On October 25, 2007, BP Products North America, Inc. (“BP”) agreed to pay record fines totaling more than $350 million for violations of federal energy, environmental, and securities law. The criminal and civil fines stem from three separate events: an alleged commodities price-fixing scheme occurring in New York, Ohio, Pennsylvania, and Texas; a fatal explosion at a BP refinery in Texas; and an oil spill on the Alaskan tundra. The U.S. Department of Justice along with several other federal agencies tied these settlements together in a single news briefing. The single announcement of these record-breaking fines is not accidental. This multidiscipline approach sends a message to corporate America that U.S. agencies are working together, that these types of violations will be investigated criminally, and that monitors will be installed where appropriate.
The $303 Million Commodities Trading Enforcement Settlement
BP agreed to pay a record $303 million as part of a deferred prosecution agreement to settle claims that BP conspired to violate the Commodity Exchange Act and to commit mail and wire fraud in connection with an alleged energy trading scheme in 2004. The charges allege that certain of BP’s Houston-based traders attempted to fix prices of propane fuel that flowed through a pipeline running from Texas to markets in Ohio, Pennsylvania, and New York. The Corporate Fraud Task Force Acting Chairman commented that “[t]his case demonstrates that the Commodity Futures Trading Commission (CFTC) will aggressively combat manipulation in the nation’s energy markets.” The BP fine doubles the previous record set in 1988 for illegal copper trading. The fine will be divided amongst the CFTC ($125M), the Justice Department ($100M), a restitution fund to reimburse victims ($53M), and the U.S. Postal Service consumer fraud education fund ($25M).
The Justice Department will dismiss charges against BP after three years if BP complies with all terms of the deferred prosecution agreement. The agreement requires oversight of BP’s trading operations by a court-appointed monitor with authority to investigate ongoing trading activities. In addition, several former employees of a BP subsidiary have been indicted by a federal grand jury in Illinois for wire fraud and conspiracy to manipulate the propane market.
$50 Million Clean Air Act Criminal Fine
Following a fatal explosion at a Texas refinery in 2005, a $50 million fine was levied as part of the EPA’s first-time prosecution of Clean Air Act requirements aimed at preventing accidental releases that may cause death or injury. Granta Nakayama, assistant administrator for the EPA’s Office of Enforcement and Compliance Assurance, stated that “today’s agreement sends a message that these types of crimes will be prosecuted.” Government investigators learned that facility operators regularly failed to follow written standard operating procedures for ensuring the mechanical integrity of safety equipment and that alarms failed to function or were ignored. BP America’s Chairman and President commented that “if our approach to safety and risk management had been more disciplined and comprehensive, this tragedy could have been prevented.”
The $50 million fine is the largest criminal fine ever assessed against a corporation for Clean Air Act violations. This is the first time that the EPA has prosecuted violations of the federal Risk Management Plan (“RMP”) regulations promulgated under the Clean Air Act. In addition to the $50 million penalty, the company will serve three years of probation. As a condition of the probation, BP agreed to cooperate with the ongoing federal investigation of possible criminal violations related to the explosion. BP is also required to complete a facility-wide study at an estimated cost of $265 million.
$12 Million Clean Water Act Criminal Fine
Also on October 25, 2007, BP pled guilty to Clean Water Act violations stemming from the largest oil spill on the Alaskan North Slope. BP agreed to pay a $12 million fine for spilling 200,000 gallons of crude oil onto the Alaskan tundra in 2006. Investigators determined the leak was caused by a sediment buildup in the pipeline. Further, investigators found that BP failed to properly inspect or clean the pipeline and had been aware of increased corrosion in the pipeline since 2004. BP will serve three years probation and is required to replace 16 miles of pipeline at an estimated cost of $150 million.
Implications for the Energy Sector
The BP fines are significant because of their record-breaking amounts and the agencies’ aggressive and multimedia enforcement efforts. This multifront initiative against BP follows recent actions by the CFTC, the Federal Energy Regulatory Commission (FERC) and the EPA against other companies in the energy sector. On July 25 and 26, 2007, the CFTC and the FERC filed separate charges against Amaranth Advisors LLC (Amaranth) and Energy Transfer Partners, LP (ETP) alleging, among other things, attempts to manipulate the price of natural gas. In the announcement of the charges, the CFTC expressed gratitude to the FERC for its assistance in the investigation which led to the CFTC’s complaint. Interestingly, about one month later in its Memorandum of Law in opposition to Amaranth’s motion seeking a stay of the FERC’s administrative proceeding, the CFTC suggested that the FERC lacked authority to bring the case. In the ETP actions, the CFTC filed a civil complaint in a Texas federal district court and the FERC issued a “show cause” order to ETP. The FERC is reportedly proposing fines of up to $167 million for alleged violation of market rules. As evidenced by these recent FERC filings, the FERC is robustly exercising its enhanced ability to impose civil penalties as authorized by the Energy Policy Act of 2005. In addition to these aggressive, overlapping filings by the CFTC and the FERC, the EPA has recently stepped up its enforcement efforts in the energy sector. On September 5, 2007, Mid-America Pipeline Company pled guilty and agreed to pay a $1 million criminal penalty for violation of the Clean Water Act relating to an ammonia release.
These recent enforcement actions serve to reinforce the importance of preventative measures, including a robust environmental management system to measure compliance and internal protocols to identify and address issues in a timely fashion. They are a clear warning signal that energy companies should take immediate steps to best position themselves in the event of a similar government investigation and/or enforcement action, including implementing information/record-keeping protocols and employee education programs.