FERC Orders Evidentiary Hearing For Alleged Market Manipulation By BP

by Cadwalader, Wickersham & Taft LLP

On May 15, 2014, the Federal Energy Regulatory Commission (FERC) issued an order setting an evidentiary hearing before an administrative law judge (ALJ) to determine whether BP America Inc., BP Corporation North America Inc., BP America Production Company, and BP Energy Company (collectively, BP) violated FERC’s prohibition on market manipulation in section 1c.1 of FERC’s regulations and section 4A of the Natural Gas Act.  In an August 2013 report, FERC’s Office of Enforcement (OE) alleged that BP manipulated the next-day, fixed-price natural gas market at the Houston Ship Channel (HSC) between September and November 2008.  BP denied these allegations and requested that FERC dismiss the proceeding.  In the May 15, 2014 order, FERC rejected BP’s threshold legal objections regarding the FERC’s authority to proceed and set the matter for an evidentiary hearing.

The allegations against BP arise out of an investigation conducted by the OE.  OE alleges that BP made uneconomic sales at HSC and attempted to increase its market share at HSC as part of a manipulative scheme designed to suppress the HSC Gas Daily index, to benefit certain BP physical and financial positions that settled based on the HSC Gas Daily index.  According to OE:

  • BP had a financial spread position that benefited when the spread between the daily physical gas prices at HSC and Henry Hub increased after Hurricane Ike in September 2008;
  • BP traders sold next-day, fixed-price gas at HSC to suppress physical gas prices at HSC and, thus, slow the contraction of the HSC-Henry Hub spread; 
  • BP used transportation capacity on the BP Houston Pipeline between Katy and HSC to make uneconomic sales at HSC; and
  • this activity continued through November 2008. 

The investigation began with a self-report by BP when one of its traders called another trader on a recorded line with what FERC construes as concerns that BP was manipulating the physical market in order to benefit a related position.

On August 5, 2013, FERC issued an Order directing BP to show cause why FERC should not find that BP manipulated the next-day, fixed-price natural gas market at HSC between September and November 2008.  FERC’s Order also directed BP to show cause why it should not pay civil penalties in the amount of $28,000,000 and disgorge $800,000 in unjust profits, plus interest, or a modification to these amounts as warranted.  The Order to Show Cause included a report by OE describing the findings of OE’s investigation.

BP responded to FERC’s Order to Show Cause on October 4, 2013 and requested that FERC dismiss OE’s claims.  BP argued, among other things, that the OE report:

  • takes the recorded conversation by BP’s traders out of context;
  • is based on flawed and erroneous circumstantial evidence;
  • is based on misconstrued, unreliable, and faulty data;
  • misapplies FERC’s Penalty Guidelines;
  • incorrectly asserts FERC’s jurisdiction over the conduct at issue; and
  • fails to state a claim under FERC’s anti-manipulation rule.

FERC’s May 15, 2014 order requires a trial-type evidentiary hearing before a FERC ALJ to determine whether BP violated FERC’s prohibition on market manipulation in section 1c.1 of FERC’s regulations and section 4A of the Natural Gas Act.  FERC rejected BP’s motion to dismiss the proceeding, reasoning that there are genuine issues of material fact which require a hearing before an ALJ.  In particular, FERC rejected BP’s claims regarding FERC’s lack of jurisdiction, finding that FERC may exercise subject matter jurisdiction as a threshold legal issue.  However, FERC noted that further fact-finding is necessary to determine whether the alleged conduct was, in fact, jurisdictional and/or “in connection with” jurisdictional transactions.

FERC directed the ALJ to make findings based on the record developed at the hearing regarding FERC’s subject matter jurisdiction and each element of a manipulation claim under FERC’s regulations, specifically:

  • Conduct:  whether BP “directly or indirectly, . . . (1) . . . use[d] or employ[ed] any device, scheme, or artifice to defraud; (2) . . . ma[d]e any untrue statement of a material fact or omit[ted] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (3). . . engage[d] in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity”;
  • Scienter: whether BP acted with intent or recklessness; and
  • “In connection with” a jurisdictional transaction:  whether BP’s conduct was “directly or indirectly, in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of [FERC].”

FERC reserved for its later consideration whether to impose and the amount of any civil penalty, disgorgement or other sanctions.  Nevertheless, FERC directed the ALJ to make factual findings based on the record developed at the hearing regarding issues related to the penalty (regardless of the final determination of the manipulation claim).  In particular, FERC ordered the ALJ to make findings on the following factors relevant to a civil penalty under FERC’s Penalty Guidelines:

  • the number of violations committed, if any, and the number of days on which any such violations occurred;
  • the loss, the volume of natural gas involved (calculating financial and physical positions separately), and duration;
  • whether BP “committed any part of the [alleged] instant violation less than 5 years after a prior [FERC] adjudication of any violation or less than 5 years after an adjudication of similar misconduct by any other enforcement agency”;
  • whether “the commission of the [alleged] instant violation violated a judicial or [FERC] order or injunction directed at [BP] by the [FERC] or other Federal and state enforcement agencies that adjudicate similar types of matters as [FERC]”;
  • BP’s compliance program as compared to the factors in FERC’s Penalty Guidelines; and
  • the amount of profits that BP obtained from its alleged manipulative trading activity, including both a gross profit amount and a net amount that subtracts BP’s losses from its physical trading.

Administrative Law Judge Carmen A. Cintron has been appointed to preside over this case.  Judge Cintron also presided over the FERC enforcement case against Brian Hunter.  See Brian Hunter, 130 FERC ¶ 63,004 (2010).  You can view FERC’s May 15, 2014 order at: http://ferc.gov/whats-new/comm-meet/2014/051514/M-2.pdf.

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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