The FERC v. Vitol/Corteggiano matter is interesting on several different levels and telling from a compliance expectations standpoint. The matter involves the arcane world of congestion revenue rights (CCRs). The allegation made by FERC is that the Vitol trader understood the mathematical models (and the workings of those models) to such an extent that two physical trades had the effective of setting the locational marginal price that benefitted Vitol’s corresponding financial position in the congestion revenue rights. “Respondents lost money on the imports, but avoided a far larger loss on the CRRs at Cragview.”
The FERC is seeking the disgorgement of profits in the amount of $1.2 million, a fine of $6 million against Vitol and a fine against the trader in the amount of $800,000.
Aside from the allegations made by the FERC in the 82-page Enforcement Staff Report and Recommendation is not only how the matter came to the attention of the FERC but also how long the investigation took before the Show Cause Order was issued.
According to the FERC, “Staff’s investigation began after a market participant in the CAISO market met with staff on a confidential basis on December 16, 2013, to report its concern that Vitol had engaged in cross-product market manipulation at Cragview.” That is nearly two years and seven months from notification up to the issuance of the Show Cause Order.
Furthermore, it is was not disclosed if the “market participant” was the participant that incurred “$86,353 in losses suffered by the holders of CRR counter-flow positions at Cragview.”
The fining of the Vitol trader seems to be linked in part to the fact that the trader was previously involved in similar activity three years prior to theses transactions while working in a similar capacity at a large international bank. In the 2010 transgression the bank was fined $1.5 million and disgorged $172,645 plus interest in 2013.
The Enforcement Staff Report goes on to say that the trader, “obtained approval from Vitol’s General Counsel and a compliance advisor for his import transactions at Cragview based on his explanation that he was trying to capture the spread between the price of power in the Pacific Northwest and CAISO.” Apparently, an inaccurate representation of the facts and circumstances surrounding the trader’s purported intent was given to the General Counsel and the compliance advisor.
Implications for compliance personnel.
FERC cites several pieces of available information that were available to Vitol staff that should have been taken into consideration when supplying the trader with compliance advice. The FERC states “…other Vitol employees involved in reviewing, approving, and implementing [trader’s] proposed imports could have accessed some or all of the publicly available information as well.”
Documents cited by the FERC that compliance and legal should have taken into consideration when providing advice to the trader include CALISO presentations from 2010, a 21-page document authored by a Harvard University Professor in 2012 entitled “Multiple Market-Clearing Prices, Electricity Market Design and Price Manipulation” as well as numerous documents related to the FERC’s enforcement action against the international bank involved in the 2010 matter.
It gets personal…
A large portion of the FERC report addressed the FERC’s view of Vitol’s support functions in the section entitled “Legal/Compliance Approves Import Deal After Failing to Discover Trader’s True Intent”.
FERC has seen fit to name names throughout its 82-page Enforcement Staff Report and Recommendation. FERC included the General Counsel’s name no less than 45 times and the compliance advisor’s name 94 times. FERC also stated; “Additionally, Vitol’s compliance staff lacked sufficient training to evaluate complex transactions such as the one at issue in this case.”
The FERC goes on to state; “As explained in Section VI(B) below, both [General Counsel] and [Compliance Advisor] lacked sophisticated knowledge of power markets, which contributed to their failure to detect the manipulative purpose of the proposed imports – a manipulative purpose that Powerex had readily identified.” and “Although [trader] had the responsibility to disclose the relevant facts to [General Counsel] and [Compliance Advisor], more effective implementation of Vitol’s compliance program likely would have enabled them to identify the manipulative purpose of [trader’s] proposed imports.”
A high bar indeed.
It’s more than just the fine
While the fine and disgorgement are not insignificant the cost involved in the investigation had to also be significant. The investigation is going into year three, nine Vitol employees were deposed, and other market participants were deposed as well. Other costs (i.e. legal and lost time at work), had to be in the millions.
One must wonder how much was invested in compliance and how much that investment cost stacks up against the all-in cost of this single incidence.