On April 28, FERC issued a “show cause” order against Houston-based Total Gas & Power, North America, Inc. (TGPNA), its senior affiliate Total Gas & Power Ltd., and their ultimate parent, Total S.A. compelling them to explain why they should not be assessed civil penalties of $213 million plus “disgorgement of unjust profits” in the amount of $9.18 million (IN12-17). The fines were proposed in a FERC Office of Enforcement (OE) staff report alleging violations of section 4(A) of the Natural Gas Act (NGA) and FERC’s implementing regulations (section 1c.1) barring natural gas market “manipulation.” In addition, individual penalties were proposed for two trading desk managers viewed as architects of the strategy – Aaron Hall and Therese Tran – for $1 million and $2 million, respectively.
TGPNA’s senior affiliates Total Gas & Power Ltd. and Total, S.A. would be held “jointly and severally” liable for all the proposed penalties (both corporate and individual) on the theory that they exercised “significant control and authority” over the TGPNA traders’ activities, if FERC affirms the staff recommendations.
The April 29 order explains that, consistent with FERC’s standard practice, it is not at this point adopting or endorsing the OE staff’s report. Rather, it is conducting a deliberative process under which the respondents are given 30 days to file pleadings refuting the staff findings and recommendations. The OE staff then gets 30 days to reply to the respondents’ arguments. After that exchange of pleadings, FERC will decide whether to go ahead and impose the staff-proposed penalties in the show cause order.
The order also operates as a “notice of proposed penalty” under the NGA. FERC explained that the respondents have the “option” of either paying the proposed assessment or contesting the order’s penalties. If the respondents contest, FERC may (1) issue a “further order” assessing the penalties or (2) if it concludes that the record needs more information, direct a “paper hearing” or an evidentiary hearing before an administrative law judge (ALJ). If the latter occurs, FERC would await an initial decision (ID) by the ALJ and then review the ID before assessing any penalties.
Core Allegations. The show cause order included a description of the charges set forth in the April 1, 2016 staff report. In broad terms, TGPNA is said to have “deliberately traded to affect monthly natural gas indexes” in order to benefit its related derivative positions. The cited conduct entailed making allegedly “uneconomic trades” in the physical, fixed price monthly natural gas market at four regional hubs in the U.S. Southwest and then reporting those trades for inclusion in published monthly indexes.
The targeted conduct took place between June 2009 and June 2012. The regional trading hubs where the allegedly manipulative transactions took place were: (1) Southern California Gas Co. (SoCal); (2) El Paso Natural Gas Co., Permian Basin (Permian); (3) West Texas, Waha (Waha); and (4) El Paso, San Juan Basin (San Juan). In some months, TGPNA executed the strategy at multiple locations, according to staff.
More Detailed Contentions. The show cause order annexes the 4/1/16 OE staff report delineating the factual charges and legal analysis leading to the proposed civil penalties. The report runs over 100 pages.
The report focused on the activities of TGPNA’s “West Desk” during the investigative period. The challenged conduct revolves around “bidweek” – the last five days of the month – when publications calculate monthly index prices at trading hubs based on voluntarily reported trades. According to staff, the West Desk (led by respondents Hall and Tran) made trades in the physical fixed price gas market during bidweek from June 2009 to June 2012 intended to manipulate the index prices at four “heavily traded markets” in the U.S. Southwest in order to benefit derivative positions (both physical and financial).
The strategy had two phases, OE asserts. First, the West Desk “accumulated large positions” in both physical and financial products that were exposed to monthly index prices. Second, they traded a “dominant market share” of the monthly fixed price in natural gas during bidweek to either “inflate or suppress” the published index price to which company positions were exposed. The report charged that, as a result of this strategy, TGPNA “reaped millions of dollars in ill-gotten profits” in their derivative positions, while they “harmed other market participants” who bought or sold gas at “manipulated prices.” This pattern of conduct “also undermined the credibility of natural gas indexes in the southwestern United States,” the OE staff concluded.
The report notes testimony indicating the trading managers at the West Desk fully appreciated the relationship between their monthly physical fixed price gas trades and their “benefiting positions” in derivatives. Indeed, the West Desk “tracked the relationship between their fixed price trades and benefiting position in real time.”
