Lawyers get a bad rap in this country, and in some cases it’s well earned. However, during the month of October I enjoyed the distinct privilege of interviewing nearly a dozen of the industry’s...
Trading on a Knife Edge
The Deutsche Bank case and the meaning of ‘price manipulation.’
A few months back, the Federal Energy Regulatory Commission directed Deutsche Bank Energy Trading LLC to show cause why it shouldn’t be assessed a civil penalty of $1.5 million and be made to return some $123,000 in allegedly unjust profits from power trading in markets run by the California ISO.
FERC acted on an investigation and proposed findings reported by its internal Office of Enforcement. That investigation had found evidence that Deutsche Bank engaged in a “fraudulent scheme” of trading in one market to benefit a position in another, aided by “falsely designating” certain imports and exports as complying with ISO rules.
Moreover, FERC’s enforcement staff alleged that Deutsche Bank had “conceived and executed” a program of trading in spot energy markets, from January through March 2010, so as to benefit certain complementary positions that Deutsche Bank had held on CRRs—“congestion revenue rights,” the term used by the ISO in California to describe what are more commonly known, in East Coast markets, as FTRs, or “financial transmission rights.” (See, Order to Show Cause and Notice of Proposed Penalty, Dkt. IN12-4, Sept. 5, 2012, 140 FERC ¶61,178.)
In purely dollar terms, the Deutsche Bank case falls short of some other recent enforcement actions. It was only this past March that FERC exacted a $245 million settlement from Constellation Energy Commodities Group—the largest ever ordered by the commission, including penalty and disgorged profits.
Yet this comparison wasn’t lost on John Estes and the rest of Deutsche Bank’s legal defense team from Skadden, Arps, Slate, Meagher & Flom. Their response to the charges from the FERC staff, filed early last month, acknowledges the small sums involved:
“Given that Enforcement seeks sanctions here of only $1.6 million—a small amount compared to other alleged energy manipulation cases—one might wonder,” the defense writes, “why DBET has not already settled.”
“After all, the cost of defending the case is likely to exceed the amount Enforcement seeks.”
Yet the stakes couldn’t be higher. And the reason, says the Deutsche Bank defense team, comes down to a “point of principle.”
Recall that in the Constellation settlement, enforcement staff had found CECG culpable of trading in one set of markets (virtual and day-ahead physical schedules) with the aim of maximizing returns in others (financial positions on contracts for differences). And now, in the Deutsche Bank matter, staff advances a similar-sounding charge: that Deutsche Bank “falsely scheduled unprofitable physical exports at the Silver Peak intertie with the intent to benefit its financial positions [on congestion rights] in the ISO system. (See, 2012 Report on Enforcement, FERC Office of Enforcement, Dkt. AD07-13-005, Nov. 15, 2012, p. 7.)
But at the same time, the legal defense team from Skadden Arps appears to have made at least a prima facie case that Deutsche Bank’s scheduling of physical transactions wasn’t false or misleading, nor intentionally unprofitable. If this defense should hold up—that Deutsche Bank traded honestly, openly, and efficiently (with a profit-seeking intent)—then FERC’s