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Court Upholds Gallo's Right to Receive Documents from CFTC Probe of EnCana Affiliate

A federal appeals court in Washington, DC has upheld a lower court's decision requiring the Commodity Futures Trading Commission (CFTC) to turn over documents to E. & J. Gallo Winery that were obtained during an investigation into the natural gas trading activities of WD Energy Services. Gallo pursued the documents as part of its lawsuit against the now-defunct U.S.-based energy trading unit of EnCana Corp.

The U.S. Court of Appeals for the District of Columbia Circuit said it reached its decision without addressing the merits of a U.S. District Court for the District of Columbia ruling that found no "settlement privilege" attached to the documents to justify barring Gallo's access to them. As a result, the district court ordered the CFTC to provide the Modesto, CA-based winery company with the sought-after discovery material.

The appellate court also took issue with an earlier decision by a magistrate for the Eastern District of California that denied Gallo's discovery request on the grounds that the documents supplied by WD Energy to the CFTC were protected by a federal settlement privilege. The judge said at the time that approving Gallo's request would "chill" future settlement negotiations.

"We affirm the discovery order granting Gallo's motion to compel production by the [CFTC]...We do not address the merits of WD Energy's settlement privilege claim; rather, we affirm on the alternative ground that WD Energy has failed to meet its burden of demonstrating that the disputed settlement documents were created for the purpose of settlement discussions, and therefore would merit protection under any federal settlement privilege that the court might recognize. We ...do not reach the merits of the district court's ruling that no federal settlement privilege exists. That question remains open in this circuit," the three-judge appellate panel said.

The CFTC has since turned over the disputed documents to Gallo, but WD Energy's appeal of the district court's ruling is not moot, the appeals court said. It noted that the energy company was seeking the return of the documents to the CFTC and the destruction of all work stemming from Gallo's examination of the discovery materials.

The CFTC probe of WD Energy was resolved in July 2003, when the company -- without admitting any wrongdoing -- agreed to pay a civil penalty of $20 million. In April of that year Gallo, the largest wine producer in the U.S. and one of the largest gas consumers in California, brought a lawsuit against EnCana Energy Services Inc. and EnCana Corp. seeking damages of more than $30 million for the company's alleged manipulation of gas prices in California through sham trades, false reporting of trade information and other misconduct.

In October 2004, Gallo subpoenaed all the documents that the CFTC had collected from WD Energy and nine other energy companies in the course of the agency's energy trading investigations for use in its lawsuit. The CFTC notified the energy companies of the subpoena, and they contested it on several grounds, including that the requested documents were protected by investigative privilege.

In March 2005, Gallo petitioned the DC district court to reconsider the California magistrate's ruling that upheld WD Energy's position in the dispute. WD Energy urged the district court to bind the CFTC to the magistrate's decision on the issue of settlement privilege, preventing the agency from disclosing documents in response to an otherwise valid subpoena. The court ruled in favor of Gallo, holding that no federal privilege attached to the settlement between the CFTC and WD Energy that would bar the disclosure of the sought-after documents. The CFTC subsequently turned the disputed documents over to Gallo.

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