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Powhatan Energy Fund LLC, a private hedge fund based in Virginia, has launched a website defending itself against allegations leveled by FERC that it manipulated energy markets through a contract trader in 2010.
On its website, Powhatan officials said they take the allegations by the Federal Energy Regulatory Commission "very seriously.
"However, we are rule followers who take compliance even more seriously. We have spent much time, energy, and resources preparing our recent legal arguments. We believe in them. Powhatan launched this site because we didn't want to wait two to three years to tell our side of the story -- we want the public to know the full story now. Without it, it is impossible to fairly evaluate FERC's allegations."
In preliminary findings issued last August [No. IN10-5-000], FERC's Office of Enforcement (OE) concluded that Houlian Chen manipulated the PJM Interconnection LLC electric power market -- through certain up to congestion (UTC) transactions -- on behalf of his own funds, HEEP Fund Inc. and CU Fund, as well as for Huntrise Energy Fund LLC and Powhatan. The transactions were made from February through August 2010.
"[Chen] designed and scheduled matched UTC transactions that had the same or nearly the same effect as what the law would label a 'wash trade' or 'sham' transaction," OE said. "These trades were carefully configured to eliminate or reduce both profits and losses from price differentials in the market, and they also incurred certain costs related to scheduling the transactions. Yet, these same transactions profited, intentionally so, from collection of the MLSA [marginal loss surplus allocation] based on associated transmission reservations."
OE said the matched UTC transactions lost about $100,000 on price differentials in the market, and charges imposed by PJM on transmission reservations cost more than $6.6 million. But the office said Chen earned nearly $11.5 million in MLSA from the trades, and collectively netted more than $4.7 million in profit from the manipulation.
In separate letters to OE in October, attorneys representing HEEP and Powhatan said the preliminary findings "make no sense."
John Estes III and Karis Anne Gong, attorneys with the Washington, DC-based firm Skadden, Arps, Slate, Meagher and Flom LLP, urged OE to terminate its investigation. "The trading activity at issue was consistent with price signals approved by the Commission, added value to the PJM markets and assumed market risks, and contained absolutely no deceptive or fraudulent element," the attorneys wrote.
William McSwain, of the Philadelphia law firm Drinker, Biddle and Reath LLP, added that Huntrise and Powhatan "will respond publicly and forcefully" if OE proceeds with a public notice against the funds.
The website includes links to eight documents that describe the case, and 26 exchanges between FERC and Powhatan dating back to August 2010. The most recent communication between the two sides was a Feb. 26 letter from OE attorney Steven Tabackman to McSwain.
"Our investigation is moving forward; it is unaffected by the outcome of Powhatan's deliberations whether to make its website concerning this matter accessible to others," Tabackman wrote. "Should the Commission decide to proceed against your clients for violating any statute, regulation or order in connection with the subject matter of the investigation, your client will be given advance notification that a NAV [notice of alleged violation] will be issued."
The website also contains nine position papers obtained by Powhatan after the hedge fund learned that FERC might take the case public.
"These nine expert opinion papers have not been delivered to OE because it only gave us 45 days to respond to its preliminary findings," Powhatan said. "Despite having most of our materials for over a year, OE made it clear that they would not grant us additional time to respond. So we simply could not get the additional expert opinions completed before our response was due."
According to the U.S. Securities and Exchange Commission (SEC), Powhatan was incorporated in Delaware in 2010 and its executives reside in Henrico County, VA. The director of FERC’s Office of Enforcement, Norman C. Bay, has been nominated by President Obama to become the Commission’s next chairman.