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Federal Energy Regulatory Commission v. Barclays Bank PLC

United States District Court, E.D. California

March 28, 2017

FEDERAL ENERGY REGULATORY COMMISSION, Plaintiff,
v.
BARCLAYS BANK PLC; DANIEL BRIN; SCOTT CONNELLY; KAREN LEVINE; and RYAN SMITH, Defendants.

          ORDER

          Troy L. Nunley United States District Judge.

         Plaintiff Federal Energy Regulatory Commission (“FERC”), has filed this action, seeking affirmance of its administrative Order Assessing Civil Penalties (“Assessment Order”) against Defendants. ECF No. 1 (“Petition”). In its Assessment Order, FERC states that Barclays Bank PLC (“Barclays”) and four individuals violated the anti-manipulation provisions of the Federal Power Act (“FPA”), 16 U.S.C. § 824v(a), and FERC's Anti-Manipulation Rule, 18 C.F.R. 1c.1. Administrative Record (“AR”) 16-66.[1] The Assessment Order also assessed penalties and disgorgements against Defendants totaling $487.9 million. AR 84-85.

         I. THE CURRENT MOTION

         Pending before the Court is FERC's Motion to Affirm Civil Penalties. ECF No. 125. The parties have fully briefed the motion. See ECF No. 125 (motion), 136-54 (Defendants' opposition briefing and declarations), 166 (reply). The matter came on for hearing on February 9, 2017, at which time the parties responded to specific questions put to them by the Court. See ECF No. 186.

         For the reasons that follow, the Court concludes, in agreement with every other federal court that has expressly addressed this issue, that Defendants are entitled to conduct discovery under the Federal Rules of Civil Procedure. See FERC v. Maxim Power Corp., 196 F.Supp.3d 181 (D. Mass. 2016); FERC v. City Power Marketing, LLC, 199 F.Supp.3d 218 (D.D.C. 2016); FERC v. Silkman, 2017 WL 374697, 2017 U.S. Dist. LEXIS 10902 (D. Me. 2017); FERC v. ETRACOM LLC, 2017 WL___, 2017 U.S. Dist. LEXIS 33430 (E.D. Cal. 2017). Accordingly, the Motion To Affirm will be denied without prejudice to its renewal as a dispositive motion at an appropriate time.

         II. PROCEDURAL HISTORY

         On October 9, 2013, FERC commenced this action by filing its “Petition” in this Court, referring to itself as “Petitioner” and Barclays and the individuals as “Respondents.” ECF No. 1. The Court will refer to FERC as the “Plaintiff and to Barclays and the individuals as “Defendants.”

         On May 22, 2015, the Court denied Defendants' motions to transfer venue of this case to the Southern District of New York, or to dismiss (in whole or in part) on grounds of lack of jurisdiction, failure to state a claim, or statute of limitations. ECF No. 88.[2] An overview of the alleged manipulation is set forth in that order.

         From the beginning of this litigation, the parties have sparred over whether or not the Court should permit the parties to conduct discovery under the Federal Rules of Civil Procedure. See ECF Nos. 44 (Defendants' motion to dismiss), 52 (Joint Report re Fed.R.Civ.P. 26(f)), 101 (Defendants' briefing on bifurcation), 103 (FERC's briefing on bifurcation), 118 (Defendants' motion for discovery).

         III. ADMINISTRATIVE HISTORY

         A. FERC's Authority

         In 2006, acting under the authority granted it by 16 U.S.C. § 824v(a), FERC promulgated its Anti-Manipulation Rule, 18 C.F.R. § (“FERC Rule”) 1c.2. 71 Fed. Reg. 4244 (January 26, 2006). Broadly speaking, the rule prohibits fraudulent practices “in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission.” FERC Rule 1c.2(a); see Simon v. KeySpan Corp., 694 F.3d 196, 207 (2d Cir. 2012) (the rule bars “fraud or deceit in connection with the sale of energy”), cert. denied, 133 S.Ct. 1998 (2013).

