Avoiding The ‘Al Capone’ Trap: The Dangers Of Supplying Inaccurate Information To FERC

One of the primary objectives of the Federal Energy Regulatory Commission's Enforcement division is to prevent, or at least punish, manipulation of the energy markets. But market participants and practitioners should be just as leary of accidentally tripping over the seemingly simple rule against providing inaccurate information to FERC as they are of intentionally committing systemic fraud. A bit like Al Capone's tax infractions relative to his suspected greater misdeeds, allegations that a market participant made an inaccurate statement to FERC is a tempting piece of low-hanging fruit for FERC Enforcement when manipulation claims may be difficult to prove. Below, we outline FERC's increasing willingness to pursue allegedly inaccurate statements made to FERC or FERC Staff, and practical considerations for how best to protect against such claims.1

1. If Proving Manipulation Is Too Difficult, Include an Additional Offense

   FERC Enforcement investigations are in high gear as the agency continues to move to establish itself as a credible antifraud enforcer. Without the long history of enforcement of its brethren at the Department of Justice, Securities and Exchange Commission, and Commodities and Futures Trading Commission, FERC seems to be playing an aggressive game; and arguably its most prominent weapon are the anti-manipulation rules covering electricity and natural gas markets.2 Several settlements involving electricity manipulation allegations have given FERC the benefit of some arguably good press, and at least a few pending manipulation matters present the possibility of litigation in the near future – though only regarding conduct that occurred several years ago.3 FERC, however, has yet to litigate to conclusion any alleged electricity manipulation cases. Meanwhile, the DC Circuit recently slapped down FERC's claim that it had jurisdiction over allegations of manipulation of natural gas futures that occurred over six years ago.4

   The resulting perception that energy manipulation claims are difficult and time-consuming to litigate and ultimately prove also happens to be the reality.5 Without an established, successful anti-manipulation litigation regime, FERC has shown itself willing to pursue other additional offenses. Section 35.41(b) of the Commission's rules6 – which prohibits making inaccurate statements to FERC – is most prominent among these additional allegations. In numerous cases, some briefly described below, FERC has either included or separately alleged violations of Rule 35.41(b) in the context of fraud and manipulation investigations. It is perhaps easy to see why: such claims appear much simpler for FERC to establish than a substantive fraud or manipulation claim, yet still carry potentially substantial penalties.7 An appreciation for the legal parameters of Rule 35.41(b), including its due diligence defense, and an understanding of how FERC has pursued alleged violations of the Rule, provide the necessary background for considering of how to avoid falling victim to those allegations.

2. Enron's Legacy: The Market Behavior Rule and Accurate Information

   Among the impact that Enron's failure had on the energy markets was the regulatory and enforcement response designed to give FERC more authority and more options to prevent and punish wrongdoing. One piece of the regulatory overhaul included the adoption of Market Behavior Rule 3, later codified as Rule 35.41(b).8 That Rule provides: A Seller must provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with the Commission . . . unless Seller exercises due diligence to prevent such occurrences.9

   Violations of the Rule can give rise to sanctions, including civil penalties under Section 316A of the Federal Power Act, and the suspension of market-based rate (MBR) authority under Section 206 of the FPA.10

   FERC has applied Rule 35.41(b) in a wide variety of contexts, regardless of intent,11 and whether or not FERC or FERC Staff were actually misled. For example, FERC has:

   Suspended MBR authority of a seller as a result of a misrepresentation in a discovery dispute, even though Staff was aware of the correct information (J.P. Morgan Ventures Energy Corp., Order Suspending MBR Authority, 141 FERC _ 61,131 (2012) ("JP Morgan")); Ordered monetary penalties where entities misrepresented and omitted facts in the context of their respective MBR applications (see e.g. Vista Energy, 139 FERC _ 61,154 (2012); Moussa I. Kourouma, 135 FERC _ 61,245 (2011) ("Kourouma")); Included violations of Rule 35.41(b) as part of a settlement of market manipulation allegations (Deutsche Bank Energy Trading, LLC, 142 FERC _ 61,056 (2013); Constellation Energy Commodities Group, Inc., 138 FERC _ 61,168 at P 2 (2012); Gila River Power, LLC, 141 FERC _ 61,136 (2012); Approved a settlement including monetary penalty where seller that repeatedly misled Staff in connection with an investigation of the entity's bidding behavior in PJM (Edison Mission, 123 FERC _ 61,170 (2008)). III. Basic Legal Standards under Rule 35.41(b)

   A violation of Rule 35.41(b) occurs only where a seller submitted false or misleading information or omitted material information and failed to exercise due diligence to prevent such a submission or omission. Although "intent" or "scienter" are not required,12 inadvertent misstatements or omissions are not intended to be covered by the Rule.13

   Notably, there is no materiality requirement with respect to affirmative misstatements. A seller arguably violates the Rule if a statement to FERC is factually inaccurate or untrue, regardless of the relative importance of the inaccuracy (though still subject to a due diligence defense).14...