Staff’s analysis spotlighted 38 so-called “point months” in which the West Desk’s trading behaviors were allegedly “most prominent” and had “the most material impact on prices.” (“Point months” are a construct designed by OE staff to give added weight to months in which the challenged TGPNA trading took place in more than one regional hub; for example, a month in which alleged manipulative trades took place at two locations would count as two “point months.”) The 38 point months figured in staff’s calculation of market harm and civil penalties.
The trading tactics employed fell into “bullish” and “bearish” subcategories. When the West Desk traders felt bullish, they made trades intended to increase the published monthly index, and when they felt bearish, they did the opposite, the report asserts. The traders would “time” their trades to “coincide with sharp and favorable trends in NYMEX prices,” while engaging in “suboptimal” trading, a tactic which (according to the company’s own Vice President of Risk Management) entailed “buying or selling at a loss, high trade concentration, [and] buying and selling at the same price.”
Whistleblowers. The staff report asserted that its perception of the West Desk’s manipulative “scheme” is strongly supported. It cited testimony from two ex-employees who “separately and independently ‘blew the whistle’ on manipulative conduct” by reporting the TGPNA activity to both FERC and the CFTC. Those eyewitness accounts were also corroborated, the OE insists, by an analysis of the West Desk’s trade data, showing how during bidweek it “amassed large portions of physical and financial products” exposed to the index price.
Moreover, the investigation uncovered “contemporaneous documents” indicating concerns raised internally by TGPNA’s “Compliance Department, Middle Office, Risk Control Office, and senior management.” These concerns touched on (1) the “very high market share” of the company in the fixed price gas market during bidweek; (2) the significant price difference between trades by the West Desk and those by other market participants; and (3) the “large positions” that profited from the desk’s fixed price trading.
The staff report also maintained that the company could come up with no “reasonable explanation” for its conduct to “disprove this evidence of manipulation.” Even Total’s explanation of “certain legitimate trading strategies” it claimed to have employed during the relevant time “did not disprove the evidence of market manipulation,” because manipulative and legitimate strategies could be conducted side-by-side. The OE was also suspicious of respondent Hall’s “urging” in 2008 that TGPNA adopt a “trade accounting system” that “commingled” all trades into a single regional book. This would enable the West Desk to “disguise and claim ignorance” of losing trades on the fixed price market, and to “offset any such losses with their gains on related positions.”
The upshot, OE concluded, was that TGPNA was able to pocket “more than $9 million in unjust profits” while harming consumers and producers of natural gas in the amount of “more than $89 million.”
TGPNA’s U.S. and West Desk Operations. The “background” section of the OE staff report relates that TGPNA’s “primary task” is to market Total’s production assets in the U.S. However, during the period of the investigation, the company and its affiliates did not have any production interests in the U.S. Southwest, nor any users or distributors of natural gas in that region. The parent Total S.A. and Total Gas & Power, Ltd. are said to “exercise direct control” over the trading operations of TGPNA, with the Vice President of Trading at the Houston trading floor reporting directly to the V.P. of Total Gas & Power (who, in turn, reports to the President of the parent’s Gas & Power Division).
Both the ultimate parent, Total S.A., and the senior affiliate Total Gas & Power were “deeply involved” in supervising the details of trading operations, the report found. Their executives were among the recipients of a 2009 memo alerting management to the firm’s “very high market share” at certain trading hubs. In that memo, TGPNA’s president “worried about resultant regulatory scrutiny and urged increased monitoring and compliance efforts” relating to the traders’ activities.
Respondent Hall headed up the West Desk from 2008 until September 2011, when he was switched to other corporate operations. He was “instrumental,” the report states, in moving TGPNA’s accounting to one that “commingled physical and financial positions.” Tran joined TGPNA in 2007 and replaced Hall as the head of the West Desk when he was reassigned. She “executed the vast majority” of both monthly physical fixed price and financial trades over the relevant period.
A subordinate of Tran, Wilson, was asked in early 2012 to place trades during bidweek in the fixed monthly physical market with the intent of benefiting TGPNA’s financial positions. After five months of participating in the scheme, the OE related, he “began to feel very uncomfortable” with this conduct and shifted to placing alternative trades in another U.S. region “as a way of distancing himself” from the West Desk trading activities. This precipitated an open argument on the trading floor between Tran and Wilson, the report chronicles, soon after which management terminated Wilson, “claiming that he was acting insubordinate to Tran.” But before departing, Wilson “alerted TGNPA management” about the West Desk trading scheme, as well as “government authorities.” The latter included a 6/2/12 email to FERC’s Enforcement Hotline as well as a whistleblower complaint filed with the CFTC.
