Fed. Energy Regulatory Comm'n v. Powhatan Energy Fund, LLC

• Decision Date: 24 September 2018
• Docket Number: Civil Action No. 3:15cv452
• Court: U.S. District Court — Eastern District of Virginia
• Parties: FEDERAL ENERGY REGULATORY COMMISSION, Petitioner, v. POWHATAN ENERGY FUND, LLC, et al., Respondents.

345 F.Supp.3d 682

FEDERAL ENERGY REGULATORY COMMISSION, Petitioner,

v.POWHATAN ENERGY FUND, LLC, et al., Respondents.

Civil Action No. 3:15cv452

United States District Court, E.D. Virginia, Richmond Division.

Signed September 24, 2018

Samuel Graves Backfield, Lisa Lee Owings, Mark E. Nagle, Federal Energy Regulatory Commission Office of General Counsel General and Administrative Law, Daniel Thomas Lloyd, Elizabeth Keller Canizares, Federal Energy Regulatory Commission (NA), Steven Carl Tabackman, Washington, DC, for Petitioner

John Staige Davis, V, Jonathan Tyler Lucier, Richmond, VA, Christian Elizabeth Piccolo, William Miller McSwain, Drinker Biddle & Reath LLP (PA-NA), Philadelphia, PA, Warren Thomas Allen, II, Donna Marie Byrne, James Patrick Danly, John Nowell Estes, III, Robert William Warnement, Skadden, Arps, Slate, Meagher & Flem, Abbe David Lowell, Michael Bhargava, Norton Rose Fulbright US LLP (DC-NA), Washington, DC, for Respondents

MEMORANDUM OPINION

M. Hannah Lauck, United States District Judge

This matter comes before the Court on the Joint Motion to Dismiss (the "Motion to Dismiss") filed by Respondents Powhatan Energy Fund, LLC ("Powhatan"), Houlian "Alan" Chen ("Chen"), HEEP Fund, Inc. ("HEEP Fund"), and CU Fund, Inc. ("CU Fund") (collectively, "Respondents"). (ECF No. 95.) Respondents contend that the Federal Energy Regulatory Commission ("FERC" or the "Commission") brought this action beyond the applicable statute of limitations, that FERC does not have the authority to seek disgorgement as a civil penalty, and, assuming disgorgement is available, that it is also barred by the statute of limitations. (Mem. Supp. Mot. Dismiss 1, ECF No. 96.) FERC opposed the Motion to Dismiss, and Respondents replied. (ECF Nos. 99, 106.) Accordingly, the matter is ripe for disposition.

The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. The Court exercises jurisdiction pursuant to 16 U.S.C. § 823b(d)(3)(B)¹ and 28 U.S.C. § 1331.² For the reasons that follow, the Court will deny the Motion to Dismiss.

I. Factual and Procedural Background

An earlier decision by this Court concluded that its de novo review of FERC's imposition of penalties required application of the Federal Rules of Civil Procedure and the Federal Rules of Evidence. Fed. Energy Regulatory Comm'n v. Powhatan Energy Fund, LLC ("FERC I "), 286 F.Supp.3d 751 (E.D. Va. 2017). FERC I contains a detailed explanation of the two administrative procedures available in 16 U.S.C. § 823b : the typical administrative process, which this Court has dubbed the "Default Option," and the uncommon administrative scheme, which this Court has called the "Alternate Option," at issue here. The determination below presumes familiarity with FERC I .

A. Factual Background ³

Respondents consist of Chen and various financial entities on whose behalf Chen traded energy for the approximately two months at issue in this case, between June 1, 2010, and August 3, 2010 (the "Two-Month Alleged Manipulation Period"). Chen owns the entirety of Respondents HEEP Fund and CU Fund. Respondents conducted financial trades through the wholesale electricity market administered by PJM Interconnection, LLC ("PJM"), an organization that operates various electricity markets throughout the Mid-Atlantic. Certain energy trades qualified market participants to receive a payment, known as a "Marginal Loss Surplus Allocation," or MLSA, which PJM distributed to customers making certain trades. (Am. Compl. Ex. 1 ("Penalty Order") ¶ 2, ECF No. 93-1.) FERC alleges here that, during the Two-Month Alleged Manipulation Period, Respondents "designed and implemented a fraudulent ... trading scheme to receive excessive amounts of MLSA payments," by manipulating "day-ahead" and "real-time" energy trades to engage in wash trades: "trades that are pre-arranged to cancel each other out and involve no economic risk." (Id. ¶¶ 3, 6.)

FERC became aware of Respondents' purportedly manipulative activities after PJM received two complaints from a market participant about someone "trying to game the system." (Id. ¶ 26.) In August 2010, in response to these complaints, PJM submitted a "referral" to the Commission's Office of Enforcement ("Enforcement"), alerting the Commission to Respondents' allegedly fraudulent behavior and setting off the investigations that ultimately resulted in this action.⁴ (Id. ) That same month, Enforcement began investigating Respondents. On August 25, 2010, the Commission issued an order formalizing the investigation. The investigation, while formal, was not adversarial. See 18 C.F.R. § 1b.13. Under applicable regulations, the investigation became formal because FERC issued an Order of Investigation.⁵ On August 9, 2013, after nearly three years of formal investigation, Enforcement staff issued letters of preliminary findings to Respondents "explaining the factual and legal bases for its preliminary findings of violations." (Id. ¶ 30.) Respondents replied to the letters on October 9, 2013.

