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More FERC Investigation Risks

New transparency practice turns confidentiality on its head.

Fortnightly Magazine - March 2011

confidentiality on its head, FERC justifies accelerated public disclosure of the subject’s identity in part because it will enable market participants to bring additional information to OE staff’s attention for possible further investigation. FERC assures that it and its staff will treat any such additional third-party communications confidentially. Perhaps, FERC will treat confidentially even the names of third-party communicators. Industry participants apparently must simply hope that any wheat will be sifted from chaff.

FERC foresees a possible benefit to those who may have been injured by the subject’s conduct and can bring their concerns to staff prior to any resolution in a binding settlement. Also, FERC says the subject possibly could be exculpated by other entities’ information, leading to mitigation of penalties or even to the closure of an investigation. But FERC is silent on the potential for other market participants to abuse or confuse an ongoing investigation of a competitor. That is, market participants or other entities could file complaints at FERC, or seek other relief under federal or state law, piggybacking in whole or in part on accelerated Notice information. 7 Apparently not concerned about opening a can of worms, FERC remarks approvingly that the Notice invites information on any heretofore unknown factors, as to which staff will seek the subject’s views, but which staff can use in future settlement negotiation or litigation with the subject.8 If unknown factors are forthcoming, all market participants, and plainly the subject of the investigation, should try to monitor for staff’s appropriately cautious use of the factors to inform prosecutorial discretion and fortify its application.

Other justifications for accelerated public disclosure seem smaller beer. FERC says accelerated disclosure of a subject’s identity relieves entities not under investigation from receiving unwarranted suspicion. But, before FERC conducts its own review of staff recommendations or independently finds any grounds of wrongdoing, the subjects of investigations themselves appear more likely to suffer from unwarranted suspicion. FERC also comments that accelerated disclosure will help educate, alert, or warn the public about violations that FERC itself is investigating. But, a Notice makes public only staff’s views, not FERC’s. Finally, it’s hard to credit FERC’s lion-lies-down-with-the-lamb view that Notices will induce others to evaluate their activities, cease illegal conduct, and file self-reports at FERC.

Reputational Harm Outweighed

When public notice of an investigation or a subject’s identity was restrained until a settlement or show-cause order, the concern was to prevent premature disclosure’s unnecessarily adverse effects on a subject’s reputation, including lowering its stock price or otherwise diminishing its ability to attract capital. FERC still acknowledges the unacceptable risk of reputational harm from disclosure at the outset of a staff investigation. Consistent with due process and a presumption of innocence, a subject plainly must not be exposed to public suspicion before enough staff discovery is conducted to reach even a preliminary staff finding of a possible violation. By authorizing Notices during ongoing staff investigations, FERC disregards the uncertain timing of investigatory procedures, and the absence of both its own review of staff recommendations and its independent findings of wrongdoing. It believes, by