In this enforcement update, we cover:
- CFTC’s enforcement division issues new advisories on cooperation;
- FERC and ETRACOM file briefs regarding scope of review in district court;
- FERC revises PJM FTR forfeiture rule and discusses cross-product manipulation;
- Citigroup Global Markets Inc. settles spoofing charges with the CFTC;
- DOJ settles with Duke Energy for violating premerger notification and waiting period requirements; and
- TOTAL files motion for leave to respond and response in FERC proceeding.
CFTC’s Division of Enforcement issues cooperation advisories. On January 19, the CFTC issued two new Enforcement Advisories outlining the factors that the Enforcement Division will consider in evaluating cooperation by individuals and companies in the agency’s investigations and enforcement actions. As set forth in the advisories, the Enforcement Division consider several factors in assessing whether a company’s or individual’s cooperation warrants credit, including: (a) the value of the cooperation to Enforcement’s investigation(s) and enforcement action(s); (b) the value of the cooperation to the CFTC’s broader law enforcement interests; (c) the culpability of the company or individual and other relevant factors; and (d) uncooperative conduct that offsets or limits credit that the company or individual would otherwise receive. The potential rewards for cooperation can range from Enforcement recommending no enforcement action to reduced charges or sanctions in connection with enforcement actions.
Our colleague Geoffrey Aronow, a Sidley partner and former Director of the CFTC’s Division of Enforcement, commented: “It is helpful for the Division to spell out in detail the factors that go into assessing cooperation, although I do not think anyone will find the factors surprising. It is noteworthy that the advisory relating to companies concludes with an explicit recognition of the importance and value of the attorney-client privilege and the work-product doctrine and asserting that, ‘These rights are not intended to be eroded or heightened by this advisory.’ The issue with how the CFTC or any agency rewards cooperation has always been not in the rhetoric, but in the application – how clear are the actual rewards reaped by being cooperative?”
FERC and ETRACOM file briefs regarding scope of review in district court. As ordered at a scheduling conference in December, FERC and ETRACOM filed initial briefs regarding the scope of review in the U.S. District Court for the Eastern District of California on January 23. Effectively, the parties just rehearse the same arguments already before the other district courts hosting FERC FPA manipulation cases.
As it has argued in order proceedings, FERC argues that the district court should conduct its review through a motion to affirm the FERC’s civil penalty based on the administrative record before the agency. According to FERC, the language of the Federal Power Act (FPA), its context, and relevant case law make clear that the district court can perform its “review de novo” through a non-deferential review of the record before FERC.
On the other hand, ETRACOM argues that the Federal Rules of Civil Procedure, including its discovery provisions, apply to the court’s de novo review of an enforcement action brought by FERC in district court under the FPA. ETRACOM cites to the two district courts to have resolved this issue—in FERC’s proceedings against Maxim Power and City Power—which held that the Federal Rules of Civil Procedure apply to FPA enforcement actions. In addition, ETRACOM cites to relevant legislative history and principles of due process to support its argument.
Responsive briefs are due by February 3.
FERC orders revisions to PJM FTR forfeiture rule and comments on cross-market manipulation. On January 19, FERC issued an order addressing its investigation into PJM’s Financial Transmission Rights (FTR) forfeiture rule, which is designed prevent market participants from using virtual transactions to create congestion that benefits their related FTR positions. FERC found that PJM’s current application of the FTR forfeiture rule on an individual basis to virtual transactions is no longer just and reasonable. Instead, FERC found that a portfolio approach, which evaluates the net effect of a market participant’s entire virtual portfolio, accurately represents the effect of a market participant’s virtual transactions on a constraint related to a FTR position.
In the order, FERC notes that the use of virtual transactions with the intent to benefit FTR positions constitutes cross-product manipulation. According to FERC, PJM’s FTR forfeiture rule is designed to deter such manipulation. Notably, FERC states that “leverage may play a part in a cross-product manipulation but it is not a necessary condition.” In addition, FERC declared that the FTR forfeiture rule does not preclude any enforcement actions involving virtual transactions and FTR positions.
