Five affiliates of New York-based Tower Research Capital LLC and Mark Gorton, managing director of a hedge fund that manages the affiliates, filed a lawsuit last Wednesday accusing the PJM Interconnection and 20 unidentified PJM members of wrongfully seizing property belonging to the affiliates, "intentionally and tortuously" inflicting severe injury and damaging the reputation of Gorton.
"PJM's wrongful conduct has been blatant, egregious and intentional, and extends to conduct in clear breach of PJM's own rules," the plaintiffs alleged in their complaint.
The plaintiffs in the case are BJ Energy LLC, Franklin Power LLC, GLE Trading LLC, Ocean Power LLC, Pillar Fund LLC and Gorton. They are seeking the return of at least $32.9 million that they claim PJM seized and $500 million in punitive damages. The defendants are PJM and John Does 1-20, who are all members of the PJM but whose identities are "presently unknown" to the claimants. The lawsuit was filed in the Court of Common Pleas of Philadelphia County, PA.
In January PJM allegedly seized the funds from the five affiliates to compensate for a default of another affiliate, Power Edge LLC, in December 2007, according to the lawsuit. "By improperly withholding the amount of at least $32 million from BJ Energy, Franklin Power, GLE Trading, Ocean Power and Pillar, PJM has prevented them from using those funds to form contracts and to trade in the electricity markets," the lawsuit said. "PJM has manually blocked [the five affiliates] from entering any trades although it has no authority to suspend trading rights."
The lawsuit claims the PJM, which operates the bulk power transmission system in the Mid-Atlantic region and part of the Midwest, seized the affiliates' funds in mid-January prior to the Federal Energy Regulatory Commission acting on PJM's request to amend the default allocation rules in its operating agreement so that it could require the five affiliates to pay for a portion of the default of Power Edge, which trades electricity products.
FERC in March denied PJM's proposal to offset Power Edge's default against the financial transmission rights' (FTR) market revenues that PJM would otherwise have paid to the defaulting company's affiliates. In its order, FERC noted that its Office of Enforcement began a nonpublic investigation in January into the activities of Power Edge and its affiliates in PJM's FTR markets. That investigation, FERC said, is the appropriate context in which to examine whether rules have been violated and, if so, whether a remedy is warranted.
In March PJM filed a complaint with FERC accusing seven private investment funds and Tower Research Capital LLC and affiliate Tower Research Capital Investments of manipulating the FTR market and day-ahead energy market of the regional transmission system, thus distorting energy prices and payments to FTR holders (see NGI, March 10). The Commission in May voted to hold PJM's complaint in abeyance pending completion of the investigation by its Office of Enforcement.
PJM has estimated that Power Edge defaulted on $66-70 million through May of this year. PJM has asserted that after experiencing substantial losses, the Tower affiliates colluded by fraudulently distributing money out of Power Edge for the gain of one or more affiliates and intentionally withholding cash when Power Edge defaulted on its FTR obligations, thereby causing other PJM members to cover its losses.
Tower companies contend there was no collusion and that it was PJM and the deficiency of PJM credit policies that directly contributed to Power Edge's default.
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