Opinion
Case No. 2:16-cv-732
11-18-2020
FEDERAL ENERGY REGULATORY COMMISSION, Plaintiff, v. COALTRAIN ENERGY, L.P., et al., Defendants.
Thomas P. Olson, Catherine Collins, Colin Chazen, Jessica Boston Wack, Kevin M. Dinan, Carol Ann Clayton, Federal Energy Regulatory Commission, Washington, DC, for Plaintiff. James A. King, Jay A. Yurkiw, Kathleen M. Trafford, Porter Wright Morris & Arthur, Columbus, OH, Christopher J. Polito, Pro Hac Vice, Kenneth W. Irvin, Pro Hac Vice, Mark D. Hopson, Pro Hac Vice, Terence T. Healey, Pro Hac Vice, Sidley Austin LLP, Washington, DC, for Defendant Coaltrain Energy, L.P. H. Ritchey Hollenbaugh, Carl A. Aveni, II, Carlile Patchen & Murphy LLP, Columbus, OH, Robert N. Weiner, Pro Hac Vice, Sandra E. Rizzo, Pro Hac Vice, Arnold & Porter LLP, Washington, DC, for Defendants Peter Jones, Robert Jones, Jack Wells. D. Michael Crites, Justin Michael Burns, Dinsmore & Shohl, LLP, Columbus, OH, Joseph B. Williams, Pro Hac Vice, Norton Rose Fulbright US LLP, Washington, DC, William J. Leone, Pro Hac Vice, Norton Rose Fulbright US LLP, Denver, CO, for Defendants Shawn Sheehan, Jeff Miller.
Thomas P. Olson, Catherine Collins, Colin Chazen, Jessica Boston Wack, Kevin M. Dinan, Carol Ann Clayton, Federal Energy Regulatory Commission, Washington, DC, for Plaintiff.
James A. King, Jay A. Yurkiw, Kathleen M. Trafford, Porter Wright Morris & Arthur, Columbus, OH, Christopher J. Polito, Pro Hac Vice, Kenneth W. Irvin, Pro Hac Vice, Mark D. Hopson, Pro Hac Vice, Terence T. Healey, Pro Hac Vice, Sidley Austin LLP, Washington, DC, for Defendant Coaltrain Energy, L.P.
H. Ritchey Hollenbaugh, Carl A. Aveni, II, Carlile Patchen & Murphy LLP, Columbus, OH, Robert N. Weiner, Pro Hac Vice, Sandra E. Rizzo, Pro Hac Vice, Arnold & Porter LLP, Washington, DC, for Defendants Peter Jones, Robert Jones, Jack Wells.
D. Michael Crites, Justin Michael Burns, Dinsmore & Shohl, LLP, Columbus, OH, Joseph B. Williams, Pro Hac Vice, Norton Rose Fulbright US LLP, Washington, DC, William J. Leone, Pro Hac Vice, Norton Rose Fulbright US LLP, Denver, CO, for Defendants Shawn Sheehan, Jeff Miller.
OPINION AND ORDER
MICHAEL H. WATSON, JUDGE
The Federal Energy Regulatory Commission ("FERC" or "Commission") brings this action against Coaltrain Energy, L.P. ("Coaltrain"), Peter Jones ("P. Jones"), Shawn Sheehan ("Sheehan"), Jeff Miller ("Miller"), Robert Jones ("R. Jones"), and Jack Wells ("Wells") (collectively, "Defendants") pursuant to section 31(d)(3)(B) of the Federal Power Act ("FPA"), 16 U.S.C. § 823(d)(3)(B), seeking to enforce FERC's May 27, 2016 order assessing civil penalties against Defendants. Compl., ECF No. 1. Defendants move for summary judgment, ECF Nos. 75, 76, 80, 81, and FERC moves for partial summary judgment, ECF No. 74. Sheehan also moves for leave to file an Amended Motion for Summary Judgment, ECF No. 83, and P. Jones, R. Jones, and Wells move for leave to file a document under seal, ECF No. 94. I. FACTUAL AND PROCEDURAL OVERVIEW
Sheehan moves to refile his motion for summary judgment to change "inadvertent language" contained in the first motion that he contends could be misconstrued. Mot. 3, ECF No. 83. FERC does not oppose it and in fact responds to the amended motion for summary judgment. See FERC Resp. 2, ECF No. 90. Accordingly, the Court GRANTS Sheehan's motion to Amend his motion for summary judgment. ECF No. 83. The Clerk is DIRECTED to update the docket to reflect this change.
The Court DENIES WITHOUT PREJUDICE Defendants’ motion to seal. Courts distinguish between limiting public disclosure of information during discovery versus the adjudicative stage of a case. See Shane Grp., Inc. v. Blue Cross Blue Shield of Michigan , 825 F.3d 299, 305 (6th Cir. 2016). "Unlike information merely exchanged between the parties, ‘[t]he public has a strong interest in obtaining the information contained in the court record.’ " Shane Grp. , 825 F.3d at 305 (quoting Brown & Williamson Tobacco Corp. v. F.T.C. , 710 F.2d 1165, 1180 (6th Cir. 1983) ). For this reason, the moving party has a "heavy" burden of overcoming a " ‘strong presumption in favor of openness’ as to court records." Shane Grp. , 825 F.3d at 305 (quoting Brown & Williamson , 710 F.2d at 1179 ); see also Shane Grp. , 825 F.3d at 305 ("Only the most compelling reasons can justify non-disclosure of judicial records." (quotation omitted)). "[I]n civil litigation, only trade secrets, information covered by a recognized privilege (such as the attorney-client privilege), and information required by statute to be maintained in confidence (such as the name of a minor victim of a sexual assault), is typically enough to overcome the presumption of access." Shane Grp. , 825 F.3d at 308 (citation and quotations omitted). Here, the parties only justification for sealing is because it has been designated as "confidential" during discovery. The Court finds this insufficient to meet the high burden of sealing.
A. Parties
FERC is the administrative agency tasked with, among other things, ensuring the just and reasonable prices of wholesale electricity through regulation and policing. Compl. ¶ 7, ECF No. 1. Coaltrain was a limited partnership and a licensed Seller of energy commodities under Commission rules from March 31, 2009, until April 15, 2011. Id. at ¶ 8. P. Jones and Sheehan are the limited partners, or co-owners, of Coaltrain. Id. R. Jones, Miller, and Wells were energy traders at Coaltrain during the relevant timeframe. Id. at ¶¶ 11–13.
The parties cite to FERC's Complaint for the factual overview of energy trading, and the Court will likewise rely on the facts derived from the Complaint and discussed in this Court's previous Opinion and Order, ECF No. 45, for the undisputed facts pertaining to the energy trading market. See e.g. , Coltrain Mot. Summ J. 5–7, ECF No. 75 (relying on FERC's Complaint for the factual overview of the energy market). Reliance on the facts in the Complaint applies only to this section unless otherwise specified.
The energy markets are regionally operated by FERC-regulated Regional Transmission Organizations ("RTOs"). RTOs are tasked with balancing the minute-by-minute supply and demand requirements for electric power across their regions. PJM Interconnection, LLC ("PJM") is the largest RTO in the nation, covering 13 states, including Ohio.
PJM is an independent, non-profit entity that is tasked with operating the transmission grid and dispatch generation to match electricity use. Id. at ¶ 24. PJM uses market-based systems to provide electricity at the lowest possible cost to consumers and maintain the reliable operation of the electric grid. Id. at ¶ 26.
PJM operates a day-ahead market and a real-time market. Electricity traded on the day-ahead market is transmitted over power lines the following day, while electricity traded on the real-time market is transmitted over power lines that same day.
