Our latest enforcement update covers:
- FERC releases 2017 Report on Enforcement showing continued focus on fraud and market manipulation;
- CFTC settles with Statoil ASA for attempted manipulation of Argus Far East Index propane benchmark – “damning” messages again cause trouble;
- Judge issues case management order and sets trial date in CFTC case against Kraft;
- FERC approves settlement in Barclays case;
- CFTC orders Cargill, Inc. to pay a $10 million civil penalty for providing inaccurate mid-market marks on swaps;
- Senate confirms McIntyre and Glick to FERC, but still not sworn in at FERC; and
- CFTC orders Morgan Stanley and Co. Incorporated to pay $350,000 penalty for Part 17 Large Trader reporting violations.
FERC releases 2017 Report on Enforcement showing continued focus on fraud and market manipulation. On November 17, FERC’s Office of Enforcement released its 2017 Report on Enforcement and related Staff presentation during FERC’s open meeting. The Report shows FERC Enforcement’s continued focus on fraud and market manipulation, serious violations of mandatory Reliability Standards, anticompetitive conduct and conduct that threatens the transparency of regulated markets. As in previous years, the Report highlights FERC Enforcement staff’s work performing surveillance and analysis of conduct in the wholesale natural gas and electric markets, monitoring market trends and market competitiveness, and auditing companies. It also provides the public with information regarding the nature of non-public enforcement activities, such as self-reported violations, surveillance inquiries and investigations that were closed without public enforcement action.
The Report notes that Enforcement will pursue the same priorities in FY2018, as FERC plans to continue to investigate conduct involving fraud and market manipulation. According to FERC, this conduct poses a significant threat to the wholesale energy markets because it undermines FERC’s goal of ensuring efficient energy services at reasonable cost and erodes confidence in those markets to the detriment of consumers and competitors.
Some highlights of the 2017 Report on Enforcement include:
- Division of Investigations: During FY2017, DOI staff opened 27 investigations, as compared to 17 investigations opened in FY2016. Of the 27 investigations staff opened this fiscal year (some of which involve more than one type of potential violation or multiple subjects), 15 involve potential market manipulation, 16 involve potential tariff violations, 4 involve potential violations of a FERC order, and 2 involve potential violations of a FERC filing requirement. The vast majority of these new investigations arose from referrals by DAS and/or RTO/ISO market monitors, with several others coming from FERC or other program offices. Staff closed 16 investigations in FY2017 through a settlement or closure without further action, as compared to 11 investigations closed in FY2016. Staff negotiated five settlements that resulted in more than $51 million in civil penalties and disgorgement of more than $42 million in unjust profits. The Report also discusses a number of illustrative investigations and self-reports closed with no action, which are intended to provide guidance to the public while preserving the non-public nature of the investigations.
- Division of Analytics and Surveillance (DAS): DAS staff provided analytical expertise on approximately 50 investigations and, through its surveillance activities, identified anomalies and potential misconduct that prompted 48 inquiries, some of which resulted in referral to Investigations staff. For the first time, the 2017 Report on Enforcement includes examples of non-public inquiries that were closed without a referral to Investigations.
- Division of Audits and Accounting: During FY2017 Audits and Accounting staff conducted 11 audits of oil pipelines, electric utilities and natural gas companies, resulting in 301 recommendations for corrective action and directing refunds and recoveries totaling more than $13.3 million.
- Division of Market Oversight: Staff continued to analyze market fundamentals, including significant trends and developments, market structure and operations to identify market anomalies, and flawed market rules. As in prior years, staff presented its annual State of the Markets report and continued ensuring compliance with various FERC forms and reports, including filing requirements for Electric Quarterly Reports. Staff also led a technical conference to discuss trends, concerns and potential solutions relating to declining levels of natural gas index liquidity.
CFTC settles with Statoil ASA for attempted manipulation of Argus Far East Index propane benchmark. On November 14, the CFTC issued an order filing and settling charges against Statoil ASA (Statoil) for attempted manipulation, which requires Statoil to pay a $4 million civil penalty. The CFTC’s order finds that from October 2011 through November 2011, Statoil attempted to manipulate the Argus Far East Index (FEI) in order to benefit Statoil’s physical and financial positions, including Statoil’s NYMEX-cleared over-the-counter swaps that settled to the Argus FEI. According to the CFTC, Statoil executed physical propane purchases in the Far East market during the November Argus window in order to place upwards pressure on the November Argus FEI and, consequently, the value of its NYMEX-cleared swaps. The CFTC’s order cites to communications demonstrating Statoil’s intent to manipulate the Argus FEI, including a communication in which a Statoil trader wrote: “If we are buying 17 cargoes there are only a few days when we will not be able to have a good impact on the Argus quote. . . . We are actually likely to move it quite a bit up as we keep buying.”
