On August 13, 2015, a Federal Energy Regulatory Commission (“FERC” or “Commission”) Administrative Law Judge (“ALJ”) issued an initial decision in which she found that BP America Inc. et al. (“BP”) manipulated the natural gas market in Texas for over two and a half months in 2008.1 ALJ Carmen A. Cintron concluded that BP intentionally sold large volumes of next-day, fixed-price physical gas to suppress the physical gas index to benefit BP’s corresponding short financial positions, in violation of Section 4A of the Natural Gas Act and Section 1c.1 of the Commission’s regulations.2 In addition, Judge Cintron determined that the Commission’s Office of Enforcement staff (“Enforcement”) proved that BP’s alleged manipulative conduct fell within FERC’s jurisdiction.3 Notably, the ALJ relied heavily on the Commission’s penalty assessment against Barclays Bank PLC et al. (“Barclays”) for alleged market manipulation—despite the fact that the proposed penalty currently is subject to de novo review in federal court.4
As noted below, BP has announced that it intends to appeal the ALJ’s decision. It is possible that the FERC or a U.S. Court of Appeals may disagree with some or all of the ALJ’s findings of fact and conclusions of law.
BP’s Alleged Manipulative Scheme
Enforcement asserted that traders on BP’s Southeast Gulf Texas team (“Texas Team”) had a spread position comprised of short index exposure at Houston Ship Channel (“HSC”) and long index exposure at Henry Hub. This position benefited when the HSC-Henry Hub spread in daily physical gas prices widened. Following Hurricane Ike on September 13, 2008, the Texas Team’s spread earned significant profits because HSC prices plummeted in comparison to Henry Hub prices.5 Enforcement contended that following the hurricane and from September 18, 2008 through November 30, 2008 (the “Investigative Period”), the team took several coordinated, affirmative steps to slow the shrinkage of the spread by increasing its short exposure to the HSC Gas Daily index and increasing its physical natural gas positions to suppress the index.
The ALJ concluded that a recorded November 5, 2008 phone call (“November call”) between Texas Team traders Clayton Luskie and Grayden Comfort provided direct evidence of BP’s manipulative conduct and intent. In the call, Luskie asked “[s]o how would you explain our dealings on [Houston’s Pipeline System] and with our paper position that don’t make it sound like we’re manipulating the index?”6 The ALJ emphasized Comfort’s lack of a valid explanation for the trading, despite his significant trading experience and participation in the trading at issue, demonstrated his manipulative intent.7 The ALJ then held that this phone call, coupled with the Texas Team’s changes in its trading conduct during the Investigative Period, sufficiently proved a scheme to manipulate natural gas prices.
Judge Cintron cited the following changes in the Texas Team’s trading as persuasive circumstantial evidence of manipulative intent:
BP argued that Enforcement improperly compared BP’s conduct during the Investigative Period with its conduct from January 2, 2008 through September 10, 2008 (the “Pre-IP”). BP asserted that the Pre-IP did not reflect several factors present during the Investigative Period that affected its trading, including seasonal changes, a higher baseload, the financial crisis, declining natural gas prices, and the hurricane. BP also contended that Enforcement improperly analyzed end-of-day Gas Daily prices that did not account for intraday trading activity that the Texas Team observed and that it relied on flawed data inputs.8 The ALJ rejected BP’s defenses and determined that BP failed to provide any valid explanations to rebut the circumstantial evidence that Enforcement presented.9
Reliance on the Barclays Case
The ALJ relied heavily on Barclays as support for her holding that BP engaged in manipulation, dismissing BP’s contention that relying on Barclays is inappropriate because a federal court is reviewing the case de novo.10 She concluded that “[t]he fact that Barclays is currently in federal court does not diminish its precedential value at this time since that court has not yet ruled. Additionally, so far a motion to dismiss has been denied by the court.”11 The initial decision analyzed the Commission’s examination of circumstantial evidence in Barclays and, citing to Barclays, emphasized as a significant factor that BP’s trading conduct did not align with profit-seeking behavior.12 The ALJ then highlighted the significant decline in the Texas Team’s financial performance on its next-day physical trading and its increased use of the Houston Pipeline System to transport gas despite the largely negative HSC-Katy price spread.
BP’s Purportedly Ineffective Compliance Program
The ALJ concluded that BP lacked sufficient compliance procedures to warrant a compliance credit under the Penalty Guidelines because it allegedly failed to prevent and detect the manipulation, failed to effectively investigate the Texas Team’s behavior, and lacked the minimum standards of a robust compliance program.13 She emphasized the following findings to support this conclusion:
Some of the foregoing facts relied upon by the ALJ, such as BP’s compensation system, seem to encroach on BP’s judgment about how it wants to run its business.
Although the Commission will assess penalties at a later time, the ALJ determined that the record supports the $48 million penalty amount requested by Enforcement.15 Moreover, Judge Cintron concluded that BP’s penalty may be enhanced because BP was the subject of three prior adjudications within the past five years, including settlements for propane manipulation with the Department of Justice and the Commodity Futures Trading Commission one year before the conduct at issue in this case.16 Following the initial decision, BP announced that it “strongly disagreed” with the ALJ’s findings and that it will appeal to the full Commission. Absent an extension, BP must submit a brief on any exceptions to the Commission within 30 days of the initial decision.17
1 B.P. America Inc. et al., 152 FERC ¶ 63,016 (Aug. 13, 2015) (“Initial Decision”).
2 15 U.S.C. § 717c-1 (2012) and 18 C.F.R. § 1c.1 (2014) prohibit manipulation of natural gas markets and require evidence that sufficiently demonstrates manipulative conduct, scienter, and the Commission’s jurisdiction. BP America Inc. et al., 147 FERC ¶ 61,130 (2014) ("Hearing Order").
3 The ALJ held that Enforcement “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.” Initial Decision at P 277.
4 See Barclays, 144 FERC ¶ 61,041 at P 149 (2013); and FERC v. Barclays Bank PLC et al., Docket No. 13-2093, U.S. District Court, Eastern District of California.
5 Initial Decision at P 7.
6 Id. at P 101.
7 Id. at P 104.
8 Initial Decision at PP 13 - 27.
9 Id. at PP 32 - 82.
10 Id. at PP 22, 33, n. 11.
11 Id. at P 33, n. 11. The ALJ reasoned that the anti-manipulation rules applicable in the electric and natural gas markets are identical.
12 Id. at P 81.
13 Initial Decision at P 264. See also Revised Policy Statement on Penalty Guidelines, 132 FERC ¶ 61,216 (2010) (“Penalty Guidelines”).
14 Initial Decision at PP 241-264.
15 Id. at P 187.
16 Id. at P 214. See also Penalty Guidelines.
17 18 C.F.R. § 385.711(a) (2006).
This memorandum has been prepared by Cadwalader, Wickersham & Taft LLP for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Cadwalader, Wickersham & Taft LLP without first communicating directly with a member of the Firm about establishing an attorney-client relationship.
For more information about LexisNexis products and solutions, connect with us through our corporate site.