Integrity of Published Index Prices. FERC staff explained the “vital role” published natural gas price indexes play in energy markets regulated by FERC. These include indexes relevant to the matter at hand – i.e., the Platts and Natural Gas Intelligence indexes. Relied upon and “widely used” in natural gas industry in both private contracting and by state commissions to review the “prudence” of gas LDC purchases, these indexes are based upon “information obtained on a voluntary basis by market participants about trades at various locations.” The report stressed that, given this reliance, “indices must be robust and accurate and have the confidence of market participants” to support the efficient functioning of markets.
The trading strategy engaged in by TGPNA’s West Desk, according to the OE’s report, has “skewed monthly index prices to the detriment of consumers and market participants.”
Steps Leading Up to Order to Show Cause. The report relates that in February 2015 the OE presented the respondents with its “preliminary findings.” In June, the Total group responded with a 118-page rebuttal. Undeterred, the OE issued a “Notice of Alleged Violations” in September. When settlement negotiations with the respondents proved “unavailing,” on 11/25/16 the OE served notice of its intent to recommend proceedings against Total. Again, Total submitted a response.
The OE stated that it “carefully considered” the respondents’ submissions but decided to recommend enforcement proceedings. On a separate track, the report notes, the CFTC accepted a settlement with TGPNA and Tran entailing (1) a $3.6 million civil penalty; and (2) a two-year trader ban preventing the company and Tran from trading monthly physical fixed price and physical basis natural gas positions during bidweek at any locations where they also held positions “whose value is derived from index prices.” In approving the settlement, the CFTC found that TGPNA had “attempted to manipulate” monthly index settlement prices at the four Southwest locations during bidweeks in several months in 2011 and 2012.
Trading Scheme. The heart of the OE’s allegations is that TGPNA’s traders, once having set up financial positions that would benefit from movements, up or down, in the monthly physical index price, engaged in “frequent and opportunistic trading of sufficient volumes of monthly physical fixed price gas, irrespective of supply and demand fundamentals and indifferent to price, in order to move index prices” in a direction that would benefit financial positions “whose value was derived from those published index prices.”
While the OE said the West Desk implemented this scheme in “many months” during the period investigated, it selected the 38 point months in which the “trading behaviors were most discernible” and TGPNA’s market concentration had the most impact. The report reiterated that its evidence to support its charges stemmed from three sources:
- The “credible testimony” of former employees Wilson and Callender;
- “Substantial” trade data corroborating their testimony; and
- Contemporaneous documents attesting to the “compliance concerns” of various Total compliance and risk management departments as well as “senior management.”
The report then extensively recounted the processes identified by witnesses Wilson and Callender to implement the manipulative bidweek trading strategy designed by respondents Hall and Tran, as well as their impressions and the regrets Wilson developed regarding his role in the strategy. Eventually he alerted FERC through its hotline and filed a “formal whistleblower complaints” with the CFTC.
Alarms Sounded within Total Organization. As noted, the TGPNA compliance department raised concerns, early on, about the West Desk’s outsized trades in the monthly fixed price physical gas market during bidweek as well as its measurable effect on the published index price and its favorable impact on TGPNA’s financial positions. A compliance officer as early as February 2009 raised a red flag with senior management and recommended that the company ramp down its trading in fixed price and physical basis markets where it had a large share. His memo urged, moreover, that TGPNA “consider compliance both in terms of fact and appearance.”
This concern reverberated at even higher levels. TGPNA’s president sent a memo to executives of Total S.A. and Total Gas & Power, and subsequently met with them to discuss the trading operation’s “very high market share at several trading points and resulting regulatory scrutiny,” as the OE report puts it. The OE report also observed that, after a review by the law firm of Covington & Burling, the compliance officer revised his monthly reporting to label his calculation of the impact of the bidweek fixed price trades on published indexes as “Dif” [sic] instead of “TGPNA Reporting Effect on Price” – apparently to allay concerns, the OE suggests, about the “legal and compliance implications.”
