From PLI s Online Program Excessive Speculation, Legislation and Litigation Recent Developments in Commodity Futures Regulation #19613

Transcription

1 From PLI s Online Program Excessive Speculation, Legislation and Litigation Recent Developments in Commodity Futures Regulation # INTELLECTUAL PROPERTY ASPECTS OF DOING BUSINESS IN CHINA Elizabeth Chien-Hale Institute for Intellectual Property in Asia Copyright 2007 Attachment I: Copyright 2006 Peter K. Yu. Reprinted with permission of the author Attachment II: Copyright 2005 Peter K. Yu. Reprinted with permission of the author.

2 CHARLOTTE CHICAGO GENEVA LONDON LOS ANGELES MOSCOW NEW YORK NEWARK PARIS SAN FRANCISCO WASHINGTON, D.C. Excessive Speculation, Legislation and Litigation Recent Developments in Commodity Futures Regulation (Enforcement Issues) David E. Mollón Michael M. Philipp

3 Overview Pressure on CFTC Energy Enforcement Efforts FERC granted anti-manipulation authority in EPAct 2005 and brings first cases against Amaranth and ETP in July 2007 Senate Permanent Subcommittee on Investigations Reports regarding excessive speculation and energy markets (Oil-June 2006/Gas-June 2007) Rising oil and gas prices FTC granted anti-manipulation authority over wholesale petroleum markets (Energy Independence and Security Act of 2007 ( EISA ) Congressional and consumer focus on so-called "Enron Loophole" and CFTC enforcement efforts

4 Overview Speculation vs. Manipulation CFTC has consistently maintained a focus on preventing manipulation in markets, which unfortunately is not defined Nevertheless, CEA includes concept of "excessive speculation," which is even less well-defined than manipulation Congress and public reacting to high energy and commodity prices, argue that speculation is artificially increasing prices Two reports from PSI have concluded that speculation has led to higher oil and gas prices CFTC has as recently as July concluded that speculation has not led to higher energy prices Case of "bad facts" make for "bad law"? In the meantime, enforcement authority is concentrated on manipulation and fraud (CFTC, FERC, and FTC)

5 Overview CFTC Energy Enforcement Efforts 42 Enforcement Actions (12/2002-7/2008) 72 Respondents (41 companies and 31 individuals) Settled 36 cases and partially settled two others Obtained $445,229,000 in civil monetary penalties Four actions remain pending (Optiver, Amaranth, Dizona, and Reed) Significant recent energy enforcement actions BP Amaranth Energy Transfer Partners Marathon Oil Optiver

6 BP Products North America Case filed June 28, 2006 Jurisdiction: N.D. Ill. Product: TET Propane Actual and attempted manipulation/cornering the market The Order found that on February 2004, BP employees sought to, and did, corner the TET propane market for the purpose of dictating prices to other market participants in order to obtain a significant trading profit. Buy, withhold, sell Audio tapes

7 BP Products North America Settlement included Deferred Prosecution Agreement with DOJ Civil Monetary Penalty CFTC: $125 Million Criminal Penalty to DOJ: $100 MM Consumer Fraud Fund payment $25 MM Restitution: $53 MM Appointed Independent Monitor for three years

8 Amaranth Advisors Filed July 25, 2007 (FERC filed case the next day) Jurisdiction: S.D.N.Y. NYMEX NG Futures contracts Claim: Attempted manipulation of settlement price Alleges that the defendants attempted to manipulate downward the price of NYMEX natural gas futures contracts two expiries, February 24 and April 26, 2006, to benefit positions in financial swaps Seeks an award of civil penalties, and other relief Jurisdictional dispute with FERC In discovery, trial likely in 2009

9 Energy Transfer Partners Case filed July 26, 2007 (FERC also filed an action) Jurisdiction: N.D. Texas Product: Natural Gas (Houston Ship Channel) and financial swaps Attempted manipulation From September 2005 to early December 2005, the defendants allegedly (1) attempted to manipulate the price of natural gas for delivery at the HSC by selling on the Intercontinental Exchange (ICE) massive quantities of natural gas at HSC to place downward pressure on natural gas prices at HSC; and (2) by reporting those transactions to Inside FERC Gas Market Reports, attempted to manipulate the index price of natural gas at HSC October and December 2005 The scheme was designed allegedly to benefit ETP's financial basis swap positions tied to the Inside FERC October and December 2005 HSC natural gas index prices.

