New regulations from FERC to prevent energy industry market manipulation take deep root in securities industry law. Modeled in part on the Securities Exchange Act of 1934 (Exchange Act), the...
Proving Intent to Manipulate Markets
Should FERC look to all Securities and Exchange Commission precedent for a model?
cruise line customer’s purchase of eight cruise ships. 22 Recklessness claims were bolstered by allegations the corporation knew of the cruise line customer’s precarious financial condition and failed to reveal that risk, while extending the customer hundreds of millions of euros of loan guarantees and continuing to tout high ship sales levels publicly. Corporate officers had scienter in allegedly signing SEC filings containing misrepresentations, while failing to learn that loan guarantees constituted a disproportionately high amount of overall debt and had not been disclosed. Also, a subsidiary allegedly had scienter in excluding millions of dollars of railcar contract costs from its financial statements.
• Scienter is established by linking corporate behavior to culpable individuals. For energy market manipulations as well as securities violations, scienter is shown in connecting the defendant to the culpability. Financial services company assurances of underwriting standards integrity were alleged to be false because, as the entity servicing the collateral, the company was responsible for reviewing delinquencies and knew, or should have known, of underwriting violations. 23 Senior management had scienter in allegedly directing employees to generate uncreditworthy loans and underreport delinquencies, violating underwriting guidelines day-to-day. Scienter was alleged given an affiliate’s functions to issue certificates supposedly secured by mobile home installment sales contracts and mortgage loans that were of low quality, and to file SEC reports on such collateral. Director officers with access to fraudulent underwriting data allegedly had scienter.
• Specifics, specifics, specifics. Both securities-industry scienter and energy-industry scienter are fact-based. There was scienter when an attorney allegedly knew of fabricated investment performance and other facts omitted from a securities investment brochure provided to investors for an offshore investment scheme, and the attorney’s law firm allegedly took actions, including SEC regulatory tactics, to conceal its role. 24 Claims that a telecommunications company overstated its line counts of new customers were sufficiently particular as to scienter to inflate its publicly reported statistics. 25 Scienter was pleaded for corporate officials’ personal direction of a fraudulent accounting entry of a $1.2 million sale while knowing the purchase already had been canceled. 26 An official who signed an SEC form, knowing it to be based incorrectly on the $1.2 million sale entry, allegedly had scienter.
PSLRA Precedents Should Benefit FERC Enforcement
Wholesale gas and electric markets are susceptible to manipulation and fraud. Analogous securities regulation precedents are to be adapted to specific energy industry facts, circumstances, and situations to help identify and prevent those illegalities. Order 670 addresses energy market manipulations in part by adopting the scienter element for violations under SEC regulation. 27 As shown above, PSLRA scienter precedents should benefit energy industry FERC enforcement.
FERC should apply the entire body of securities case law, including cases under the PSLRA strong-inference-of-scienter standard, to energy market manipulations. In that way, insufficient, vague, or conclusory allegations will be discouraged, and predictable enforcement policy will be benefited. Failure to consider the PSLRA strong-inference-of-scienter standard case law would segregate those precedents from use for FERC enforcement purposes, complicate interpretation of the Order 670 regulations, and add unpredictability to energy industry compliance efforts.