PJM offered market participants the ability to transact for both the physical delivery of electricity, as well as non-physical, financial (also referred to as virtual) transactions. Id. at ¶ 28. With respect to at least the PJM market, electricity prices vary based on the specific location ("node") in the market. There are thousands of nodes within the PJM market, many of which are in this judicial district. The market price for energy at a particular node is called the Locational Marginal Price ("LMP") and consists of (1) a basic energy price, (2) the cost of congestion (transmission constraints) at each node, and (3) the cost of line losses (the amount of electricity lost as heat during transmission). Virtual trades are financial trades for which no generation of electricity is dispatched and no load is served. Virtual transactions carry no obligation to buy or sell electricity, but they affect day-ahead market prices as reflected by the LMPs. Virtual trades also benefit the wholesale electricity markets because they promote market efficiency, increase market liquidity, and create price convergence between the day-ahead and real-time markets. In other words, they help balance out the price of electricity and achieve more just and reasonable rates.
Transmission congestion occurs "when there is not enough transmission capacity for all of the least-congested generators to be selected. The result is that some more expensive generation must be dispatched to meet demand." Energy Primer, ECF No. 31-1, at PAGEID # 929.
At issue in this case are specific virtual financial products called Up-To Congestion ("UTC") transactions, which allow traders to profit through price arbitrage—the process of correctly predicting that the difference in the price of electricity at two different nodes (known as the "price spread") will either widen or narrow from one day to the next. The UTC bid specifies a maximum, or "up-to", price spread between the two nodes that the bidder is willing to pay in the Day-Ahead Market. UTC trades allow arbitrageurs (a common name for market participants involved in these sorts of virtual trades) to "sell power at point A and buy power at point B in the [d]ay-ahead market ... if during the [r]eal-[t]ime market, the spread between those points increases, the arbitrageur makes money; if the spread decreases, it loses money." Compl. ¶ 29 (quoting Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 122 FERC ¶ 61,208, at n.85 (Mar. 6, 2008) ).
The Court in City Power provides a helpful illustration of how UTC trades are profitable:
A UTC trader might pick source A and sink B, specify 100MW, and say that the day-ahead price at B will be no more than $40/MW greater than at A. After the day-ahead market clears, it turns out the price at B is $120/MW and the price at A is $90/MW. Because the difference is less than the trader specified, her transaction clears, and she must pay $3000: the actual difference ($30/MW) times the number of megawatts (100). Luckily for the trader, the price spread grows between the day-ahead and real-time markets. In the real-time market, the price at B is up to $130/MW; at A, down to $85/MW. Hence, the trader receives $4500: the real-time price difference ($45/MW) times the number of megawatts (100). Taken as a whole (and ignoring certain transaction costs for the moment), the UTC turned a profit of $1500.
Federal Energy Regulatory Commission v. City Power Marketing, LLC , 199 F. Supp. 3d. 218, 224 (D.D.C. 2016).
Apart from whether these virtual trades proved to be profitable, the market allocated traders a credit based on the volume of these and other trades. Id. at ¶ 2. This is because during the timeframe at issue, market participants that transacted in financial UTCs, which did not result in the physical transmission of electricity across the grid, were nonetheless still required to reserve capacity on transmission lines for each of their UTC transactions. Id. at ¶ 30; Bresler Dep. (Sept. 12, 2019) 38:5–9, ECF No. 75-6, at PAGEID # 4590. These transmission reservations could be either paid or unpaid. Traders could permissibly avoid paying for reservations in a variety of ways, including by exporting from PJM into the wholesale market region operated by the neighboring RTO. Alternatively, traders could pay a specified price per megawatt hour ("MWh") to reserve transmission between two nodes in the PJM market. Because there was a finite amount of transmission, reservations for financial trades thus prevent other market participants from using the reserved transmission unless PJM re-releases it into the day-ahead market later in the trading day. Compl. ¶ 31, ECF No. 1.
These credits are referred to by PJM as Marginal Loss Surplus Allocation ("MLSA") payments, and by Defendants as MLSA payments and also Overcollected Loss ("OCL") payments, but they mean the same thing. It is these credits that are at issue in this case. MLSA payments come from the surplus of money collected by PJM to account for transmission line losses. Transmission line losses represent the amount of electricity lost in the form of heat during its transmission. PJM charges line losses as one component of the LMP, which it uses to compensate generators for lost electricity. To send the appropriate price signals, PJM sets the price for line losses at the marginal, rather than average, rate. Doing so, however, causes PJM to collect more in line losses than it distributes to generators, hence why Defendants referred to as "over-collected loss" payments. The resulting surplus is distributed to market participants in the form of MLSA credits.
These terms are used interchangeably in the Opinion and Order as the parties use both terms in their briefing.
The purpose of UTC trading was arbitrage, i.e. finding the price spread, although MLSA payments could be considered in making transacting decisions. See Black Oak Energy, L.L.C., et al. , 167 F.E.R.C. ¶ 61,250, PP 33–34 (June 20, 2019) ; Matson Dep. (Sept. 18, 2019) 75, ECF No. 75-5, at PAGEID # 4351.
At first, PJM distributed MLSA only to physical trades. This is partly because the Commission was concerned about "perverse incentives" if virtual traders were allowed to collect MLSA credits. As early as 2008, the Commission expressed disapproval of trading for purposes other than arbitrage. For example, in its October 2008 Black Oak decision, the Commission was apprehensive to pay arbitrageurs any MLSA credits because "payment of the surplus to arbitrageurs that is unrelated to the transmission costs could distort decisions and reduce the value of arbitrage by creating an incentive for arbitrageurs to engage in purchase decisions, not because of price divergence, but simply to increase marginal line loss payments." 125 F.E.R.C. ¶ 61,042, P 43 (Oct. 16, 2008). P. Jones, Miller, Sheehan, and R. Jones all testified that the purpose of UTC trades was arbitrage. See P. Jones Dep. (Sept. 16, 2010) 21, ECF No. 88-19, at PAGEID # 12241; Miller Dep. (Dec. 19, 2012) 22, ECF No. 88-20, at PAGEID # 12419; Sheehan Dep. (Oct. 11, 2012) 51–52, ECF No. 88-22 at PAGEID #12506; and R. Jones Dep. (Jan. 9, 2013) 19–20, ECF No. 88-59, at PAGEID ## 13941–42.
Market Participants, including Coaltrain, advocated for the opportunity to collect MLSA credits and represented to the Commission in multiple filings that market participants would continue to focus on profiting from the price spread and that "there is no merit to any claim that updating the allocation percentage will give market participants perverse incentives to engage in virtual transactions in order to capture a larger share of the surplus [(MLSA credits)]." Financial Marketers’ Req. for Reh'g, Docket No. EL10-40-000, at 20 n. 23 (June 9, 2010), ECF No. 88-24, at PAGEID # 12607; see also Compl. of Financial Marketers, Docket No. EL10-40-000, at 2 n.3, 15 n.20 (Feb. 2, 2010), ECF No. 88-23, at PAGEID ## 12640, 12653. Coaltrain's owners’ other company, Energy Endeavors LP ("Energy Endeavors") made the same statements in two 2009 filings as part of the Black Oak litigation. See Req. for Rhr'g, Docket No. EL08-14-002, at 17 n.4 (Oct. 19, 2009), ECF No. 88-27; Mot. for Leave to Intervene, Docket No. EL08-14-002, at 14 n.5 (Apr. 16, 2009), ECF No. 88-34. P. Jones testified that he did not read the briefing and did not know about the representations that were being made to the Commission on Coaltrain's behalf. P. Jones Dep. (June 24, 2019) 439–40, ECF No. 75-2, at PAGEID ## 3343–44.
Coaltrain was one of the financial marketers challenging the allocation methodology. See Req. for Reh'g, Docket No. EL10-40-000, at 1 (June 9, 2010), ECF No. 88-24, at PAGEID #12588.
Accordingly, in 2009, PJM began distributing MLSA on a per-MW/h pro rata basis to all market participants that contributed to the cost of maintaining the transmission system. See Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 128 FERC ¶ 61,262 (2009) ; Compl. ¶ 34, ECF No. 1. This included UTC traders who reserved transmission. Under this method of distribution, PJM determined the number of MW/h of eligible trades for each hour of the day and divided the surplus collected that hour equally among the participants. Thus, as a market participant's volume of MLSA-eligible trades increased, its share of available MLSA payments also increased.
