They've agreed to work out jurisdictional gray areas in connection with market surveillance and investigations, but there are still differences in FERC and the Commodity Futures Trading Commission's (CFTC) approaches to enforcement, according to officials from the two agencies and an attorney who has represented defendants in enforcement proceedings.
Even the definition of the word "entity," and whether its use leaves individual commodity traders, as well as companies, open to prosecution seems unclear.
"The term 'any entity' does include persons or individuals," though the issue is being litigated in multiple cases, according to Federal Energy Regulatory Commission (FERC) policy, said Larry Gasteiger, deputy director of the Commission's Office of Enforcement.
"It doesn't necessarily specify 'only corporations' by any stretch of the imagination; there's plenty of cases where the term 'entity' has been defined to include persons," Gasteiger said Tuesday at the Energy Bar Association's Annual Meeting in Washington, DC. "Just from a common sense perspective, and I think a policy standpoint, it's hard to understand why Congress would want to apply anti-fraud and anti-manipulation regulation only to companies but not to individuals."
One thing that the agencies should be taking into account when they go after individual traders is their intent, according to Michael Spafford, a partner at the Boston-based Bingham McCutchen LLP law firm. Were they trading in a way that was consistent with the policies and practices of the entity, or were they rogue traders?
"I'd submit that they are two different situations...that to me is something that has to factor into an evaluation of the individual's trading conduct," Spafford said.
The importance of a trader’s intent, and whether prosecution of individual traders falls under FERC's jurisdiction, were demonstrated in the case of Amaranth Advisors LLC natural gas trader Brian Hunter (see Daily GPI, March 18, 2013). In that case, the U.S. Court of Appeals for the District of Columbia eventually ruled that CFTC alone (not FERC) has jurisdiction over gas futures contracts, and it overturned a FERC order imposing a $30 million penalty on Hunter for allegedly manipulating natural gas futures for the failed hedge fund. But Hunter had also argued that regulator's jurisdiction does not cover individuals, Spafford said.
"In the Hunter case, the issue of whether or not an individual trader could be pursued under manipulation came up, the issue being whether or not the anti-manipulation statute refers to any entity, and not any person. If you compare the two statutes, the CFTC statute refers to 'person,' whereas the FERC anti-manipulation [rule], at least under the Federal Power Act, refers to 'any entity.' Brian Hunter made the argument that 'entity' on its face does not include an individual...and then he also argued that the statutory structure was consistent with not pursuing the individual for manipulation. The FERC ALJ [administrative law judge] rejected that...the Circuit Court mooted that decision because it decided that the trading at issue was under the exclusive jurisdiction of the CFTC. So that issue still remains out there," Spafford said.
"...There are several other provisions that do reach individuals, and certainly FERC has been very aggressive in pursuing individuals in the course of their investigations, and several individuals have been named in settlements."
FERC and CFTC differ significantly on naming individuals in enforcement settlements. FERC names individuals in settlements by their employers, even in cases where the individual trader has admitted no wrong doing. CFTC does not.
"I do not think [FERC's] practice is either unlawful or a violation of any due process standards in the way that we do it," Gasteiger said. "The tests for whether there's a due process issue is fairly stringent. We need to have all statements within the settlement; our settlements are factually based and framed in terms of staff allegations; and the ones that this has applied to to date have all had 'neither admit nor deny' language."
"We don't do it," said Rick Glaser, of CFTC's Division of Enforcement. "We take great pains, in fact, to not name people...we don't name people in complaints or orders unless we charge them...charging somebody in a federal complaint is a pretty big deal, and that's one thing, but then to drag somebody else's name into it is also a big deal, and we need to be mindful that it is a big deal. There's no point to us to put somebody in unless we are charging them."
Spafford said he believes there is an issue when an individual named in a settlement was not a party to the settlement. "If that person is not a party to the settlement, they have no ability to negotiate in terms of that settlement...I think that presents a fairness problem. Whether or not it rises to a due process issue depends on the situation. I think there could be, but more fundamentally, I don't think it's a fair process, and why do it? There is no purpose. You're settling with a party to reach an agreement to put something to an end; why bring in a third party?"
FERC and CFTC have butted heads over jurisdictional issues for several years, but recently signed memoranda of understanding to address overlappingjurisdiction and information sharing in connection with market surveillance and investigations into potential market manipulation, fraud or abuse (see Daily GPI, Jan. 3; Nov. 5, 2008). Cooperation between the two Commissions is still a work in progress, according to FERC Acting Chairman Cheryl LaFleur (see Daily GPI, Jan. 28).