CONTRIBUTOR
ARTICLE
To print this article, all you need is to be registered or login on Mondaq.com.

Originally published August 21, 2008

Keywords: FTC, penalties, fraud, petroleum markets, oil, gasoline, petroleum futures, Section 811, Energy Independence and Security Act, EISA, civil penalty, FTC Act, SEC, CFTC, FERC,

Some blame the recent increases in the price of oil and gasoline on "market manipulation" by oil companies, or investors who trade in petroleum futures. In response to these concerns, the US Congress passed Section 811 of the Energy Independence and Security Act of 2007 (EISA), which prohibits market manipulation in wholesale petroleum markets, and authorizes the Federal Trade Commission (FTC) to adopt and enforce rules defining illegal market manipulation.1 EISA provides that violations of these FTC rules are punishable by a civil penalty of up to US$1 million per day, in addition to any other penalties under the FTC Act.2

The FTC has now proposed a rule to implement EISA that would prohibit intentional fraud in petroleum transactions — which already is prohibited by the FTC Act and several other statutes — and would impose significant new penalties for violations. The rule would add a new layer of federal regulation of transactions that are regulated by other federal agencies, including the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the Federal Energy Regulatory Commission (FERC). Comments on the proposed FTC rule must be submitted by September 18, 2008.

The new enforcement mechanisms of EISA follow the significant expansion in enforcement authority over the natural gas and electricity sectors granted to the FERC by the Energy Policy Act of 2005. Combined with ongoing Congressional investigations and CFTC enforcement actions, the FTC action demonstrates the pressures on participants in energy trading markets and the need for well-developed and properly implemented compliance programs.

The Proposed Rule

The new FTC rule, which is explicitly modeled after SEC Rule 10b-5, would prohibit fraud in wholesale petroleum transactions. The operative language is:

It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale,

(a) To use or employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person.3

Like Rule 10b-5, this rule requires scienter — i.e., "intentional or willful conduct that is designed to deceive or defraud."4 The FTC emphasizes that "the proposed Rule does not impose affirmative disclosure or record-keeping obligations, ... does not regulate supply decisions or require that market participants provide access to terminals or pipelines,"5 and does not "discourag[e] pro-competitive or otherwise desirable market practices."6

Thus, the proposed rule is limited to a narrow category of conduct that already is clearly illegal under the FTC Act and several other established regulatory schemes. By proposing such a limited rule to implement EISA, the FTC rejected arguments that it should use its rulemaking authority under EISA "to investigate the petroleum industry for various types of alleged misconduct or to take other action to control increasing prices."7

Enforcement of the Proposed Rule

EISA provides that violations of the rule may be punished by civil penalties of up to US$1 million per day, in addition to any other penalty for violation of the FTC Act.8 Section 5(m) of the FTC Act authorizes the FTC to sue in federal district court to recover a civil penalty from any person who knowingly violates an FTC rule. Thus, the practical effect of the proposed rule is to increase the penalty for intentional fraud in petroleum transactions by US$1 million per day.

Overlapping Regulatory Schemes

The proposed rule will duplicate other federal regulatory schemes that prohibit market manipulation, including those administered by the CFTC, SEC and FERC.9 Although the FTC acknowledges that "different agencies could simultaneously initiate enforcement action with respect to the same activities," it says it will continue its "longstanding practice of coordinating its enforcement efforts with agencies that have overlapping jurisdiction" so that "the proposed Rule should not impose any additional compliance costs."10

The FTC expressly rejected CFTC's argument that commodities futures markets should be exempt from the FTC rule in order to avoid "duplicative or inconsistent regulatory requirements," thereby siding with FERC and against CFTC in an inter-agency dispute over whether CFTC has exclusive jurisdiction to regulate futures markets:

CFTC authority over manipulation relating to commodities futures markets is not exclusive and, moreover, is separate from CFTC's exclusive authority under CEA Section 2(a)(1)(A). The Commission believes the proper approach, and the one courts favor, is to give full effect to all statutory schemes that may address the conduct at issue here. Nothing in EISA itself indicates that Congress intended to exempt conduct in the futures markets from the reach of any rule that the Commission might promulgate under Section 811. Accordingly, the Commission believes that its proposed Rule proscribes manipulative or deceptive conduct in wholesale futures markets and it would not improperly intrude upon the jurisdiction of the CFTC or any other agency whose authority may overlap in whole or in part with respect to such activities.11