C. Investigation
In late July 2010, PJM became suspicious of Defendants’ UTC trading. It discovered that Defendants were placing large-volume UTC trades that were not profitable from price spreads but were nonetheless still very profitable from collecting larger MLSA payments. Compl. ¶ 36, ECF No. 1. PJM's Independent Market ("IMM") referred the matter to FERC, who began the investigation at issue in this lawsuit.
The IMM is an independent watchdog unit, tasked with finding and detecting improper conduct by market participants, and if necessary, was required to alert FERC about such activity. Compl. ¶ 25, ECF No. 1.
1. Data Production
As part of the investigation, FERC issued data requests and subpoenas. Id. at ¶ 40. On August 18, 2010, FERC sent a preservation Notice to Coaltrain to preserve "any and all documents, data or information related to Coaltrain Energy's power scheduling and trading in PJM for the period May 1, 2010 through the present." Letter from Blair Hopkin to P. Jones, Aug. 18, 2010, ECF No. 74-20, at PAGEID # 2769. After Coaltrain received FERC's preservation Notice, it informed its employees to not delete or hide files, P. Jones Dep. (June 25, 2019) 376, ECF No. 75-2, at PAGEID # 3380, instructed employees to copy any potentially relevant files to two drives on the company's networked servers, Wrinn Dep. (Nov. 13, 2019) 54–56, ECF No. 75-8, at PAGEID # 5336, and retained outside counsel to assist in the collection and production because Coaltrain had no in-house counsel. Coaltrain Mot. Summ. J. 17, ECF No. 75.
The Letter also informed Coaltrain that FERC was investigating "possible violations of the Commission's regulations, including but not limited to the prohibition against market manipulation codified at 18 C.F.R. § 1c.2 (2010)." Id. In November 2010, FERC issued a second data request, asking Coaltrain to produce, inter alia , "copies of all written communications ... relating to UTCs and the investigation during the Relevant Period." Attachment A to Letter from Blair Hopkin to Carol Smoots, Nov. 5, 2010, ECF No. 74-21 at PAGEID ## 2783–84. The Second Data Request Letter defined "documents" as follows:
i) "Documents" refers to the originals of all writings and records of every type in your possession, control,
or custody, including but not limited to: memoranda, correspondence, letters, email, instant messaging, text messaging, testimony and exhibits, reports (including drafts, preliminary, intermediate, and final reports), surveys, analyses, studies (including economic and market studies), summaries, comparisons, tabulations, charts, books, pamphlets, photograph forms (including microfilm, microfiche, prints, slides, negatives, videotapes, motion pictures, and photocopies), maps, sheets, ledgers, transcripts, vouchers, accounting statements, budgets, work papers, engineering diagrams, communications, speeches, and all other records, written, electronic (including information on electronic or magnetic storage devices), mechanical, or otherwise, and drafts, attachments or appendices of any of the above.
ii) "Documents" includes copies of documents, where the originals are not in your possession, custody, or control. As to any document related to the matter herein that is not in your possession, but that you know or believe to exist, you are requested to identify and indicate to the best of your ability its present or last known location or custodian.
iii) "Documents" includes every copy of a document which contains handwritten or other notations or which otherwise does not duplicate the original or any other copies.
iv) "Documents" includes electronic data and records stored on computer equipment, including electronic devices which are capable of collecting, analyzing, creating, displaying, converting, storing, concealing or transmitting electronic, magnetic, optical, or similar computer impulses or data. These devices include but are not limited to any data-processing hardware (such as central processing units, hard disks, memory typewriters, and self-contained "laptop" or "notebook" computers); internal and peripheral storage devices (such as fixed disks, external hard disks, floppy disk drives and diskettes, tape drives and tapes, optical storage devices, CD-ROMs, printer buffers, Bernoulli drives, smart cards, memory calculators and other memory storage devices); peripheral input/output devices (such as printers and scanners); and related communications devices (such as modems, recording equipment, and RAM or ROM units).
Second Data Request, Att. B, Letter from W. Blair Hopkin to Carol Smoots, ECF No. 88-23, at PAGEID ## 12582–83.
On February 3, 2011, Coaltrain sent a letter to FERC, along with P. Jones’ affidavit, in which he averred that "the attached responses to Staff's Amended Second Data Request to Coaltrain Energy, LP have been prepared under my supervision and control" and that "these responses constitute a true, complete and accurate response to the requests, to the best of my knowledge, information and belief." P. Jones Feb. 2, 2011 Aff'd, ECF No. 74-22, at PAGEID # 2976.
Thereafter, in June 2012, while FERC's investigation into Coaltrain was still ongoing, a former Coaltrain employee informed FERC that Coaltrain had a computer monitoring software called Spector which captured screenshots and keystrokes of Coaltrain employees’ computers, with the exception of co-owners’ P. Jones’ and Sheehan's computers. ECF No. 74-3, at PAGEID # 2053. Notwithstanding P. Jones’ February 3, 2011 representation, however, Coaltrain did not produce any Spector screenshots or keystroke data files in response to the Data Request then or at any time in 2010 or 2011. Olson Decl. ¶ 3, ECF No. 74-1 at PAGEID # 1543. It is this failure to produce Spector information that is the basis for FERC's 18 C.F.R. § 35.41(b) claim.
At the time FERC made its document requests, both P. Jones and Sheehan had the ability to view and access the Spector data. Wrinn Dep. (Nov. 13, 2019) 53, ECF No. 74-4, at PAGEID # 2382. For example, P. Jones and Sheehan used information collected by Spector against a former employee Moussa Kourouma in 2009. See Mot. for Leave to Intervene and Protect, ECF No. 74-14, at PAGEID ## 2719–23; ECF No. 74-15, at PAGEID # 2730 (instant messaging chat about Spector); ECF No. 74-16, at PAGEID ## 2731–40 (supplement to protest, citing evidence uncovered about the employee using "a commercially available software program for monitoring employee use of the Company computer system"). In May 2010, P. Jones and Sheehan likewise used Spector information against another employee, Nicole Simpson, and both P. Jones and Sheehan were given a password to access Spector at that time. See ECF No. 74-15, at PAGEID # 2730 ("ConectivPete" [P. Jones] asking a "GaryStarwood" [Wrinn] for "the access link, pw etc for spector" on May 26, 2010); ECF No. 74-17, at PAGEID # 2758 ("ShawnConectiv" [Sheehan] asking "GaryStarwood" for his spector login information on May 26, 2010); see also P. Jones Dep. (June 24, 2019) 314–15, ECF No. 74-2, at PAGEID ## 1840–41. (testifying that he learned key facts about Simpson's trading "by looking at her screenshots on Spector.").
Additionally, FERC presents the following evidence that P. Jones and Sheehan communicated about Spector, including during the document production time frame:
• On July 6, 2010, Adam Hughes sent Peter Jones an email stating that "Bob's computer crash this morning was caused by Spector." COALTRAIN007150 [ECF No. 74-23, at PAGEID # 2798].
• On October 20, 2010, Sheehan and Hughes exchanged emails about an upgrade to the Spector software. COALTRAIN011708 [ECF No. 74-24 at PAGEID # 2800].
• On November 19, 2010, Hughes told Peter Jones by email that he had used Spector "to view the activity on the computer in the team room." COALTRAIN011641 [ECF No. 74-25, at PAGEID # 2803].
• On January 10, 2011, Peter Jones asked Hughes to confirm that Spector was being installed on all of the firm's new computers. COALTRAIN011642 [ECF No. 74-26, at PAGEID # 2805].
• On February 2, 2011, IT staffer Will Rogers (username "goncyn") exchanged IMs with Sheehan about Spector ("the computer you [Sheehan] took home didn't have spector on it to begin with"). COALTRAIN011694 [ECF No. 74-27, at PAGEID # 2807].
• On February 24, 2011, Wrinn copied Peter Jones and Sheehan on an email about "critical items needed to get up and running," including Spector. COALTRAIN011601 [ECF No. 74-28, at PAGEID #2809].