Geoffrey Aronow, Sidley partner and former Director of the CFTC’s Enforcement Division, commented, “The press release and CFTC order both note that the trading done was not just to attempt to manipulate the market, but was also done to ‘meet customer obligations.’ Even so, the CFTC is apparently willing to say trading can be manipulative even if when intended to meet customer obligations – if the CFTC believes the manner of meeting that obligation was done with manipulative intent. In this case, the CFTC believed Statoil had that manipulative intent, which was evident in concentrating the trading during the index’s pricing window. The CFTC here, as in most cases, relies heavily on internal communications, which the agency characterizes as expressly reflecting the intent to move the price, in this case, the index price. Thus, the CFTC continues to act on the belief that those types of trader comments provide sufficient basis on which to lay a charge of attempted manipulation.” Thanks Geoff – that approach by the CFTC sounds eerily like FERC’s notice that “illicit purpose” is tantamount to manipulation under the FPA and NGA.
Judge issues case management order and sets trial date in CFTC case against Kraft. On November 15, Judge John Robert Blakey held a case management conference and issued a case management order regarding the CFTC’s ongoing case against Kraft Food Group Inc., et al. for alleged manipulation of the cash wheat and wheat futures markets in the U.S. District Court for the Northern District of Illinois. Under the case management order, the jury trial is set for March 4, 2019. The case management order also includes dates and deadlines related to discovery and pretrial issues.
FERC approves settlement in Barclays case. On November 7, FERC issued an order approving the settlement between FERC’s Office of Enforcement and Barclays Bank PLC (Barclays), Daniel Brin, Scott Connelly, and Karen Levine for alleged manipulation of the power markets in the Western U.S. from 2006 to 2008. Under the terms of the settlement, Barclays and the traders neither admit nor denied the alleged violations. Barclays agreed to make payments totaling $105 million, including a $70 million civil penalty to the U.S. Treasury and $35 million in disgorgement. For the disgorgement payment, Barclays agreed to pay $15 million that FERC directed be paid to the Low Income Home Energy Assistance Program of certain states in the Western U.S., with the remaining $20 million as reserved remediation for persons or entities claimed to have been harmed as a result of the alleged conduct.
CFTC orders Cargill, Inc. to pay a $10 million civil penalty for providing inaccurate mid-market marks on swaps. On November 6, the CFTC announced the filing and simultaneous settlement of charges against Cargill, Inc. (Cargill) for providing mid-market marks that concealed from counterparties and its swap data repository (SDR) its full mark-up on certain swaps, in violation of the Commodity Exchange Act (CEA) and the CFTC’s regulations. In particular, the CFTC’s order finds that Cargill provided counterparties and the SDR inaccurate marks, which concealed up to 90% of Cargill’s mark-up. Cargill also failed to diligently supervise its employees in connection with these inaccurate marks and with inaccurate statements made to swap counterparties. According to the CFTC’s order, Cargill provided marks that concealed its full mark-up because of a concern that providing accurate marks would reduce Cargill’s revenue. The CFTC’s order requires Cargill to pay a $10 million civil penalty.
Senate confirms McIntyre and Glick to FERC. On November 2, the U.S. Senate confirmed the nominations of Kevin McIntyre and Richard Glick to join FERC. McIntyre will serve as Chairman. McIntyre will serve out the remainder of a term that ends June 2018 and a full term that ends June 2023, and Glick will serve out the remainder of a term that ends in June 2022. FERC Chairman Neil Chatterjee congratulated McIntyre and Glick on their confirmation: “I am very pleased to welcome Kevin and Rich to the Commission, and I look forward to working with them on behalf of the American people. I’ve enjoyed getting to know Kevin through the confirmation process and am eager to start working with him, and it will be great to reunite with Rich Glick, my former Senate colleague. Both Kevin and Rich bring years of experience and knowledge to the significant issues before the Commission and, importantly, their arrival restores the Commission to full strength.”
CFTC orders Morgan Stanley and Co. Incorporated to pay $350,000 penalty for Part 17 Large Trader reporting violations. On November 2, the CFTC issued an order filing and simultaneously settling charges against Morgan Stanley and Co. Incorporated (Morgan Stanley), a registered Futures Commission Merchant, for non-compliance with applicable rules governing Part 17 Large Trader reports to the CFTC spanning a ten-year period and affecting thousands of line items of information. The CFTC’s order finds that from 2007 through 2017, Morgan Stanley omitted mandatory futures and options data from its Part 17 Large Trader reports to the CFTC, which omissions were the result of four distinct problems with Morgan Stanley’s proprietary reporting software. The CFTC’s order requires Morgan Stanley to pay a $350,000 civil monetary penalty. In the order, the CFTC’s recognizes that Morgan Stanley provided substantial cooperation throughout the Division of Enforcement’s investigation. Morgan Stanley proactively provided substantial and detailed information regarding the scope and duration of the deficiencies, and also self-reported a deficiency to the CFTC. According to the CFTC, the civil monetary penalty imposed has been significantly reduced due to this cooperation.