Energy companies should base annual trader bonuses at least in part on the ethics of their natural gas and power traders, said the chief enforcement officer for the Commodity Futures Trading Commission (CFTC) Wednesday.
“If ethics were a critical component of the yearly review process [for traders] — if bonuses were tied to ethics — [it] would indeed make at difference at least, I think, at the end of the day,” noted Greg Mocek, the CFTC’s director of enforcement, during a conference sponsored by the National Energy Marketers Association (NEMA) in Washington, DC.
He believes his proposal and other protections would help to avoid a repeat of the trader misconduct seen over the past couple of years, which resulted in “billions of dollars of market capital” being lost in the energy industry.
Mocek, partly in defense of the energy industry, acknowledged that the illegal trading activity represented a small segment of the market. “The individuals that were involved in illegal conduct were few and far between when you look at the overall number of people involved in the market.” In the end, “we believe that the industry is best left to its own to develop free markets and design markets that make sense,” he said.
Since the collapse of Enron Corp. in late 2001, Mocek reported the CFTC has investigated 43 major energy companies for reporting false information about energy trades to published price indexes, wash trades, attempted manipulation and manipulation of prices.
To date, he said the agency has filed 15 enforcement actions against 20 companies, collected $180 million in penalties for misconduct involving natural gas, and brought separate lawsuits against Enron and American Electric Power Co. (AEP). Mocek noted he personally has signed 11 letters informing energy companies that the CFTC was closing the investigations on them and that they were “off the hook.”
But the CFTC has not finished its work yet. It anticipates filing a “number of other cases in the next few months” against energy companies and individual traders, he told the NEMA gathering.
He said the CFTC investigations were in-depth, taking a look at energy companies “from the secretary [all the way] to the board room.”
The agency inquiries revealed that some energy traders “falsely reported prices because they wanted to act like a big player;” they were “paranoid” that if they didn’t come across as a big player that their trades would not be included in the published price indexes, Mocek said. Others wanted to move their companies up on the list of the trader rankings published by energy publications, and others did it for profit or to manipulate the published price indexes, he noted.
Mocek also railed against publications that gather data which “are not responsive to the U.S. Government,” refusing to turn over certain data, “hiding behind” the First Amendment to the U.S. Constitution. “This has slowed down our investigation and investigations by the Justice Department and FERC and cost the taxpayers money.”
Further he charged that the “methodologies used to collect information were suspect,” and the publications had no auditing procedures in place. The CFTC continues in litigation with McGraw-Hill, the parent company of Platts over access to data, Mocek said.
On a related issue, Mocek said the agency still was investigating the run-up in natural gas prices, which began in late 2003, to determine if manipulation was a factor (see Daily GPI, Jan. 8).
The investigation is “ongoing,” he said, adding “we’re not quite sure” when it will be completed. The CFTC has interviewed a “large number of traders,” looked at a “significant amount of documents,” and analyzed market activity in coordination with the Federal Energy Regulatory Commission to determine if gas prices were artificially set, Mocek noted.
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