• On March 1, 2011, Peter Jones and Rogers exchanged emails about the need to avoid installing a Windows update that would cause Spector to crash company computers. COALTRAIN011813 [ECF No. 74-29, at PAGEID # 2811]; COALTRAIN011815
[ECF No. 74-30, at PAGEID # 2813].
• On March 4, 2011, Hughes emailed Sheehan and Peter Jones about the possibility of transferring the existing Spector license to the new entities being created by Sheehan and Jones. COALTRAIN011644 [ECF No. 74-31, at PAGEID # 2815].
• On April 15, 2011, Peter Jones emailed Sheehan about the need for "another backup of Spector." COALTRAIN011809 [ECF No. 74-32, at PAGEID #2818].
• Later on April 15, 2011, Hughes copied Sheehan and Peter Jones on an email about issues relating to the Spector data backup provided to Peter Jones's new firm. COALTRAIN011610 ("Shawn told me that you had a problem with the Spector 360 backup we provided. Can you let me know what the problem with it was?") [ECF No. 74-33, at PAGEID # 2820].
• On December 27, 2011, Peter Jones emailed John Charette (now with Sheehan's firm, XO Energy) about an invoice from Spector. COALTRAIN012636 [ECF No. 74-34, at PAGEID # 2823].
• On December 29, 2011, Charette emailed Rogers that Sheehan "wants [Spector] or a replacement." COALTRAIN012639 (Att. 36). Later that same day, Charette emailed Rogers again, saying that he "had several conversations with [Sheehan] and he is all over it so please do it sooner rather than later." Id. [ECF No. 74-35, at PAGEID #2825].
FERC Mot. Summ J. 9–10, ECF No. 74.
P. Jones avers that Coaltrain's IT specialist, Wrinn, left the company in October 2010, shortly before FERC sent its document requests. Wrinn Dep. (Nov. 13, 2019) 54, ECF No. 74-4. Wrinn testified that he did backup the Spector screenshots and other data in response to the FERC investigation and notice to preserve. Wrinn Dep. (Nov. 13, 2019) 56, ECF No. 74-4, at PAGEID # 2385. P. Jones and Sheehan testified at deposition that it did not occur to them that Spector information was a source of potentially responsive documents. See P. Jones Dep. (June 24, 2019) 374:2–12, ECF No. 75-2, at PAGEID # 3378 (testifying that he "certainly did know it existed ... [b]ut the fact that it was an employee monitoring software and not part of our analysis just did not bring me to think that Spector could be a responsive document to FERC."); Sheehan Dep. 27 (Aug. 7, 2019) 6, ECF No. 75-3, at PAGEID # 3732 (indicating that it did not occur to him that Spector information would be relevant to FERC's production request); Wrinn Dep. (Nov. 13, 2019) 57:17–21, ECF No. 75-8, at PAGEID # 5339 (testifying that prior to his departure in October 2010 Spector data being produced for FERC's investigation "never came up."). Other than by Wrinn, Spector information was infrequently accessed. P. Jones Dep. (June 24, 2019) 374:2–6, ECF No. 75-2, at PAGEID # 3378.
Larry Thompson ("Thompson"), Spector's corporate representative, testified at deposition that the developer of Spector did not consider the Spector program itself to be a document. Thompson Dep. (Oct. 23, 2019) 87:3–11, ECF No. 75-11, at PAGEID # 5528. Similarly, FERC's 30(b)(6) representative testified that FERC added "employee monitoring software" to its definition of "document" at some point after it sent its data requests to Coaltrain. Matson Dep. 120, ECF No. 75-5, at PAGEID # 4396.
2. Market Manipulation
As discussed above, PJM allowed market participants, such as Coaltrain, to engage in virtual UTC trading. Virtual trades are "effectively bets on how electricity prices will change over time." City Power , 199 F. Supp. 3d at 221. UTC trades, when placed for arbitrage purposes, are profitable if the real time price spread between two nodes is greater than the day ahead price spread between the same nodes. P. Jones Decl. ¶ 4, ECF No. 88-17, at PAGEID # 11970. "The trades are based upon analysis of whether the [Day Ahead] prices fully account for possible congestion between two [nodes]." Id.
During the relevant time period, and even though UTC trades were placed on the virtual market, traders could reserve transmission through a system called OASIS. P. Jones Dep. (June 24, 2019) 89, ECF No. 88-3, at PAGEID # 10736. It cost Coaltrain 67 cents per megawatt-hour ($.67/MWh) to reserve transmission. R. Jones Dep. (July 29, 2019) 25–26, ECF No. 88-18, at PAGEID ## 12001–02. There were other transactional costs associated with reserving transmission, ranging from 22 to 30 cents per MWh. See id. ; see also Coaltrain Resp. to Fourth Data Req. No. 7, ECF No. 88-40, at PAGEID ## 13367–68. Paying to reserve transmission made the market participants eligible to collect MLSA credits from PJM for line losses during the electricity transmission. P. Jones Dep. (June 24, 2019) 120, ECF No. 88-3, at PAGEID # 10767. Coaltrain's traders were aware that MLSA payments increased as demand for electricity, referred to as "load", increased. See e.g. , June 10, 2010 Instant Message between Miller and P. Jones, ECF No. 88-42, at PAGEID # 13379 (P. Jones writing to Miller that "I would expect June losses to be up a bit given higher loads"); see also P. Jones Dep. (June 24, 2019) 62, ECF No. 88-3, at PAGEID # 10709 (agreeing that during the relevant time period summer months had the highest load because of air conditioning use, which also varied depending on the time of day).
a. Coaltrain's Spread Strategy
Coaltrain had a three-stage process for deciding what trades to place to profit from constraints (i.e. congestion on the electric grid): (1) research market fundamentals daily such as "weather, projected load, transmission outages, and generation availability," (2) identify constraints in light of these fundamentals, and (3) select paths that "will move profitability based on that information." P. Jones Dep. (June 24, 2019) 160–61, ECF No. 88-3, at PAGEID ## 10807–08. Then they would have a morning meeting to discuss the market conditions, either at 9:00 a.m. or 10:00 a.m. Sheehan Dep. (Oct. 11, 2012) 74, ECF No. 88-22, at PAGEID # 12512. They would also discuss the constraints on the "Daily Blotter," a software tool that allowed the traders to discuss potential trades online, P. Jones Dep. (Sept. 5, 2013) 49–50, ECF No. 88-35, at PAGEID ## 13109–10, and consult the Constraint Trade Sheet, which listed UTC paths that had been profitable in the past with a certain constraint. See e.g. , R. Jones Snapshot July 10, 2010, ECF No. 88-66, at PAGEID # 14259. The constraints could be interrelated, so traders would need to consider the likely impact of the entire "constraint set" that would bind the next day. P. Jones Dep. (June 24, 2019) 174, ECF No. 88-3, at PAGEID # 10821.
b. Coaltrain's OCL Strategy
On June 1, 2010, P. Jones learned that Coaltrain and his other company, Energy Endeavors, would receive almost $6 million in retroactive OCL payments from PJM for spread trades with paid transmission placed in the previous years. P. Jones Dep. (Sept. 5, 2013) Vol. II 106–08, ECF No. 88-35, at PAGEID ## 13170–72. Thereafter, Coaltrain's employees began looking into OCL payments. This included looking up OCL calculations on PJM's website, Miller Dep. (July 23, 2019) 78, ECF No. 88-11 , and discussions about OCL trades. See June 10, 2010 IM between Sheehan and Miller, ECF No. 88-85, at PAGEID # 14580 (Miller saying to Sheehan, "if you pay too much then you may be higher than the OCL number" to which Sheehan replied, "if is the same source sink in and out then its purely the ocl value").
PAGEID illegible.
