Troutman Sanders LLP: Louis Dreyfus Settles FERC Market Manipulation Case for $7.8 Million

Troutman Sanders LLP: Louis Dreyfus Settles FERC Market Manipulation Case for $7.8 Million

On February 7, 2014, FERC approved a Stipulation and Consent Agreement (“Agreement”) between the Office of Enforcement (“Enforcement”) and Louis Dreyfus Energy Services L.P. (“LDES”) regarding LDES’ virtual trading in the markets operated by the Midcontinent Independent System Operator, Inc. (“MISO”).  LDES agreed to (1) pay MISO a disgorgement of $3,340,000 plus interest; (2) pay a civil penalty of $4,072,257; and (3) institute a new compliance program.  Additionally, one of LDES’ traders, Xu Cheng, agreed to pay a civil penalty of $310,000.

Enforcement opened a market manipulation investigation against LDES based on a referral from MISO’s Independent Market Monitor.  Enforcement concluded that LDES made virtual supply and virtual demand trades to increase congestion artificially around the Velva node in North Dakota.  While the virtual trades lost money, Enforcement claimed that the congestion increased the value of LDES’ positions in the financial transmission rights (“FTR”) market, resulting in a net gain.  Enforcement also determined that LDES knew the trades would affect their FTR positions because Cheng, the trader responsible for LDES’ activity in FTR markets for the western portion of MISO, wrote his PhD dissertation on the strategy of using virtual trades to increase congestion thereby benefiting FTR holdings.  Finally, Enforcement rejected LDES’ argument that it relied on market fundamentals in conducting its virtual trades, finding no persuasive explanation for LDES’ virtual trading patterns. Although LDES and Cheng stipulated to the facts in the agreement, they neither admitted nor denied the actions were a violation of FERC’s Anti-Manipulation Rule.

The Agreement demonstrates FERC’s continued focus on cross-product and cross-market manipulation.  Late last year, FERC petitioned the United States District Court for the Eastern District of California for an order affirming its assessment of penalties against Barclays for trading physical electricity uneconomically to benefit financial positions (see October 9, 2013 edition of the WER).  FERC also prosecuted energy trader Brian Hunter for trading natural gas futures on an exchange to benefit swap and option positions on other trading platforms.  Ultimately, however, the United States Court of Appeals for the D.C. Circuit overturned FERC’s Hunter decision, finding that the CFTC has exclusive jurisdiction over commodity futures markets (see March 18, 2013 edition of the WER).

A copy of FERC’s Order is available here.

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