D.C. Court of Appeals Sets New Precedent in Affirming FERC Enforcement Penalties Against a Seller Making False or Misleading Submissions to FERC or to a FERC-Approved Market Organization

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The District of Columbia Circuit Court of Appeals, in Kourouma v. FERC, (Docket No. 11-1283, July 23, 2013), has set new precedent affirming FERC’s authority to enforce penalties for a seller’s violation of its Market Behavior Rule (18 CFR § 35.41(b)) prohibiting the submission of false or misleading information or the omission of material information in any submission to FERC, to a FERC-approved ISO, RTO, or market monitor, or to a jurisdictional transmission provider, unless excused by the seller’s exercise of due diligence to prevent the occurrence. In Kourouma, the Court of Appeals upheld FERC’s imposition of a $50,000 penalty on an individual trader who falsified and concealed his identity on forms submitted to FERC and to PJM in registering as a new market participant.

Seller’s right to an ALJ hearing prior to agency assessment of a penalty is limited. By statute, prior to FERC’s assessment of a penalty after issuance of a show cause order, the seller may elect to have the determination of violation and the “basis” of the penalty made “on the record after an opportunity for an agency hearing … before an Administrative Law Judge.” 16 U.S.C. § 823b(d)(2)(A). The trader requested such a hearing, but the Commission summarily assessed the penalty, without an ALJ hearing. Declaring it a matter of first impression, the Court of Appeals upheld summary disposition under § 823b(d)(2)(A), holding that FERC need not set a penalty assessment for an ALJ hearing if there is no material fact in dispute. This is the same standard applied by FERC under its generally applicable Rule of Practice and Procedure 217 for summarily issuing, without an ALJ evidentiary hearing, any order required to be made on the record after opportunity for a hearing. Section 823b(d)(2)(A) thus does not constrain FERC’s usual discretion to act summarily, even with respect to penalty assessments. The Court of Appeals found that the trader’s affidavit submitted in response to the order to show cause admitted the falsifications and omissions and, therefore, the violation of the Market Behavior Rule was clear. Implicitly, the decision means that a seller is not entitled to ALJ determination of the “basis” or amount of a penalty, if a violation of the Market Behavior Rule is admitted.

FERC need not find “intent to deceive” or a “knowing” violation of the Market Behavior Rule. Again, ruling on a matter of first impression, the Court of Appeals held that an intent to deceive is not an element of violation of the Market Behavior Rule and that only inadvertence despite the exercise of due diligence excuses the filing of false or misleading submissions. The Court of Appeals states, in what might be considered dicta, that the due diligence excuse contained in the pertinent Market Behavior Rule “implies even negligent misrepresentations may be actionable.” The Court of Appeals characterized the trader’s violations as not inadvertent and “worse than carelessness.” Whether FERC will apply in the future a standard of care and due diligence based on negligence, carelessness, or not inadvertence remains to be seen. Kourouma strongly supports a not inadvertent standard and market participants would probably be deemed on notice that negligent, careless and not inadvertent violations of the Market Behavior Rule prohibiting false or misleading submissions are potentially subject to penalty.

Topics:  Due Diligence, Enforcement, False Statements, FERC, Material Disclosures, Misleading Statements, Omissions, Penalties, Policy Violations, Sellers

Published In: Business Torts Updates, Energy & Utilities Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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