The proposed rule states that it preempts state and local laws "to the extent that any such law conflicts with this Rule," but specifies that a "law is not in conflict with this Rule if it affords equal or greater protection" against fraud.12 Thus, the rule will not preempt existing state statutes and common-law rules that prohibit fraud and allow fraud victims to sue for damages.

Implications for the Future

The combination of the proposed rule, Congressional investigations and recent actions of the CFTC and the FERC underscore the heightened scrutiny, backed in some cases by increased authority to levy penalties, that is being applied to traders of crude oil and petroleum products, electricity and natural gas. Faced with an array of agencies with overlapping jurisdiction, a skeptical public and an ongoing debate in Congress and the states over the role of manipulation by energy producers and traders in rising energy prices, market participants need to be certain that they have properly developed compliance programs and that they demonstrate good faith implementation of their standards.

Endnotes

1 42 U.S.C. § 17301 ("Prohibition on market manipulation. It is unlawful for any person, directly or indirectly, to use or employ, in connection with the purchase or sale of crude oil gasoline or petroleum distillates at wholesale, any manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Federal Trade Commission may prescribe...").
2 Id. § 17304(a) ("In addition to any penalty applicable under the Federal Trade Commission Act (15 U.S.C. 41 et seq.), any supplier that violates section 811 or 812 [42 U.S.C. § 17301 or 17302] shall be punishable by a civil penalty of not more than $ 1,000,000."); § 17304(c)(1) ("each day of a continuing violation shall be considered a separate violation").
3 FTC Notice of Proposed Rulemaking, p. 70 (August 13, 2008), available at
http://www.ftc.gov/opa/2008/08/nprm.shtm .
4 Id. at 46.
5 Id. at 25.
6 Id. at 24.
7 Id. at 8.
8 42 U.S.C § 17304(a).
9 Notice of Proposed Rulemaking, p. 17 & n. 45.
10 Id. at 58.
11 Id. at 30-31.
12 Id. at 71.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

AUTHOR(S)
David I. Bloom
Mayer Brown
Mitchell D. Raup
Mayer Brown
POPULAR ARTICLES ON: Energy and Natural Resources from United States
SEC Adopts Climate Risk Disclosure Rules
Arnold & Porter
On March 6, the SEC adopted long-awaited rules requiring registrants to provide certain climate-related information in their registration statements and annual reports.
New Hydrogen Regulations Show The Need For IP Protections
Foley & Lardner
In the dynamic world of renewable energy, hydrogen technology stands as one of the main pillars of sustainable progress.
Direct Pay Creates New Clean Energy Opportunities For Tax-Exempt Organizations And State And Local Governments
Taft Stettinius & Hollister
Historically, neither tax-exempt organizations nor state and local governments were eligible to directly receive any significant benefit from clean energy tax credits.
Treasury Department And IRS Release Final Regulations On The Direct Payment Of Tax Credits
Holland & Knight
The U.S. Department of the Treasury and IRS on March 5, 2024, released final regulations regarding the direct payment of tax credits under Section 6417 of the Internal Revenue Code.
Is A Merger A "Transfer Of Leases"?
Gray Reed & McGraw LLP
In Texas, no. Read on to learn why. In Nortex Minerals LP v. Blackbeard Operating LLC et al, the question was the meaning of this limited assignment provision in the "Alliance Leases"...
The Sacketts' Lawyers Have A New Client And It Seems Like A Visit To The Supreme Court Is In Their Future!
Mintz
Last August, when EPA and the Army Corps of Engineers published their tenth attempt to determine the jurisdictional reach of the Clean Water Act...
FREE News Alerts
Sign Up for our free News Alerts - All the latest articles on your chosen topics condensed into a free bi-weekly email.
Upcoming Events
Mondaq Social Media