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?
4988 at *6-7, 25-29 (S.D.N.Y. Feb. 10, 2006). Alternatively, recklessness suffices if knowledge of facts or access to information contradicting defendants’ corporate public statements is alleged. Mere position in a corporate hierarchy does not show intent. 15 Regarding a financial services corporation’s bundling of loans as assets backing bonds, there was no scienter in pointing to mere involvement in loan approvals violating internal underwriting guidelines. No access to specific reports or statements about malfeasance or supervision of wrongdoers was alleged.
• Mistakes from negligence alone are not punishable . Analogies to the energy industries are found in securities cases on the lack of scienter in standard business conduct. Where a scheme was claimed to inflate a stock price with a press release about government approval of a prescription product, the court noted the purpose to punish knowing fraud or reckless behavior, but not mistakes from negligent or even grossly negligent behavior. 16 There was no scienter in an alleged effort to reduce cash outlays for debt service because that generalized motive to reduce costs is common to most, if not all, corporations. Nor was it reckless to omit from the press release more detailed data, for which there was no obvious duty to disclose.
• Details, details, details. A chief instruction from recent securities case law is the judicial focus on sufficient scienter detail. While FERC enjoys substantial discretion, it is not unlikely that future judicial review will focus on whether energy industry enforcement scienter has been detailed adequately. A recent case 17 showed no specific details of discrimination by a broker-dealer options specialist and its clearinghouse against a customer’s purchase and sell orders. Another case showed no telecommunications company scienter absent details on how overhead costs were allocated or on any improper allocation practices. 18 Scienter again was insufficient about insider trading after a stock price rise, absent explanations of the percentage of stock sold and what the figures represented, and details of personal involvement for corporate officials’ scienter of obvious financial, cash flow, and accounting problems. 19 There likewise was no scienter for a financial service company parent corporation or its president without documents or other details showing intentional disregard of mobile home loan underwriting guidelines. 20
• Motive to profit at investor expense and reckless disregard of non-creditworthiness suffice. Just as in securities industry cases where scienter is alleged effectively, the more plain the motive and opportunity, or the recklessness, the more plausible the showing. Scienter was pleaded based on the officers’ and employees’ motive and opportunity to make short-term profits at investor expense in Dynex. 21 Allegations of systematic disregard for borrowers’ lack of creditworthiness in order to complete large volumes of loans quickly, ignoring signs of defective bond collateral, showed recklessness.
• Aberrant business conduct showing scienter. In energy industries, as well as the securities industry, if the act speaks volumes, such as failure to explain the ongoing risks of poor corporate finances, scienter showings are facilitated. Scienter was pleaded in parent corporation lack of public disclosure of the execution of loan guarantee financing arrangements for a