CFTC orders Citigroup Global Markets Inc. to pay $25 million for spoofing and related supervision failures. On January 19, the CFTC issued an order filing and settling charges against Citigroup Global Markets Inc. (Citigroup) for spoofing—bidding or offering with the intent to cancel the bid or offer before execution—in U.S. Treasury futures markets and for failing to diligently supervise the activities of its employees and agents in conjunction with the spoofing orders between July 16, 2011 and December 31, 2012. The order requires Citigroup to pay a $25 million civil monetary penalty.
The CFTC’s order finds that Citigroup, by and through five of its traders (who worked on either its U.S. Treasury or U.S. Swaps desks), engaged in spoofing more than 2,500 times in various Chicago Mercantile Exchange (CME) U.S. Treasury futures products during the relevant period. According to the order, the traders’ spoofing strategy involved placing bids or offers of 1,000 lots or more with the intent to cancel those orders before execution. The spoofing orders were placed in the U.S. Treasury futures markets after another smaller bid or offer was placed on the opposite side of the same or a correlated futures or cash market. The traders placed their spoofing orders to create or exacerbate an imbalance in the order book and cancelled their spoofing orders after either the smaller resting orders had been filled or the traders believed that the spoofing orders were at too great a risk of being executed.
In addition, the CFTC’s order finds that Citigroup provided insufficient training about spoofing to traders on its U.S. Treasury and U.S. Swaps desk, as the only communication most of the relevant traders received about spoofing before or during the relevant period consisted of a single compliance alert containing the Commodity Exchange Act’s anti-spoofing language. The CFTC’s order finds that Citigroup did not have adequate systems and controls in place to detect spoofing by traders on its U.S. Treasury and U.S. Swaps desks. Finally, according to the order, even when alerted to a spoofing incident involving one of its traders, a supervisor and other members on the U.S. Treasury desk failed to comply with Citigroup’s then-existing policies regarding reporting violations.
DOJ settles with Duke Energy Corporation for violating premerger notification and waiting period requirements. On January 18, the Department of Justice announced a settlement with Duke Energy Corporation (Duke) for violating the reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The settlement requires Duke to pay $600,000 in civil penalties to resolve the DOJ’s charges that, after agreeing to purchase the Osprey Energy Center (Osprey) from Calpine Corporation, Duke took control of Osprey’s business before filing required HSR Act notifications and waiting for the expiration of the mandatory waiting period for antitrust review.
The complaint alleges that at the same time that Duke agreed to purchase Osprey, Duke entered into a tolling agreement that immediately gave Duke control over Osprey’s output and gave Duke the right to receive the day-to-day profits and losses from Osprey’s business. As a result, from the moment the tolling agreement went into effect, Osprey ceased to be an independent competitor. These actions occurred before Duke made its required HSR Act notifications and before it had observed the required waiting period. According to the complaint, the tolling agreement reflected an effort to obtain expedited FERC approval for the purchase of Osprey. After entering into the tolling agreement, the parties stated in their application for FERC approval that the acquisition of Osprey posed no competitive threat and did not increase concentration because Duke “already controls [Osprey] pursuant to the Tolling Agreement.”
TOTAL files motion for leave to respond and response in FERC proceeding. On January 17, TOTAL filed a motion for leave to respond and response to FERC Enforcement Staff’s reply in the FERC proceeding in Docket No. IN12-17. According to TOTAL, Enforcement Staff asks the Commission to make “findings” on disputed facts and issues without an evidentiary hearing. TOTAL argues that Enforcement Staff relies heavily on two witnesses with strong biases against the respondents who have significant personal motivations to falsify their testimony. Therefore, TOTAL objects to Enforcement Staff’s attempt to assess fines exceeding $200 million without requiring Enforcement Staff to prove its case before any tribunal, without allowing the respondents to take any discovery, and without subjecting any witness to cross-examination.
Moreover, TOTAL asks FERC to dismiss Enforcement Staff’s claims with respect to the 33 out of 38 point-months in the Staff Report for which it failed to even attempt to allege a “scheme” or scienter by the respondents. If FERC determines to move forward on the remaining five allegation point-months, TOTAL asks FERC to bring an action in federal district court.