Notwithstanding the level of concern indicated by the compliance officer’s memo and the TGPNA president’s memo to senior management at the Total affiliates, the OE report remarked that “there is no evidence that TGPNA management, or Total or TGPL, conducted any meaningful inquiries regarding the trading activity that Craven [the compliance officer] flagged.” Even Craven did not take steps to interview the traders and get to the bottom of their trading tactics.
Similar declarations of concern were raised by TGPNA’s “Middle Office” in reports flagging the dramatically high shares of trades executed by the company in the fixed price monthly gas market during bidweek, and the fact that TGPNA’s trades were typically the high or the low price in these reporting periods.
Finally, in June 2012, when Wilson began his internal whistleblowing activities and senior management at the Total affiliates including the ultimate parent were alerted, TGPNA’s VP of Risk Control was requested to study the trading patterns of the West Desk and report back. Her report to management identified “patterns that looked like suboptimal trading” in conjunction with sizeable market shares in the monthly fixed price physical market. But even then, the internal investigation fizzled. Though the VP of Risk Control “understood,” the staff report opined, that the “suspicious trades” required a “full inquiry” including analysis of contemporary trader communications and interviews, there is “no evidence that management ever questioned Tran about her trades.”
OE’s Legal Conclusions. The staff report concluded that the evidence supported a finding that TGPNA’s trading activities constituted manipulation of the fixed price monthly physical gas market with the intent of benefiting its financial positions, in violation of NGA section 4A and the Commission’s anti-manipulation rule. The report goes on to trace the elements required to prove a case of a “fraudulent device, scheme or artifice” and found that each such element existed in the three-year pattern of trading and market impacts engaged in by TGPNA. In particular, it underscored that the West Desk’s fixed price trading “did not reflect supply and demand fundamentals” and that “its traders were generally indifferent to price.” Instead of “trying to buy low and sell high,” the OE observed, the traders “bought and sold gas for the purpose of influencing published index prices.”
Further, the report reviewed the various business rationales offered by Hall and Tran for their trading patterns, but concluded that these either were not credible or “not inconsistent” with the ongoing market manipulation strategy alleged by OE.
Scanning the record for evidence of the intent – or “scienter” – required to prove a violation of the anti-fraud rules, the OE report relied first on the “direct” evidence of Wilson’s testimony. It underscored how the ex-employee admitted he was trained to manipulate the published indexes for the benefit of TGPNA’s financial positions and was subsequently congratulated by his supervisor, Tran, for getting the knack of it, before he grew disaffected.
Second, the OE relied on “indirect” evidence of intent drawn from the company’s trading records that corroborated the testimony of the whistleblowers. The report emphasizes (1) the “routinely established large Print Risk positions” of TGPNA; (2) the trading during the bidweek to move the published indexes directionally to favor TGPNA’s Print Risk; and (3) the West Desk’s real-time tracking, using “customized spreadsheets,” of the effect of their bidweek trades on the published prices and the firm’s profit and loss.
Finally, the OE inferred fraudulent intent from the several departmental managers’ and senior executives’ memos highlighting their “concern” about the implications of the West Desk’s disproportionate trading positions at certain regional hubs – concerns that somehow never resulted in confronting the responsible traders.
In the jurisdictional part OE’s legal analysis, the report determined that TGPNA’s natural gas fixed price and index transactions were either (1) directly FERC-jurisdictional or (2) “affected” third-party jurisdictional transactions that were “in connection with” TGNPA’s challenged fixed-price transactions.
With respect to the affiliates that stood above TGPNA in the Total corporate hierarchy – namely, Total Gas & Power and the parent, Total, S.A. – the report found that these deeper-pocketed entities should be held jointly liable with TGPNA, Hall, and Tran, as the latter threesome could “escape accountability due to insufficient funds.”
The OE reasoned that FERC could “disregard the corporate form” of Total’s structure because the affiliated group “acted as a single entity.” It elaborated that “for years” the Commission has “applied its single entity doctrine” and disregarded corporate boundaries “when necessary to fulfill its statutory obligations.” In this connection, OE staff recounted the evidence of active management and oversight of TGPNA’s business by the two senior affiliates to conclude that the “single entity” doctrine applied to the Total business structure. It moreover rejects the respondents’ claim that the “minimum contacts” of the foreign-based affiliates with the U.S. rendered them immune from FERC’s jurisdiction.