On June 15, 2010, Coaltrain's IT task list included an entry for analyst Hughes to "create application to find deals for loss credits". Hughes Snapshot, June 15, 2010, ECF No. 88-45, at PAGEID # 13459. Hughes created a tool called "Lost and Found" to examine spreads on UTC paths. See Hughes Snapshot, June 17, 2010, ECF No. 88-46, at PAGEID # 13462. The screenshots captured over a ten-minute timeframe show Hughes looking at UTC paths with smaller and smaller spreads until he found the SOUTHIMP-SOUTHEXP path, which had $0.00 spreads in the day ahead and real time markets the previous week. Id. at PAGEID ## 13464–68. Hughes then looked up the SOUTHIMP-SOUTHEXP path in another tool called the "Node Analyzer." Id. at PAGEID # 13469. The Node Analyzer showed $0.00 spreads for every hour the previous week on that path. Id. at PAGEID ## 13469–71. Hughes then sent the SOUTHEXP-SOUTHIMP path to Sheehan, who responded: "da da perfectly 0." Id. at PAGEID # 13472. Hughes also used a tool called "Spreads," which allowed Hughes to look at the spreads in the SOUTHIMP-SOUTHEXP path from January 1, 2010–present. Id. at PAGEID # 13473. The Spread tool showed that the SOUTHIMP-SOUTHEXP path had average spread losses of 27 cents per MWh (-$.27/MWh). Id. According to FERC, the positive spreads on that path from January 1, 2010 to June 17, 2010, showed that the price spreads had exceeded $1/MWh in only .002% of the time. FERC Resp. 26, ECF No. 88 (interpreting data from Hughes Snapshot, June 17, 2010, ECF No. 88-46, at PAGEID ## 13473–75). Coaltrain also added OCL payment data to the Node Analyzer, which was checked frequently by Coaltrain employees. See June 16, 2010 Snapshot, ECF No. 88-61, at PAGEID ## 14164–87 (screenshots of the Node Analyzer; R. Jones also wrote in the chat feature, "[s]o far this month the best hours for losses are 12-22 for an average of $1.38 in losses."); Screenshots of Node Analyzer showing SOUTHIMP-SOUTHEXP Spreads and OCL Rates from June 22, 2010 to July 26, 2010, ECF No. 88-13, at PAGEID ## 11757–91; Calendar showing Coaltrain's Screenshots about OCL rates, ECF No. 88-62, at PAGEID ## 14190–91.
FERC indicates that "da da" means "day ahead." FERC Resp. 25, ECF No. 88.
Coaltrain used a software tool called "Market Interface" to place UTC trades with PJM. P. Jones Dep. (Aug. 7, 2019) 88–92, ECF No. 88-100. This tool had a category labeled "Strategy" with options in the drop-down menu titled "Spread" and "Physical." Id. at 4. Starting in mid-June 2010, Defendants started referring to trades as part of their "OCL Strategy." Resp. to Sixth Data Req. to Question No. 6, ECF No. 88-29, at PAGEID # 12727; see also R. Jones Snapshot 38145, June 16, 2010, 10:08:29 a.m., ECF No. 88-30, at PAGEID # 12733 (referencing the "HE 12-22 OCL play" as the best hours for losses [ie OCL payments]). On or around June 29, 2010, Coaltrain added an "OCL" option to the Strategy drop-down box. See R. Jones Snapshot, June 29, 2010, ECF No. 88-31, at PAGEID # 12735. R. Jones also re-labeled some trades submitted between June 14 and 29, 2010 as "OCL" trades, which had been listed as Spread trades prior to the OCL label option. Resp. to First Set of Reqs. for Admis. No. 11, ECF No. 88-109, at PAGEID # 15217; Sheehan Decl. ¶ 9, ECF No. 88-33, at PAGEID # 13029. During the relevant time period, Coaltrain labeled over 11,000 trades as "OCL" trades. Hamal Decl. ¶ 2, ECF No. 88-2, at PAGEID # 10632.
PAGEID illegible.
Defendants challenge Hamal's declaration because they contend it is not based on personal knowledge. See Coaltrain Reply 5, ECF No. 100. However, Hamal is FERC's expert, and experts are permitted to opine on information outside of their personal knowledge. See Fed. R. Evid. 703. Moreover, Defendants do not make any specific challenge to the admissibility of Hamal's declaration under the appropriate Daubert framework. Finally, Hamal states that he prepared two expert reports for FERC in this case and was also deposed, see Hamal Decl. ¶ 1, ECF No. 88-2, yet Defendants do not argue they did not receive the information or did not have the opportunity at deposition to ask Hamal about the basis for his opinions.
Defendants told FERC investigators that the OCL label "simply designates that the transaction would be eligible for an over-collected loss credit." See P. Jones Dep. Vol. II, (Sept. 5, 2013), 27, ECF No. 88-35, at PAGEID # 13091; see also id. at 34–45 ("PJM OCL" is "simply a classification that would identify it as one that's eligible for a credit, that's all."); id. at 66 ("The OCL designation and OCL strategy is more of a classification, is only an identification on a transaction that says that could be eligible for over-collected loss credit."; id. at 71 ("I think the term loss play simply means a los[s] transaction, a transaction that would be eligible for an over-collected loss credit."); id. at 78–79 ("The term OCL, as it applies to a transaction, identifies that the transaction is eligible for an over-collected loss credit."); R. Jones Dep. (Jan. 9, 2013), 141–42, ECF No. 88-59 ("OCL trade to me is any trade eligible for the loss credit ... To me, the OCL strategy were any up-to transactions eligible for the loss credit."); R. Jones Dep. (July 29, 2019), 234, ECF No. 88-18 ("to classify a trade as OCL would indicate that that is eligible for the loss credit.").
However, Coaltrain later admitted that during the relevant time period it also placed large volumes of OCL-eligible trades that it labeled as "Spread Strategy" trades, not OCL Strategy trades. See Coaltrain Resp. to Req. for Admis. No. 69, ECF No. 88-47, at PAGEID # 13530; see also Hamal Decl. ¶¶ 2, 14, ECF No. 88-2, at PAGEID ## 10632, 10641.
D. Procedural Overview
After FERC's enforcement division's investigation, FERC issued a show cause order to Defendants in early 2016. On May 27, 2016, FERC issued an order finding that Defendants used financial instruments to manipulate and defraud the nation's largest wholesale energy market and that Coaltrain made false and misleading statements and material omissions during the investigation in an effort to cover up that scheme.
FERC assessed $38 million in civil penalties and $4.12 million in disgorgement. Defendants did not pay the penalties and disgorgement, and thus, on July 27, 2016, FERC filed in this Court, seeking an order affirming and enforcing its May 27, 2016 Order. On March 30, 2018, this Court issued a detailed Opinion and Order, ECF No. 45, addressing Defendants’ motions to dismiss. The Court found that this case was more akin to a civil lawsuit than an administrative review and ordered that this case proceed accordingly. Id. at 7–8. The Court also found that the Anti-Manipulation Rule is not unconstitutional and that FERC has the authority to regulate UTC transactions, promulgate rules pursuant to that authority, and enforce civil penalties related to violations of the FPA and promulgated rules. Id. at 21–22, 41–44, 61–70. Finally, the Court denied Defendants’ motions to dismiss based on lack of personal jurisdiction, improper venue or transfer of venue, and for failure to state a claim except for Sheehan and P. Jones’ motion to dismiss the § 35.41(b) claim against them in their individual capacities. See generally id.
Thereafter, the parties engaged in discovery and filed dispositive motions, which are ripe for review.
