Initial Decision Overview
On May 15, 2014, FERC set a hearing to address whether BP violated FERC’s anti-manipulation rules and Section 4A of the NGA and to make certain factual findings regarding the application of the FERC’s Penalties Guidelines. After hearing (and nearly seven years since the alleged violations), and consistent with the OE’s allegations, on Aug. 13, 2015, Presiding Administrative Law Judge (ALJ) Carmen Cintron issued an Initial Decision in BP America, Inc., et al, 152 FERC ¶ 63,016 (2015), concluding that BP America Inc., BP Corporation North America Inc., BP America Production Company, and BP Energy Company (collectively, BP) violated Section 1c.1 of the Commission’s anti-manipulation regulations 18 C.F.R. § 1c.1 (2014), and section 4A of the NGA with respect to its trading of next-day, fixed-price natural gas at Houston Ship Channel (HSC) from Sept. 18, 2008, through Nov. 30, 2008 (Investigative Period).
Alleged Violations: Changing Trading Patterns
Despite BP’s arguments to the contrary, the Presiding ALJ found that OE Staff had met its burden of proof and concluded that “BP, through the Texas team, manipulated the market by selling next-day, fixed, price natural gas at HSC during the Investigative Period, in such a way that they managed to suppress the Gas Dailyindex and benefit their financial positions.” Judge Cintron noted, “[t]heir financial positions benefited from the Gas Daily index for HSC being lower than the index at Henry Hub.” In concluding that BP engaged in market manipulation, the Presiding ALJ stated “[t]his is a classic case of physical for financial benefits.” She agreed with FERC Enforcement Staff’s assertion that BP’s Texas team of traders “directly used a scheme to defraud, engaging in uneconomic trading in the physical markets at the HSC” during the two and a half month Investigative Period in 2008.
The Presiding ALJ concluded that during the Investigative Period, “BP intentionally sold large volumes of next-day physical gas at HSC in a way designed to benefit their corresponding short financial positions.” She concluded that beginning “on September 18, 2008 through the end of that month, BP’s primary Texas team physical trader began to manipulate the HSC Gas Daily index to slow the shrinkage of a valuable spread position in the Texas team’s book related to the occurrence of Hurricane Ike and short-term supply and demand disruptions.” Judge Cintron then concluded that “[a]fter a successful September the Texas team extended the manipulation through October and November 2008.” Judge Cintron found it determinative that the “Texas team trading during the Investigative Period was markedly different than their trading before the Investigative Period.” Specifically, the ALJ found “[c]confirmation of the manipulation is found in the recorded November 5, 2008 phone call.” Moreover, Judge Cintron concluded, “[t]here [wa]s no economic or other justification for their changed and unprofitable trading patterns.”
The Presiding ALJ found BP’s manipulative scheme after Hurricane Ike involved “suppressing the HSC Gas Daily index through a series of coordinated affirmative acts.” The affirmative acts were: (1) the shift to almost exclusively net selling at HSC (this led them to become the sellers with the largest market share in the next-day, fixed-price market at HSC during the Investigative Period); (2) increasing the percentage and volume of their fixed-price sales at HSC (The Texas team also transported substantially more gas to HSC from Katy using BP’s HPL transport); (3) selling heavier volumes early in the trading day, they became the largest seller in the first five minutes of the HSC trading session; and (4) making more offer-initiated sales at HSC when they had a contemporaneous opportunity to sell more economically at Katy. In addition, according to the ALJ’s findings, there was a shift to posting aggressively lower offers compared to other sellers at HSC and there was an increase in the frequency of sales made by hitting bids. Furthermore, the ALJ found that “the Texas team’s early selling also indirectly impaired the functioning of the next day fixed-price market at HSC by “marking” or “framing” the open” thereby injecting false information into the marketplace.
The shift to net selling in the Investigative Period, according to the ALJ, and other changes in the trading patterns facilitated the manipulative scheme since they were successful in creating downward pressure on the weighted average of the HSC Gas Daily price. This allowed them to profit on their financial positions (the ones with exposure to the HSC Gas Daily index) as the artificially depressed HSC Gas Daily price settled on each flow day of the Investigative Period,” according to Judge Cintron.The ALJ also found that the BP Texas team lost money on their next day physical gas trading during the Investigative Period and their trading patterns in this time frame cannot be explained as profit seeking behavior.
Having concluded BP participated in an unlawful scheme to manipulate the HSC Gas Daily index to benefit their financial positions, contrary to BP’s arguments, the Presiding ALJ further “concluded that they did so with the requisite scienter(intent) and “in connection with” jurisdictional transactions.” The ALJ found intent based on knowledge of the specific market, trading patterns, the traders’ conduct and demeanor on recorded calls, motive, and false exculpatory statements. Judge Cintron adopted OE Staff’s position that BP had acted with the intent to manipulate, citing Barclays for the proposition that “open market transactions undertaken with manipulative intent are sufficient to establish scienter.” Relying on Barclays, Judge Cintron found Enforcement Staff was “correct that consistent, repeated losses on physical trading such as the ones in this case are a marker of intent to manipulate in a cross-market manipulation.”
FERC’s Jurisdiction: “In Connection” or “Intertwined” with Jurisdictional Transactions
BP argued that FERC Enforcement Staff failed to prove the Commission had jurisdiction in this proceeding. BP argued that it made no jurisdictional natural gas sales at HSC for resale relating to the alleged manipulative practices during the Investigative Period and that Enforcement Staff failed to allege or prove that the Commission possesses NGA jurisdiction over any transportation services in the case. BP argued that “section 1(b) of the NGA did not give the Commission jurisdiction over intrastate transportation, intrastate sales, direct sales, or first sales of natural gas.” BP proffered that a tape recording touted as a “cornerstone” of this case, actually relates only to HPL, an intrastate pipeline “outside Commission jurisdiction.”