         B. Investigation

         In July 2007, FERC's Office of Enforcement staff (“Enforcement”) commenced a preliminary investigation into allegations of “manipulative trading by Barclays in physical electricity markets in the western U.S., ” and notified Barclays that it was doing so. Petition ¶¶ 34, 35;[3] AR 6461 (FERC letter to Barclays).[4] On October 2, 2008, FERC authorized Enforcement to commence a “formal investigation” of Defendants, thus granting Enforcement the power to obtain testimony and other evidence through compulsory process. AR 8, 6647-48.[5]

         C. Preliminary Findings & Responses

         On June 10, 2011, Enforcement issued Preliminary Findings Letters to Defendants stating that it had preliminarily concluded that Defendants had engaged in manipulative activity in violation of the Anti-Manipulation Rule. AR 8, 6022-301.[6] The letters invited Defendants to respond with any additional information or rebuttals before Enforcement made a recommendation to FERC.[7] See AR 6022-301. On August 29 & 30, 2011, Defendants responded to the Preliminary Findings Letters. AR 8.[8]

         D. Notice of Alleged Violations and Rule 1b.19 Notice & Responses

         On April 5, 2012, Enforcement issued a “Staff Notice of Alleged Violations.” AR 8, 6663.[9] It appears that settlement discussions ensued, but the matter was not resolved. See AR 94.[10]

         On May 3, 2012, Enforcement provided Defendants a FERC Rule 1b.19 letter, notifying Defendants of its intent to recommend that FERC issue an Order To Show Cause why FERC should not institute an enforcement action against Defendants seeking penalties and disgorgements. AR 8, 6371-85; see FERC Rule 1b.19.[11] The FERC Rule 1b.19 letters invited Defendants to respond to the 1b.19 letter, advising that they could address any matter they wanted FERC to consider, and that they could provide additional evidence. See AR 6371-85. On June 11, 2012, Defendants responded to the FERC Rule 1b.19 letters. AR 8.[12]

         E. Staff Report & Order To Show Cause

         Enforcement compiled a Staff Report (undated), that “concluded that Barclays Bank PLC (Barclays) and its individual traders manipulated the electricity markets in and around California from November 2006 to December 2008 in violation of 18 C.F.R. § 1c.2 (2012) (Anti-Manipulation Rule or 1c.2).” AR 90-158 (“Staff Report”). Specifically:

Enforcement determined Respondents engaged in a coordinated scheme … to take the physical positions they had built and liquidate them in the cash markets - generally at a loss - to impact the ICE daily index settlements to benefit Barclays' related financial positions that settled against those indices.

Petition at 9 ¶ 36; AR 92.

         On October 31, 2012, FERC directed Defendants to show cause why they should not be found to have violated 16 U.S.C. § 824v(a) and the Anti-Manipulation Rule, and why they should not be assessed civil penalties and disgorgements. AR 86-89. The Staff Report was attached as an exhibit.

         The OSC further directed Defendants to elect whether they would proceed by “(a) an administrative hearing before an Administrative Law Judge (ALJ) at the Commission prior to the assessment of a penalty under section 31(d)(2), or (b) an immediate penalty assessment by the Commission under section 31(d)(3)(A).” AR 88. Defendants were advised that if they chose the “immediate penalty assessment” route, and if the Commission assessed a penalty which Defendants failed to pay within 60 days, “the Commission will commence an action in a United States district court for an order affirming the penalty, in which the district court may review the assessment of the civil penalty de novo.” AR 88.

         F. Answers & Election

         Defendants filed Answers to the OSC on December 14, 2012.[13] All Defendants elected the immediate penalty assessment route, so that they could “have this case adjudicated de novo by a federal district court pursuant to sections 3l(d)(1) and (3)(A) of the Federal Power Act (‘FPA'), 16 U.S.C. §§ 823b(d)(1), (3)(A).” See AR 159-98 (Barclays).[14] On January 28, 2013, Enforcement replied to Defendants' Answers. AR 958-1062.

         G. Order Assessing Civil Penalties & District Court Filing

         On July 16, 2013, FERC issued its Order Assessing Civil Penalties. AR 1-85. In the Order, FERC stated that Defendants had violated 16 U.S.C. § 824v(a) and the Anti-Manipulation Rule, and it assessed civil penalties and disgorgements against them. Id On October 9, 2013, FERC filed this action, seeking an affirmance of its Order Assessing Civil Penalties. ECF No. 1.

         This Court has jurisdiction under 16 U.S.C. § 823b(d)(3)(B).