II. STANDARD OF REVIEW
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). The movant has the burden of establishing that there are no genuine issues of material fact, which may be accomplished by demonstrating that the nonmoving party lacks evidence to support an essential element of its case. Celotex Corp. v. Catrett , 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; Barnhart v. Pickrel, Schaeffer & Ebeling Co. , 12 F.3d 1382, 1388–89 (6th Cir. 1993). To avoid summary judgment, the nonmovant "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; accord Moore v. Philip Morris Cos. , 8 F.3d 335, 340 (6th Cir. 1993). "[S]ummary judgment will not lie if the dispute about a material fact is ‘genuine,’ that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In evaluating a motion for summary judgment, the evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co. , 398 U.S. 144, 158–59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970) ; see Reeves v. Sanderson Plumbing Prods., Inc. , 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000) (stating that the court must draw all reasonable inferences in favor of the nonmoving party and must refrain from making credibility determinations or weighing evidence). Furthermore, the existence of a mere scintilla of evidence in support of the nonmoving party's position will not be sufficient; there must be evidence on which the jury reasonably could find for the nonmoving party. Anderson , 477 U.S. at 251, 106 S.Ct. 2505 ; see Copeland v. Machulis , 57 F.3d 476, 479 (6th Cir. 1995) ; see also Matsushita , 475 U.S. at 587–88, 106 S.Ct. 1348 (finding reliance upon mere allegations, conjecture, or implausible inferences to be insufficient to survive summary judgment).
Here, the parties have filed cross-motions for summary judgment on at least some of the claims. Each party, as a movant for summary judgment, bears the burden of establishing that no genuine issue of material fact exists and that he or she is entitled to judgment as a matter of law. The fact that one party fails to satisfy that burden on his or her own Rule 56 motion does not automatically indicate that the opposing party or parties has satisfied the burden and should be granted summary judgment on the other motion. In reviewing cross-motions for summary judgment, courts should "evaluate each motion on its own merits and view all facts and inferences in the light most favorable to the non-moving party." Wiley v. United States , 20 F.3d 222, 224 (6th Cir. 1994). "The filing of cross-motions for summary judgment does not necessarily mean that the parties consent to resolution of the case on the existing record or that the district court is free to treat the case as if it was submitted for final resolution on a stipulated record." Taft Broad. Co. v. United States , 929 F.2d 240, 248 (6th Cir. 1991) (quoting John v. State of La. (Bd. of Trs. for State Colls. & Univs. ), 757 F.2d 698, 705 (5th Cir. 1985) ). The standard of review for cross-motions for summary judgment does not differ from the standard applied when a motion is filed by one party to the litigation. Taft Broad. , 929 F.2d at 248.
III. ANALYSIS
FERC moves for partial summary judgment on its 18 C.F.R. § 35.41(b) claim against Coaltrain as well as for summary judgment on all of Defendants’ affirmative defenses. Mot., ECF No. 74. Defendants move for summary judgment against all of FERC's claims.
A. Section 35.41(b) Claim
FERC moves for summary judgment on its § 35.41(b) claim, contending that the undisputed facts demonstrate Coaltrain made false statements, omitted material information, and otherwise failed to exercise due diligence in its responses to FERC's second data request when it failed to produce any Spector-related information in response to FERC's document requests. FERC Mot. 11–14, ECF No. 74. Coaltrain likewise moves for summary judgment on this claim and argues that its responses to FERC "were truthful to the best of its knowledge and belief when made" and that FERC cannot otherwise establish that any omission was material. Coaltrain Mot. Summ. J. 18–19, ECF No. 75.
The FPA "grants FERC the authority to regulate the activity of traders who participate in energy markets." Kourouma v. FERC , 723 F.3d 274, 277 (D.C. Cir. 2013). As this Court has previously noted, this authority extends to promulgation of rules to aid in that enforcement, see Opinion and Order 60–70, ECF No. 45, including 18 C.F.R. § 35.41(b), formerly known as "Market Behavior Rule 3." This Rule requires that:
As this Court previously explained:
In 2005, Congress passed the Energy Policy Act of 2005 ("EPAct"), Pub. L. 109-58, which made several amendments to the FPA. Upon passage of the EPAct, FERC codified some of its Market Behavior Rules and rescinded others as redundant in light of the new legislation. Market Behavior Rule 3 is codified, without changes, at 18 C.F.R. § 35.41(b).
Op. and Order 63, ECF No. 45.
A Seller must provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with the Commission, Commission-approved market monitors, Commission-approved regional transmission organizations, Commission-approved independent system operators, or jurisdictional transmission providers, unless Seller exercises due diligence to prevent such occurrences.
In adopting this Rule, the Commission recognized that "[t]he integrity of the processes established by the Commission for open competitive markets rely on the openness and honesty of market participant communications." Order Amending Market-Based Rate Tariffs and Authorizations , 105 F.E.R.C. ¶ 61,218, at P 107 (Nov. 17, 2003).
1. Is there a Scienter Requirement?
As an initial matter, the parties disagree as to whether the false statement or omission requires a certain mental state for a § 35.41(b) violation to occur.
Coaltrain argues that only intentional false statements or omissions are sanctionable under the Rule and points to Investigation of Terms and Conditions of Pub. Util. Market-Based Rate Authorizations , 105 F.E.R.C. ¶ 61,218, at P 110 (Nov. 17, 2003) for support. Coaltrain Resp. 6, ECF No. 92 (the "inadvertent submission of inaccurate or incomplete information will not be sanctioned .... the rule prohibits the knowing submission of false or misleading data."). FERC contends that this statement is inapplicable and taken out of context. Paragraph 110 in full reads:
110. We have also revised the rule to assure that inadvertent submission of inaccurate or incomplete information will not be sanctioned. As revised, the rule prohibits the knowing submission of false or misleading data. In this regard, we intend the "due diligence" exception to apply to the entity, not the individual, submitting the data. As such, we expect the seller submitting the information to have in place processes that assure the accuracy of the submitted information. The submission of false or incomplete information on behalf of a seller by an individual that did not personally know it to be false or incomplete in the absence of a process to insure data accuracy and sufficiency will not excuse the seller's conduct under this rule.
105 F.E.R.C. ¶ 61,218, at P 110 (Nov. 17, 2003) (emphasis added). On rehearing, the Commission Panel reaffirmed the due diligence standard for this Rule. Specifically, it rejected requests that the "due diligence standard be further strengthened (or simply replaced) by an express intent requirement and/or by similar qualifications that would have the same effect of limiting the application of [ § 35.41(b) ]." 107 F.E.R.C. ¶ 61,175 at P 96 (May 19, 2004). Instead, it reaffirmed its prior reasoning that the "due diligence defense will give sellers sufficient latitude to bring all relevant facts on this issue before the Commission." Id.
Likewise, the Commission has since reiterated that "[s]ection 35.41(b) does not contain a scienter requirement." 132 F.E.R.C. ¶ 61,216, at P 176 (Sept. 17, 2010) ; see also J.P. Morgan Ventures Energy Corp. , 141 F.E.R.C. ¶ 61,131, at P 45 (Nov. 14, 2012) ("No showing of the respondent's intent or mindset is necessary in order to demonstrate that a violation of section 35.41(b) has occurred" and that "intent or state of mind is irrelevant" to find a § 35.41(b) violation). Moreover, Coaltrain's previous employee, Kourouma, raised an identical argument to Coaltrain's, which was explicitly rejected by the Commission Panel:
21. In addition, we agree with OE Staff that the history of section 35.41(b) indicates that intent is not a necessary element of a violation of this section . As the respondent points out, the language of section 35.41(b) is taken directly from Market Behavior Rule 3. In adopting Market Behavior Rule 3, the Commission explained that the rule was not intended to penalize the inadvertent submission of inaccurate or incomplete information. While the Commission acknowledged that Market Behavior Rule 3 was intended to penalize the "knowing" submission of false or misleading information, the Commission explained that it was including the due diligence exception to ensure that the inadvertent submission of information was not penalized. The Commission stated that the due diligence exception applied to the seller, not the individual employee of the seller, submitting the data and that the Commission expected sellers to have in place processes that ensure the accuracy of submitted information. Although the respondent cites the Commission's reference to the "knowing" submission of false or misleading data as supporting his assertion that intent is a necessary element of section 35.41(b), the Commission clarified that it was not the intent of a seller but the actions taken by the seller to prevent the submission of inaccurate information that matters .
Specifically, the Commission found that the submission of false or incomplete information "on behalf of a seller by an individual that did not personally know it to be false or incomplete in the absence of a process to insure data accuracy and sufficiency will not excuse the seller's conduct under the rule."