Citing Order No. 670 at P 22, Judge Cintron noted that “[t]he Commission views the ‘in connection with’ element [of the anti-manipulation rule] . . . as encompassing situations in which there is a nexus between the fraudulent conduct of an entity and a jurisdictional transaction.” The ALJ noted that the under the NGA the “Commission has jurisdiction over non-jurisdictional matters “intertwined with jurisdictional activity.”
Unpersuaded by BP’s arguments, Judge Cintron found “Enforcement Staff proved jurisdiction through third party transactions priced off the HSC Gas Daily index, cash-out transactions priced off the same index and BP’s own next-day, fixed-price sales of gas at HSC made to suppress the HSC Gas Daily index.” The ALJ found that “[i]n this proceeding, jurisdictional sales for resale, influenced by the combined effect of intrastate and interstate sales on the HSC Gas Daily index, fall under the Commission’s jurisdiction.” Accordingly, “[t]hese jurisdictional sales were priced off of that manipulated index, and therefore fall under Commission’s jurisdiction.”
In addition to jurisdictional sales for resale priced off the HSC Gas Daily index, the ALJ concluded Enforcement Staff proved that certain jurisdictional cash-out transactions were priced off the manipulated HSC Gas Daily index. Moreover, the ALJ determined Enforcement Staff successful “proved 52 examples of the Texas team’s next-day fixed-price sales for resale of physical natural gas during the Investigative Period to be jurisdictional.” Indeed, she stated that “sales for resale of natural gas in interstate commerce are subject to the Commission’s jurisdiction.” The Presiding ALJ concluded Enforcement Staff’s examples were “all subject to the Commission’s jurisdiction because they all were made in interstate commerce, the sales were sales for resale, and none were first sales.”
FERC’s Penalty Guidelines: Findings Regarding Penalty Factors
The ALJ examined FERC’s Penalty Guidelines and determined that the evidence in this case showed that BP “had hundreds of affirmative acts in furtherance of the manipulative scheme during the Investigative Period (49 trading days covering a period of 73 flow days).” Specifically, BP “made 680 fixed-price sales at HSC, 101 bid-initiated sales at HSC when they could have hit a more economic bid at Katy, and 129 offer-initiated sales when they could have sold more economically by adjusting their offer price at Katy.” While each individual trade could have been treated as a separate violation, according to the ALJ, Enforcement Staff recommended a minimum number of 48 violations. Enforcement Staff’s recommendation was based on the fact that the Texas team pursued its manipulative scheme throughout each of the 48 days in the Investigative Period in which they were net sellers at HSC. Therefore, Judge Cintron found the record supported the finding that BP committed at a minimum, 48 violations.
As is relevant to civil penalty assessment under FERC’s Penalty Guidelines, the ALJ concluded “BP’s manipulation resulted in financial losses of $1,375,482 to $1,927,728 on the next-day natural gas markets at Houston Ship Channel and Katy during the Investigative Period.” Indeed, “the amount of natural gas involved in BP’s sales of next-day, fixed-price physical gas at HSC in the Investigative Period was 10,632,400 MMBtus.” The amount of natural gas involved in the financial natural gas positions at HSC in the Investigative Period was 25,310,000 MMBtus, and the losses were during 49 trading days of the Investigative Period.
The Presiding ALJ agreed with Enforcement Staff’ argument that BP’s manipulative trading during the Investigative Period violated three relevant settlements and are therefore subjected BP to enhanced penalties under the Penalty Guidelines. Moreover, the Presiding ALJ rejected BP’s argument that the Penalty Guidelines are a non-binding policy statement. The ALJ stated the Commission routinely uses its Penalty Guidelines to guide its penalty analysis. Concluding the current violation was less than five years after a prior Commission adjudication and adjudications of similar misconduct by the CFTC and DOJ, the ALJ determined BP’s conduct warranted an increase in its culpability score. Moreover, it was concluded that BP “did not have an effective compliance program and thus no credit under the penalty factors was given.” Finally, the Presiding ALJ determined BP’s gross profits from the manipulation were between $233,330 and $316,170 and net profits between $165,749 and $248,589.
Conclusion and What’s Next
Despite minimal alleged profits from the alleged scheme, Enforcement Staff has proposed significant civil penalties and disgorgement resulting from BP’s alleged misconduct. As the Commission stated in its Order Establishing Hearing, “[w]e reserve for our later consideration: (a) whether civil penalties should be imposed for any BP violations, and the determination of the amount of penalties, per section 22(c) of the NGA; (b) whether any other sanctions should be imposed; and (c) whether, and the method by which, BP should disgorge any unjust profits, and in what amount.” Indeed, “[t]he Commission will make these determinations based on the record developed at the hearing.”
This is not the end of the story. Expect further argument and review before the Commission of FERC’s orders and the Commission’s Final Decision regarding theInitial Decision and on the merits of the allegations, including any penalty assessments. From there, the parties may appeal the decision to federal court. Cited precedent relied upon by Judge Cintron in the Initial Decision, moreover, remains the subject of judicial review regarding FERC’s underlying manipulation and legal theories and jurisdiction, which depending on the resolution of those issues could further change the picture.