After nearly a decade of watching the Federal Energy Regulatory Commission (“FERC”) enforcement staff fumble and bumble their way to ignominy, it is time to tell the real story of the allegation of natural gas price manipulation by BP at the Houston Ship Channel in 2008.
In order to divulge the past, let us first catch up to the present time. Watching an allegation to an incident blow up into a circus lasting more than a decade is baffling, to say the least.
A headline from July 10th, 2023, reads “BP reaches $10.75M settlement in U.S. gas market manipulation case. BP (“NYSE:BP”) agreed to pay a $10.75M civil penalty – less than it already has paid in the case- to cover allegations its traders manipulated natural gas markets in 2008, Reuters reported Monday, citing a filing by the U.S. Federal Energy Regulatory Commission [“FERC”]. “The company had paid a $24.35M civil penalties in December 2020 and a $250K disgorgement of unjust profits in January 2021 in the case, but it paid the penalties under protest and appealed the case to the Fifth U.S. Circuit Court of Appeals, which remanded the matter back to FERC to reassess the civil penalty. Finally, “FERC said the settlement resolves the case and that it would not object if BP (BP) seeks to reclaim excess payments through a lawsuit in the U.S. Court of Federal Claims.”
It is the last line of this recent article that leaves me continuing to scratch my head in wonder about a hypothetical end to this spectacle, or do we wander about this legal quagmire in perpetuity.
In 2006 BP agreed to pay a total of $303 Million in sanctions (the largest at the time) to settle charges of manipulation and attempted manipulation in the propane market. Those charges against BP originated in 2003. It would result in a civil action and settlement in 2006. The United States Department of Justice (“DOJ”)’s Fraud Section of its Criminal Division simultaneously file their complaint and would enter into a deferred prosecution agreement with BP. The government agencies (“CFTC” and “DOJ”) had flexed their muscles and received civil monetary penalties of $125 million and $100 million dollars respectively. They would also secure $53 million and $25 million dollars respectively for victims and consumer fraud funds. As part of the settlement there was the imposition of a Corporate Monitor for a minimum of three years with the possibility of a two-year extension.
A Corporate Monitor embeds in the corporation and, in this case, reports back periodically to both the DOJ and the CFTC about the state of compliance at the corporation. In the BP propane matter, the person chosen to be the Corporate Monitor was an individual by the name of Bart Schwartz. The cost of the Monitor and the Monitor’s staff is borne by the corporation.
I was hired in 2006 to establish and implement the compliance program, policies, and procedures for the trading operation of BP in its North American Operations, leveraging my expertise and knowledge of the regulatory environment related to trading in both physical and financial commodity markets. It was also my position to drive cultural change in the overall trading organization. I established a compliance operation in BP’s North American Gas & Power Unit prior to a promotion to Head of Trading Compliance (2008) over all North American trading assets, which included gas, power, liquids, crude, and products.
My first encounter with Mr. Schwartz was just some small talk in my office in 2006. Mr. Schwartz then asked me to go into a small conference room across the hall. It was at that time he asked if I could recommend a few books for him to read: one on energy, one on trading, and another on compliance. I was stunned and just walked out.
The most significant and last encounter I had with Mr. Schwartz was in 2008 when he falsely reported, to both the DOJ and the CFTC, that I had referred to one of the Associate Directors at the CFTC in a derogatory manner at a large BP compliance gathering. I was subsequently removed from my position at BP in January 9, 2009. An investigation into my purported remarks would follow. As outside counsel conducting the investigation found out, after interviewing participants at the gathering, those words as reported by Mr. Schwartz were never said.
Assessed Traders Course
BP has a rigorous process of evaluation and training before the company would let individuals become traders with the ability to bind the company to risk positions. A major program within that process was the Assessed Traders Course (“ATC”).