Kourouma , 135 F.E.R.C. ¶ 61,245, at P 21 (June 16, 2011) (emphasis added).
Finally, at least one other court has found that "[i]ntent to deceive is not an element" of a § 35.41(b) violation. See Kourouma , 723 F.3d at 278. Instead, the Kourouma court found that the Rule "forgives false or misleading submissions only if they are made inadvertently despite the filer's due diligence to avoid such errors." Id. (emphasis added). In other words, although a Seller is not strictly liable if it does not comply with § 35.41(b), this Rule does not absolve recklessness and "implies even negligent misrepresentations may be actionable." Id.
Upon review, this Court finds that intent is not required for a § 35.41(b) violation.
2. Was the Omission Material?
Coaltrain next argues that the information sought was not material because there was no detrimental impact on FERC or FERC's investigation. Its argument is two-fold. First, it contends that there are no allegations any Spector information was missing or destroyed. Second, the two-year delay in production of Spector information did not harm FERC because FERC will not quantify the damage. Coaltrain Resp. 2, ECF No. 92. But Coaltrain's "no harm, no foul" arguments are misplaced.
Materiality does not hinge on whether the omission has a detrimental impact on the investigation. The Rule puts an affirmative responsibility on the Seller to provide accurate information and to not omit material information. See 18 C.F.R. § 35.41(b) ("A Seller must provide accurate and factual information and not submit false or misleading information, or omit material information ..." (emphasis added)). There is no qualifier requiring the omission of material information to "impede or harm the FERC investigation" like Coaltrain suggests. Moreover, as evident from the Rule's language, material modifies the type of information, making the logical inquiry whether the information itself was material, not the impact of the omission. This is not to say that the omitted material information could not also have a detrimental impact on an investigation, simply that the Rule does not require a detrimental effect before a Seller is liable for a § 35.41(b) violation.
Interestingly, although Coaltrain attempts to redefine what materiality is, it never actually argues that the omitted Spector information was immaterial. Meanwhile, FERC avers that more than 2,000 Spector screenshots have been used to support its investigation against Coaltrain and its employees—indicative of its materiality. Olson Decl. ¶ 6, ECF No. 74-1 at PAGEID # 1544.
Likewise, to the extent Coaltrain argues that FERC has no claim because it fails to quantify the harm caused by any omission, this Court has already rejected that argument. See Op. and Order 60, ECF No. 45 (rejecting Coaltrain's argument that FERC should have sought a separate penalty for the § 35.41(b) violation because "Coaltrain points to no case law, statute, regulation, or policy that required FERC to assess its penalties separately in order to state a claim.").
In sum, the Court rejects Coaltrain's contention that the Spector information was not material. 3. Did Coaltrain Act with Due Diligence in Its Document Production?
FERC also contends that Coaltrain, through its representative P. Jones, made false statements when he averred that Coaltrain's responses were true, accurate, and complete. Because the Court has already determined the omissions of Spector information were material, it will not address FERC's alternative argument.
There is no dispute that Coaltrain failed to submit Spector information, and this Court has found the omitted information was material. Thus, all that remains is whether Coaltrain exercised due diligence.
a. Which party has the burden of proof?
The parties first dispute which one has the burden to prove the existence, or lack, of due diligence. FERC argues that based on the Rule's phrasing, there is a violation unless the Seller exercised due diligence. Thus, FERC contends that due diligence is an affirmative defense rather than an element of a § 35.41(b) violation. Coaltrain maintains that it is FERC's burden to prove it did not act with due diligence because lack of due diligence is an element of a § 35.41(b) violation. The Court once again looks for guidance in the Commission's own statements about the due diligence requirement.
The Commission has consistently referred to the due diligence standard as a defense for a Seller to raise when it otherwise appears that it made false statements or omitted material information. See Moussa I. Kourouma d/b/a Quntum Energy LLC , 135 F.E.R.C. ¶ 61,245 at PP 21–22 (June 16, 2011) (referring to the due diligence standard as the "due diligence exception" and discussing that the Commission "did not believe that the due diligence standard would be inadequate for the purposes of considering such a defense ." (emphasis added)); see also Market Behavior Reh'g Order , 107 F.E.R.C. ¶ 61,175, at P 96 (May 19, 2004) ("[W]e believe that a due diligence defense will give sellers sufficient latitude to bring all relevant facts on this issue before the Commission." (emphasis added)). The Market Behavior Rehearing Order could not have been clearer—it is the Seller's obligation to bring forth "all relevant facts" about their "due diligence defense" to the Commission. Accordingly, the Court finds that the burden of proof is on Coaltrain to bring forth sufficient facts demonstrating its due diligence in responding to FERC's requests for production.
b. Whether Coaltrain Exercised Due Diligence
FERC argues that Coaltrain did not exercise due diligence in responding to the second data request because Coaltrain's owners were aware of Spector, communicated about Spector during the weeks before and after receiving the data request, created backups of the Spector documents, and used Spector information to advance its own interests when disputes with former employees arose. FERC Mot. Summ. J. 13, ECF No. 74. Coaltrain contends it exercised due diligence.
i. What does due diligence require?
As an initial matter, the Court must first provide some parameters for what due diligence looks like. Although the parties disagree as to whether due diligence was met, neither party provides a meaningful definition of what due diligence requires.
The Commission has explained, however, that the omission of material information is a violation unless the Seller can show that it exercised due diligence to prevent such an occurrence. 141 F.E.R.C. ¶ 61,131, at P 45 (Nov. 14, 2012). A Seller can avoid liability for a violation if it shows it had a process to ensure the accuracy of its responses. See Kourouma , 135 F.E.R.C. ¶ 61,245, at P 21 (June 16, 2011) ("submission of false or incomplete information on behalf of a seller by an individual that did not personally know it to be false or incomplete in the absence of a process to insure data accuracy and sufficiency will not excuse the seller's conduct under the rule." (internal citations and quotations omitted)).
In the securities fraud context, an accountant is able to raise a "due diligence" defense, which, "[i]n effect, is a negligence standard" and "avoid civil liability with respect to the portions of the ... statement for which he was responsible by showing that ‘after reasonable investigation’ he had ‘reasonable ground[s] to believe’ that the statements for which he was responsible were true and there was no omission of a material fact." Ernst & Ernst v. Hochfelder , 425 U.S. 185, 208, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).
Piecing these together then, Coaltrain can avoid liability if it shows that it conducted a reasonable investigation to make sure it produced the relevant and material information and followed a process to ensure the accuracy of its responses. As discussed below, most of Coaltrain's due diligence arguments are not so much examples of due diligence as excuses for why the Spector information was not produced. The Court will discuss each argument in turn.
ii. Coaltrain hired counsel
Coaltrain relies heavily on the fact that it hired counsel to aid in production to demonstrate its due diligence. The Court looks to see whether the Commission has addressed this.
According to the Commission, "submission of false or incomplete information ‘on behalf of a seller by an individual that did not personally know it to be false or incomplete in the absence of a process to ensure data accuracy and sufficiency will not excuse the seller's conduct under the rule.’ " Moussa I. Kourouma d/b/a Quntum Energy LLC , 135 F.E.R.C. ¶ 61,245, at P 22 (June 16, 2011). Thus, the question becomes whether hiring outside counsel constitutes "a process to ensure data accuracy and sufficiency." See id.
Coaltrain's argument fails for two reasons. First, it never argues anyone at Coaltrain made counsel aware of the Spector information or that counsel made the determination not to produce the information in response to FERC's document request. Thus, Coaltrain provides no evidentiary link to the omission and any action of counsel. Second, Coaltrain has already stated it will not rely on an advice-of-counsel defense. See ECF No. 74-39, at PAGEID ## 2883–84. It cannot try to backdoor that defense in now.
