On November 17, 2016, the Office of Enforcement (“FERC Staff”) of the Federal Energy Regulatory Commission (the “Commission” or “FERC”) issued a White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005 (“Manipulation White Paper”) to “provide insight” on its ten years of experience investigating potentially manipulative conduct under the Anti-Manipulation Rule.1 During this period, FERC Staff has investigated over 100 matters, settled 24 proceedings resulting from those investigations, and pursued two matters in administrative proceedings. In addition, FERC currently is litigating six penalty assessment orders in federal district courts.2 According to FERC Staff, through these investigations and proceedings, the Commission and the courts have “developed a body of law that, while still in its early stages and continuing to evolve, identifies and provides notice on specific types of conduct that can constitute market manipulation in the energy markets and factors that are indicative of such conduct.”3
In its Manipulation White Paper, FERC Staff largely restates its litigation positions – many of which currently are being challenged – and seeks to provide notice of: (1) factors that typically indicate manipulative conduct; (2) specific types of conduct that often constitute manipulation; (3) mitigating and aggravating factors affecting penalty amounts for manipulation violations; and (4) the types of investigations that it has closed without further action.
FERC Staff first provides the following non-exhaustive list of key elements emerging from FERC’s developing manipulation law:
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Fraud is a question of fact;
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Fraud includes open-market transactions (g., transactions executed with manipulative intent on exchanges or public trading platforms);
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Fraud is not limited to violations of a tariff or other express rule;
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A manipulation violation does not require a showing that the manipulative conduct resulted in artificial prices;
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The Anti-Manipulation Rule includes attempted fraud;
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Manipulative intent, even where it is combined with a legitimate purpose, establishes the scienter element of the Anti-Manipulation Rule;
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Pursuant to its “in connection with” jurisdiction, the Commission has jurisdiction over conduct that affects jurisdictional transactions, including the “rates, terms, and conditions of service in a market”; and
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Individuals constitute “entities” and, as such, are subject to the Anti-Manipulation Rule.4
Indicia of Fraud
Identifying what it characterizes as typical indicia of fraud, FERC Staff explains that the distinction between fraudulent and lawful market behavior can hinge on the underlying purpose of the behavior.5 For example, in three orders relating to Up-To Congestion (“UTC”) trades, the Commission compared the purpose of UTC trading against the purpose behind respondents’ UTC trades and determined that their trades “were neither consistent with how the UTC product historically traded nor aligned with the arbitrage purpose of those trades.”6 The Manipulation White Paper does not identify where market participants should look to understand what Staff will view as “the purpose” of particular products like UTCs. Staff emphasizes, however, that the purpose driving a market participant’s behavior in the market is a “critical factor” in a manipulation determination. FERC Staff recommends, therefore, that companies require employees to document the purpose behind conduct likely to raise red flags.7 In the right circumstances, market participants should also consider documenting their understanding of the purpose of the relevant products and why their trading aligns with those purposes.