10 Energy Transfer Partners Settlement Civil Monetary Penalty CFTC: $10 FERC case still pending, awaiting hearing

11 Marathon Petroleum Case filed August 1, 2007 (CFTC order) Jurisdiction: CFTC Product: Spot cash West Texas Intermediate crude oil (WTI) Claim: Attempted manipulation CFTC charged that Marathon attempted to manipulate price of spot price of WTI delivered at Cushing, Oklahoma on November 26, 2003, by purchasing NYMEX WTI contracts to sell physical WTI during the Platts window at prices intended to influence the Platts WTI spot cash assessment downward. Further, during the Platts window, MPC knowingly offered WTI through the prevailing bid at a price level to influence downward the Platts WTI assessment. Civil Monetary Penalty: $1 Million

12 National Crude Oil Investigation In May 2008, the CFTC announced that, in December 2007, the Division of Enforcement had launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivative contracts. The Commission took the extraordinary step of disclosing this investigation because of unprecedented market conditions. Reiterated that it continues to focus on policing markets for ensuring manipulation and abusive practices Only one case initiated thus far

13 Optiver Filed July 24, 2008 and cited as first case arising out of National Crude Oil Investigation (and first under new Acting Director of Enforcement) Jurisdiction: S.D.N.Y. NYMEX Light Sweet Crude Oil, New York Harbor Heating Oil, and New York Harbor Gasoline futures contracts Claim: Actual and attempted manipulation during March 2007 ("banging" or "marking" the close) The scheme allegedly involved trading a significant volume of futures contracts in in the opposite direction of the associated TAS position, before and during the close of the contracts in order to "control the VWAP" and benefit Optiver's Trading at Settlement (TAS) positions Seeks an award of civil penalties, and other relief

14 FTC Anti-Manipulation Rulemaking EISA prohibits market manipulation in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, and reporting false or misleading information related to the wholesale price of those products August 13, 2008, FTC issued a Notice of Proposed Rulemaking Essentially adopts SEC Rule 10b-5 language

15 FTC Anti-Manipulation Rulemaking Scope Addresses fraud or manipulation "in connection with" crude oil, gasoline, or petroleum distillates at wholesale Only applies to wholesale transactions ( purchases or sales at the terminal rack level or upstream of the terminal rack level. Transactions conducted at wholesale do not include retail gasoline sales to consumers. )

16 FTC Anti-Manipulation Rulemaking Elements (1) uses a fraudulent device, scheme or artifice, or makes a material misrepresentation or a material omission, or engages in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity (2) with scienter (recklessness, according to FTC) (3) in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale

17 FTC Anti-Manipulation Rulemaking Jurisdictional Issues Already have CFTC and FERC policing energy markets and disputes over jurisdiction Amaranth case in DC Circuit lays out battle lines CFTC joined Amaranth and industry groups FERC is supported by natural gas consumer groups

18 Amaranth Advisors Jurisdictional Arguments Under CEA, CFTC has exclusive jurisdiction... with respect to accounts, agreements and transactions involving contracts for the sale of a commodity for future delivery. 7 U.S.C. 2(a)(1)(A) Under the exclusive grant of jurisdiction to the [CFTC], the authority in the Commodity Exchange Act... would preempt the field insofar as futures regulation is concerned. H.R. Conf. Rep. No , reprinted in 1974 U.S.C.C.A.N FERC recognized in Order 670 that Congress did not expand the Commission s subject matter jurisdiction in EPAct 2005, and that if it intended to it would have done so explicitly. Nevertheless, FERC claims that regulation of commodities futures is different that policing manipulation, which is covered by Order 670 and EPAct 2005

19 FTC Anti-Manipulation Rulemaking Jurisdictional Issues FTC has weighed in on the topic stating: "CFTC authority over manipulation relating to commodities futures markets is not exclusive and, moreover, is separate from CFTC s exclusive authority under CEA Section 2(a)(1)(A)." (Emphasis supplied). This position, like FERC's, may well lead to disputes over conflicting agency authority. Clearly CFTC does have exclusive authority over futures regulation, the issue is where lines will be drawn. (Amaranth case may clarify)

20 FTC Anti-Manipulation Rulemaking Jurisdictional Issues Concern is increasingly complex patchwork quilt of regulation Potential for conflicting interpretations (scienter, markets at issue) Waste of resources Competing investigations Increased regulation can hamper efficiency of market by excluding speculators

21 CHARLOTTE CHICAGO GENEVA LONDON LOS ANGELES MOSCOW NEW YORK NEWARK PARIS SAN FRANCISCO WASHINGTON, D.C.