The report also explained why OE is recommending that TGPNA trading desk managers Hall and Tran be held individually liable, given their instrumental roles in devising and implementing the strategy at the heart of the investigation. And the OE catalogs the respondents’ factual and legal defenses in the process of refuting and rejecting them.
Sanctions. In appraising the “seriousness” of the challenged activity as a driver of the penalty size, the report cites these considerations:
- Degree of market harm: The respondents’ actions harmed other market participants by “distorting natural gas index prices” at four “heavily traded market hubs” and caused about $89 million in losses to third parties;
- Persistence: The challenged scheme endured for a three-year period;
- Magnitude: The “manipulative and deceptive” trading strategy at issue intentionally resulted in a “disproportionate share of the physical fixed price volumes and deals” during the bidweek periods;
- Executives implicated: Personnel at TGPNA wielding “substantial authority” were “willfully ignorant of the violations,” having “failed to follow up” on concerns raised internally about the West Desk conduct;
- Efforts to remedy: The respondents made “no effort to remedy their violations” and “persisted in their conduct” despite the warnings along the way that reached TGPNA’s senior management.
In addition to enumerating these “seriousness” factors, the OE found that “mitigating factors” were “minimal.” In this regard, the report asserted that, while the respondents “cooperated” with the investigation, they did “not self-report” or “accept any responsibility for their conduct.” Moreover, while they had a written compliance program in place, it did “not warrant any credit,” OE found, because it was not effective in “detecting and deterring the West Desk’s manipulative conduct” and, even when the concerns surfaced, management “did not follow up.” And while the company had compliance training, Hall testified that it was superficial (“[it] can be a little bit too easily just skimmed over without taking in any of the substance; but it fulfills the obligations of the company to supply it.”)
The “sanctions” section concluded with an explanation of how OE derived its proposed “disgorgement of profits” penalty of just over $9 million and its civil penalty proposals for (1) TGPNA ($213 million) and (2) the two individual traders ($1 million for Hall, $2 million for Tran).
 Total S.A. is an international energy firm headquartered in Paris, France, with operations in over 130 countries. It is regarded as one of the “six supermajor” oil companies, according to the OE staff report.
 Chairman Bay did not participate.
 Advocates for energy traders, both in the context of similar FERC enforcement cases and in energy industry conferences, have maintained that this process for adjudicating show cause orders is stacked against them.
 The term “respondents,” as used in the show cause order and staff report, refers to all four accused parties: TGPNA, Total S.A., and the two individual trading managers.
 The order goes on to state that the respondents may seek rehearing of the final order assessing penalties and may thereafter appeal the decision to a federal court of appeals. If FERC assesses a civil penalty and it remains unpaid for 60 days, the Commission may initiate a “collection action” in a federal district court.
 Commodity Futures Trading Commission.
 Another TGPNA employee, Callender, while not directly involved in the West Desk’s trading operations, became privy to them in his functions for the firm and, after being terminated in 2011, likewise filed a whistleblower complaint at the CFTC.
 The report underscores that the two ex-employee “whistleblower” accounts were separately made, based on experience gained at separate times, yet matched each other.
 The CFTC, but not FERC, has a formal procedure for encouraging whistleblowers to come forward, including a financial reward mechanism.
 In fact, Tran testified that “no one ever talked to her about these trades” and she’d never heard about the VP’s analysis.
 “Print Risk” in the vernacular of the trading floor at TGPNA meant positioning the firm to obtain exposure to shifts in the monthly published fixed price index based on reported transactions during bidweek.
 OE’s analysis asserts that there is a “robust history” of federal agencies piercing the corporate veil and setting aside corporate form when the “fiction of corporate separateness” might “frustrate the policies of a federal statute.”
 OE maintains that FERC’s exercise of “personal jurisdiction” over the foreign, parental affiliates is warranted where the latter exercise “control [over] the day-to-day affairs of the subsidiary” – a circumstance the staff report finds is present here. The report cites not only the two foreign affiliates’ systematic oversight of TGPNA but also their direct business activities in the U.S.
 OE further faulted TGPNA for a “long history” of not responding appropriately to compliance concerns. It notes, for example, that when it was discovered by management in 2010 that several traders were dealing in an unauthorized product, it removed the controller but did not nothing to discipline the traders.
 OE asserted that the individual trading managers could “afford to pay” these proposed penalties, citing their generous base salaries and bonuses during the relevant period.
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