holder announced the formation of the Oil and Gas Price Fraud Working Group, with representatives from the U.S. Department of Justice, the National Association of Attorneys General, the Commodity Futures Trading Commission, the Federal Trade Commission, the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission and the Departments of Agriculture and Energy.

The group will look for wrongdoing in retail and wholesale oil and gasoline markets, and in associated futures markets. At the retail and wholesale level, the group will look for “any evidence of manipulation of oil and gas prices, collusion, fraud, or misrepresentations” that violate state or federal laws, while at the futures level, the group will “evaluate developments in commodities markets and examine investor practices, supply and demand factors and the role of speculators and index traders.”[4]

Increased Cooperation between FTC and CFTC Also Means Increased Risk

Also in April, the Federal Trade Commission and the Commodity Futures Trading Commission signed a Memorandum of Understanding (“MOU”) to facilitate the sharing of nonpublic information on investigations being conducted by the agencies.

The FTC’s press release announcing the MOU specifically cited enforcement in the energy industry as one of the driving forces behind the arrangement. FTC Chairman Jon Leibowitz noted, “With gasoline prices on the rise, we are committed to doing all we can to ensure that petroleum markets are competitive. ... Competition works to keep prices lower, and this MOU improves the ability of the FTC and CFTC to take action if and when we find market manipulation.”[5]

The FTC and the CFTC have independent and somewhat overlapping authority to prosecute alleged fraudulent and manipulative conduct in the petroleum industry. The FTC’s Petroleum Market Manipulation Rule (16 C.F.R. § 317) prohibits fraud or deceit in the wholesale markets for crude oil, gasoline and petroleum distillates, including omissions of material information likely to distort those markets. The precise reach of this rule has yet to be tested.

Similarly, while the Commodity Exchange Act (“CEA”) has long prohibited price manipulation in physical and futures markets (as well as the false reporting of information tending to affect the price of commodities in interstate commerce), the Dodd-Frank legislation adds to the CEA a new prohibition against using or employing “any manipulative or deceptive device or contrivance” in physical, futures or swaps transactions.

The information sharing between the two agencies could thus result in matters before the FTC triggering separate review by the CFTC, and vice versa.[6] For instance, a party that submits documents to the FTC pursuant to an investigation into possible manipulation of petroleum prices — or even pursuant to an antitrust inquiry — may find the documents also raise questions as to possible violations of the CEA, which the FTC may bring to the attention of the CFTC.

The converse is also true. Companies appearing before either agency, therefore, should take into account the possibility that information produced may be reviewed and analyzed by both agencies for various purposes.[7]

The Increased Risk Of Private Lawsuits

Energy companies also should be prepared for increased private antitrust litigation. Class actions are regularly filed in the wake of government review of energy industry prices and practices. Indeed, from In re Petroleum Products Antitrust Litigation in the 1970s through In re Natural Gas Antitrust Litigation in the 2000s, they appear to be filed as a matter of course every decade or so following cyclical upswings.

Conclusions

Increased government scrutiny and public backlash against the upswing in cyclical oil and gas prices are likely to raise the risk for oil and gas companies in the near term. We strongly recommend that companies across these sectors gird themselves for this increased risk and make sure their compliance programs with respect to the trading of oil, natural gas and refined products physicals and futures — as well as their antitrust compliance programs — are robust and effective.