It was at an ATC in 2008 that a person who never traded before uttered the memorable words to one of the Monitor’s staff that “BP manipulated the price of gas at ship channel”, which was news to me. Alarm bells go off throughout the system with the Monitor reporting the same to his government-minders at the DOJ and CFTC.
It should go without saying that, while effectively on probation with a couple of federal agencies, you don’t want to repeat “bad behavior”, such as another commodity price manipulation charged against you. It should go without saying that a major company would not be so ignorant, or arrogant, as to come to a substantial settlement with two federal agencies in 2006 and then repeat with a similar offense, while on probation, in 2008. I can assure you that BP was not such a company.
FERC’s 2013 Show Cause Order
Just shy of the five-year statute of limitations, the FERC issued a Show Cause Order claiming not only that BP did manipulate the price of natural gas at ship channel, but that I had essentially covered up the manipulation. Specifically, in that August 2013 Show Cause Order the FERC wrote the following:
“In a similar vein, Berry responded that when he met with Luskie later that week, he “had something more fulfilling in mind.” These emails reflect that less than two weeks after the recorded call, both Simmons and Berry felt that Luskie was deserving of punishment, not praise, for bringing unwarranted scrutiny to the Texas team’s trading at HSC, even though Compliance had not completed its analysis of the trading data nor even interviewed Luskie or the other Texas team traders.”
Had the FERC taken the most elementary step, and the time, to depose me, the Head of Compliance about the facts and circumstances on the ground prior to the issuance of the Show Cause Order, then maybe they wouldn’t find themselves in this farcical position in 2023. I was finally deposed on October 16, 2014, over a year after the Show Cause Order was published.
Both parties to the litigation would then agree to have my deposition sealed. Baffling.
Here is the allegation.
How is it that a corporation that has pled to and was guilty of commodity price fraud and was on probation for three to five years has not been pursued criminally as to those new allegations while under a corporate monitorship by the DOJ and CFTC? How is it that the same corporation would “settle” with the FERC for the very same type of offense and then drag out legal controversies regarding said settlement(s) for years-on-end? The following question presents itself: Given the facts and circumstances of the BP propane manipulation, if there was another manipulation, only this time in natural gas, would not the CFTC and DOJ pursue the matter? No, the matter was resolved. The Deferred Prosecution Agreement and Consent Order were satisfied in 2009.
My contention is simple. The Monitor made a grievous error in reporting to the government that I made a disparaging remark against a government official. In return for not turning in the Monitor, he leaves, and BP saves a lot the money. What nobody counted on in 2009 is the FERC would enter in 2013 to try their hand at the exact same fact pattern.
The one the DOJ and CFTC must have concluded did not occur and did not pursue despite the Monitor being in place.
I choose to speak now – as this has now reached a farcical stage. This part of the BP story is one example emblematic of the argument at the center of the current policy debate around the Chevron Deference. BP was already under intense scrutiny because of its actions in the propane matter. There were “enforcement staff” on the ground when the natural gas manipulation allegation surfaced, and they concluded the manipulation didn’t happen. Five years later another part of the executive branch comes in alleging the same thing. BP must go through the FERC’s administrative law process with no redress.
The price discovery and price formation business is a serious enterprise. For the FERC to choose to investigate an amount of natural gas that represents .001 % of daily natural gas intake at one of the largest industrial ports in the largest economies in the world to establish the elements of price discovery – go for it. From the choice of transaction to exert their new (at the time) anti-market manipulation authority, to their investigative tactics, to their “results” the story of regulatory competency can be discussed at some other time. The FERC bringing forth the Duty of Candor Rule may help.
FERC’s adventure has cost the consumers of America untold millions of dollars, paid to lawyers, who have used the system to extract dollars at the expense of providing clarity. It is my contention that the alleged manipulation simply did not happen.
With the FERC’s feckless grab at power due to congressional laxity in nomenclature with the objective of achieving jurisdictional superiority, they have achieved the opposite. These actions also call into question the role and responsibilities of the Corporate Monitor.
BP did not pay for this farce, you did.