         IV. DE NOVO REVIEW PROCEDURES

         This Court's current task is to determine how it will proceed. The applicable statute instructs the Court to “review de novo the law and the facts involved.” 16 U.S.C. § 823b(d)(3)(B). FERC, in agreement with Defendants, asserts that “de novo” review:

requires a “fresh, independent determination of ‘the matter' at stake.” See Doe v. United States, 821 F.2d 694, 697-98 (D.C. Cir. 1987) (en banc) (Ginsburg, J. R. B.) (citations omitted). “Essentially then, the district court's charge was to put itself in the agency's place, to make anew the same judgment earlier made by the agency.” Id. at 698. This Court has fulfilled the de novo role when “the district judge made the same judgment earlier entrusted to the agency head ... on the basis of information he found sufficient to make the judgment, and without deferring to the prior agency conclusion on the same matter.”

ECF No. 125 at 8 (FERC); ECF Nos. 136 at 23 (Barclays), 140 at 9 (Smith), 141 at 10 (Levine). The dispute here is about what are “the law and the facts involved” that will be the basis for decision in this Court.

         FERC asserts that “the law and the facts involved” are limited to the evidence and arguments that are contained in what it calls the “administrative record.” ECF No. 125 at 22. Specifically, it argues, “issue exhaustion” bars Defendants from introducing new arguments or evidence here. ECF No. 166 at 15. FERC argues that there is no unfairness in this because Defendants “had the opportunity to submit additional factual affidavits to the Commission from any witnesses they wished the Commission to consider ….” ECF No. 52 at 8; ECF No. 166 at 13-14. FERC concedes that additional proceedings, including expert testimony and discovery, may be necessary to resolve how much Defendants should pay in disgorgement. In addition, FERC asserts that it is prepared to offer any additional evidence the Court deems necessary, and is “prepared to proceed with a trial” if a review of the record or supplementary evidentiary hearing is insufficient to decide the matter. ECF No. 52 at 11.

         Defendants argue that “the law and the facts involved” includes any arguments they wish to make now, plus all evidence they can collect by means of discovery. ECF No. 136 at 55-61. Defendants argue that they are entitled to conduct discovery so that they can properly defend themselves against FERC's charges. Defendants point out that they never had the ability to test the evidence submitted to FERC “to ensure its relevance, reliability, fairness, competence or scientific validity.” ECF No. 52 at 14. In any event, they argue, the evidence Enforcement chose to present to FERC - in the “administrative record” - consists of “cherry picked transactional data” and “a handful” of emails and instant messages (“IMs”). See ECF No. 52 at 13. Moreover, no “neutral trier of fact” has ever resolved the matter in a “contested evidentiary proceeding.” ECF No. 52 at 14-15.

         Defendants also argue that basic fairness, and their Due Process rights, require that they have the opportunity for a full contested hearing in this Court. ECF No. 136 at 61-63. They assert that they never intended to waive their right to a “full adjudicative process” when they elected to go to district court. ECF No. 52 at 14. To the contrary, they assert that FERC's Enforcement staff assured them that they could conduct discovery once the district court case was filed. ECF No. 136 at 18. Moreover, they argue, the applicable statute, 16 U.S.C. § 823b(d)(3)(B), as interpreted by FERC itself in a policy statement, calls for a “de novo trial.” ECF No. 136 at 60.[15]

         V. ANALYSIS

         A. The Meaning of the Statute The Court first looks to the language and structure of the applicable statute, to determine whether discovery is required.

The first step in interpreting a statute is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case. This often requires examin[ing] not only the specific provision at issue, but also the structure of the statute as a whole, including its object and policy. If the plain meaning of the statute is unambiguous, that meaning controls. If the statutory language is ambiguous, then we consult legislative history.

Wilson v. Comm'r, 705 F.3d 980, 987-88 (9th Cir. 2013) (citations and internal quotation marks omitted). The disputed statutory language provides that after FERC has assessed a penalty and waited 60 days:

the Commission shall institute an action in the appropriate district court of the United States for an order affirming the assessment of the civil penalty. The court shall have authority to review de novo the law and the facts involved, and shall have jurisdiction to enter a judgment enforcing, modifying, and enforcing as so modified, or setting aside in whole or in Part such assessment.

16 U.S.C. § 823b(d)(3)(B) (emphasis on disputed terms added).[16]

         1. The ...


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