On August 5, 2014, almost one year later, four years after the Commission began investigating Respondents, and more than four years after the Two-Month Alleged Manipulation Period, the Office of the Secretary issued a Notice of Alleged Violations. Settlement discussions failed, and Enforcement issued Respondents a notice of its "intent to recommend the initiation of a public proceeding against Respondents" (the "Notice"). Respondents replied to the Notice on September 24, 2014. The Notice and Respondents' opportunity to reply constituted the first procedural requirement with which the Commission had to comply in the investigation and penalty assessment process.⁶ Respondents submitted their response, and almost two months later, on December 17, 2014—four years and four months after the end of the Two-Month Alleged Manipulation Period—the Commission issued an Order to Show Cause.⁷ The OSC constituted the second procedural requirement—and the first process compelled by statute—with which the Commission had to comply.⁸ See 16 U.S.C. § 823b(a) ("After notice and an opportunity for public hearing, the Commission may issue such orders as necessary to require compliance ...." (emphasis added) ).

The OSC alleged Respondents violated the statute and regulation forbidding the use of manipulative behaviors in connection with the purchase or sale of electric energy:⁹ 16 U.S.C. § 824v(a)¹⁰ and 18 C.F.R. § 1c.2,¹¹ respectively. The OSC recommended that the Commission assess penalties and profit disgorgement against each of the Respondents in the following amounts:

CU Fund: $10,080,000 civil penalty; $1,080,576 disgorgement;

HEEP Fund: $1,920,000 civil penalty; $173,100 disgorgement;

Powhatan: $16,800,000 civil penalty; $3,465,108 disgorgement; and,

Chen: $1,000,000 civil penalty.

(OSC 1, ECF No. 93-2.) The OSC also recommended that: (1) HEEP Fund, CU Fund, and Chen be jointly and severally liable for disgorgement of unjust profits; (2) HEEP Fund, Powhatan, and Chen be jointly and severally liable for disgorgement of unjust profits; (3) HEEP Fund and Powhatan be jointly and severally liable for the penalties against HEEP Fund; and, (4) HEEP Fund and Powhatan be jointly and severally liable for the penalties against Powhatan.

The OSC directed Respondents to show cause within thirty days why they should not be found to have engaged in manipulative trading and required to disgorge profits and be assessed the proposed civil penalties. The OSC also ordered Respondents to elect either a formal hearing before an administrative law judge ("ALJ") prior to the assessment of a penalty, pursuant to 16 U.S.C. § 823b(d)(2), (the "Default Option"), or to proceed under 16 U.S.C. § 823b(d)(3)(A), (the "Alternate Option"), under which the Commission would "promptly" assess penalties upon a finding of violation.¹² Finally, the OSC allowed Enforcement thirty days after Respondents filed their answer to file a reply with the Commission.¹³

The Commission extended Respondents' deadline to respond once, on December 31, 2014, granting Respondents until February 2, 2015, to respond to the OSC.¹⁴ On January 12, 2015, before submitting their response, Respondents submitted a joint notice of their election to proceed in accordance with the Alternate Option, "thereby electing an immediate penalty assessment if the Commission [found] a violation." (Penalty Order ¶ 33.)

After cross-briefing¹⁵ and a review of the extensive record, the Commission issued its eighty-nine-page Order Assessing Civil Penalties (the "Penalty Order") on May 29, 2015—just over five months after issuing the OSC, and almost five years after the Two-Month Alleged Manipulation Period. In the Penalty Order, the Commission found that Respondents had "violated section 222 of the [FPA] and section 1c.2 of the Commission's regulations, which prohibit energy market manipulation, through a scheme to engage in fraudulent Up-To Congestion (UTC) transactions in [PJM's] energy markets to garner excessive amounts of certain credit payments to transmission customers." (Id. ¶ 1.) The Commission also determined that Respondents "engaged in round-trip UTC transactions not for hedging or arbitraging price spreads but instead to receive large shares of MLSA payments that otherwise would have been allocated to other market participants." (Id. ¶ 69.) The Commission ruled that "Respondents' round-trip UTC trades [were] wash trades, and therefore per se fraudulent and manipulative." (Id. ¶ 103.) Citing the Commission's Market Behavior Rules, the Commission stated that wash trades possess "two key elements[.] ... [T]he transactions: (1) are pre-arranged to cancel each other out; and[,] (2) involve no economic risk." (Id. )

Because of its findings, and pursuant to 16 U.S.C. § 823b(c),¹⁶ the Commission assessed penalties and profit disgorgement in the same amounts as those recommended in the OSC:

CU Fund: $

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