Additionally, the Commission has already addressed a similar defense and found that "retainer of qualified attorneys does not constitute sufficient due diligence to exonerate" a § 35.41(b) violation. 141 F.E.R.C. ¶ 61,131, at P 42 (Nov. 14, 2012). Indeed, the Commission further stated that:
At the time the Commission implemented Market Behavior Rule 3, the predecessor of section 35.41(b), the Commission was well aware of the fact that the vast majority of entities that interact with the Commission do so through or with the assistance of competent counsel. Had the Commission intended the assistance of counsel to satisfy the due diligence exception, it need not have established the exception at all because sellers would be excused from virtually all misrepresentations or material omissions.
Id. The Court agrees. Simply hiring counsel cannot absolve a Seller of liability. This is especially true here because there is no indication counsel was made aware of Spector and made the decision to not produce it. iii. Coaltrain's employees were instructed to preserve documents and not to destroy anything
Coaltrain next argues it exercised due diligence by instructing its employees to preserve and not destroy anything. But the violation is for failing to produce the information, not for failing to preserve it. Instructing your employees to preserve information and failing to produce such information are two different things.
iv. Whether the definition of "documents" was unclear
Coaltrain next argues that FERC did not include "security monitoring tools" in its definition of documents until after the deadline to respond; thus, it did not know that Spector information was responsive. FERC contends that the Spector materials were clearly responsive to its second data requests, especially numbers 8 and 12, which read:
8. Provide copies of all written communications, whether internal or external, relating to UTCs during the Relevant Period.
12. Provide copies of all notes, note books, journals, and any other documents relating to trading UTCs in PJM created during, or pertaining to, the Relevant Period.
Second Data Req., Att. A, Letter from W. Blair Hopkin to Carol Smoots, ECF No. 88-23, at PAGEID # 12576. "Documents", as defined by Attachment B of the Second Data Request Letter, refers to, among other things, "the originals of all writings and records of every type in your possession, control, or custody," including "electronic data and records stored on computer equipment ." Second Data Request, Att. B, Letter from W. Blair Hopkin to Carol Smoots, ECF No. 88-23, at PAGEID ## 12582–83 (emphasis added). FERC's broad definition of "documents" clearly encompasses the electronic data and records gleaned from the Spector computer monitoring software. It is likewise implausible that when pursuing action against a former employee, Sheehan refers to Spector information as "evidence," yet does not also think such information could be used as "evidence" against it when the tables are turned. See ECF No. 74-16, at PAGEID # 2733 ("Using a commercially available software program for monitoring employee use of the Company-computer system, Energy Endeavors uncovered evidence"). The Court rejects this argument that the requests were unclear.
v. It did not otherwise occur to Coaltrain's owners that Spector information could be responsive
Coaltrain's owners testified at deposition that although they were aware of Spector, it did not occur to them that it would be responsive. FERC argues that "it did not occur to us" is not a defense. FERC Resp. 42, ECF No. 88. The Court agrees. As detailed above, the owners conversed almost monthly about Spector during the relevant time period of production. See FERC Mot. Summ J. 9–10, ECF No. 74 (and accompanying citations). Moreover, for reasons discussed in the previous section, the Court finds it highly implausible that the owners could use Spector information to deny a former employee unemployment benefits, use Spector information in a FERC investigation against a former employee, and know that it was running on all the Coaltrain employees’ computers, yet not think it could contain responsive information. Regardless, simply arguing that "it did not occur" to the Seller is not persuasive, nor does it demonstrate a reasonable process was taken to ensure the response to FERC's document request did not omit any material information. vi. Their IT specialist left
Coaltrain's IT specialist, Wrinn, left prior to Coaltrain's production of documents, and Coaltrain argues that it might have produced the documents if he had not left during that time. The Court rejects this argument out of hand because the IT specialist's knowledge does not negate the fact that P. Jones and Sheehan also knew about and could access Spector, nor does Coaltrain explain how that constitutes due diligence.
vii. FERC knew that they used Spector so they should have asked for it/known Coaltrain's production was deficient
This argument borders on ridiculous, and the Court will not spend much time discussing it. But briefly, putting the burden on the entity that does not have personal knowledge, let alone control, of the relevant information would severely impair investigations because an outside party is not in the best position to know whether all relevant information was produced. As the Commission has previously cautioned other market participants,
Coaltrain's related argument—that FERC cannot assert an "it did not occur to us" defense for why it did not recognize Coaltrain had omitted Spector data likewise fails.
The Commission's grant of market-based rate authority is founded upon the presumption that a company's behavior will not involve fraud, deception or misrepresentation. Consequently, the Commission relies on the submission of complete and accurate information from those that seek authorization to charge market-based rates. Indeed, the provision of false, misleading or inaccurate information undermines the very integrity of the Commission's decision-making process, the Commission's market-based rate regime, as well as the Commission's ability to carry out its statutory obligation to ensure just and reasonable rates.
J.P. Morgan Ventures Energy Corp. , 141 F.E.R.C. ¶ 61,131, at ¶ 57 (Nov. 14, 2012) (emphasis added). The Commission relies on accurate and complete statements from the Sellers; it is under no obligation to sift through submissions to ensure their accuracy. Adopting Coaltrain's reasoning and placing the burden of verifying that the production was complete on FERC would have absurd results. Instead the onus, rightly so, is placed on the Seller to review the information in its custody and control and assure that all relevant and responsive information has been disclosed. Coaltrain cannot avoid liability by shifting the blame to FERC for not having caught its omission sooner.
viii. Evidence of due diligence
The Court is not left with much else to review except P. Jones’ declaration, in which he states that he "worked to ensure personnel were gathering the data necessary to answer the questions"; "reviewed the responses with counsel"; asked employees to "transfer all relevant documents to the Q drive, where most of our relevant trading records already were stored"; and "personally searched" his own files. P. Jones Decl. ¶¶ 9–11, ECF No. 88-17, at PAGEID ## 11972–73. What is completely lacking from Coaltrain's arguments or P. Jones’ declaration are any processes to ensure accuracy or examples of reasonable measures it took to not omit material information. Because there are no facts supporting the conclusion that Coaltrain exercised due diligence, the Court GRANTS FERC's motion for summary judgment as to this claim. B. Market Manipulation Claim ( 16 U.S.C. § 824v(a) and 18 C.F.R. § 1c.2 )
All Defendants move for summary judgment on FERC's market manipulation claim. The parties raise many of the same arguments, and the Court will address separate arguments only as needed.
Section 222 of the FPA, 16 U.S.C. § 824v, prohibits, in relevant part, a market participant, directly or indirectly, from using "any manipulative or deceptive device or contrivance (as those terms are used in [Section 10(b) of the Securities Exchange Act ("SEA")]) ... in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of electric ratepayers." 16 U.S.C. § 824v(a). This Court previously found that "Section 222 proscribes deception not only in the form of misleading statements but also in the form of misleading ‘[c]onduct itself ....’ " Op. and Order 29, ECF No. 45 (citing and quoting in part Stoneridge Inv. Partners, LLC v. Sci.-Atlanta , 552 U.S. 148, 158 (2008)).
In connection with 16 U.S.C. § 824v, FERC promulgated the Anti-Manipulation Rule. Prohibition of Energy Market Manipulation , Order No. 670, 114 FERC ¶ 61,047, 71 Fed. Reg. 4244-03 (2006) (codified at 18 C.F.R. § 1c.2 ). The Anti-Manipulation Rule explains that:
It shall be unlawful for any entity, directly or indirectly, 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,
(1) To use or employ any device, scheme, or artifice to defraud,
(2) 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
(3) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.
18 C.F.R. § 1c.2(a). The Rule adopts a broad definition of "fraud" to mean "any action, transaction, or conspiracy for the purpose of impairing, obstructing or defeating a well-functioning market." Prohibition of Energy Market Manipulation , Order No. 670, 114 FERC ¶ 61,047, at P 50, 71 Fed. Reg. 4244-03 (2006) (codified at 18 C.F.R. § 1c.2 ). Ultimately, what constitutes fraud "is a question of fact that is to be determined by all the circumstances of a case." Id. The Anti-Manipulation Rule also requires that a market participant have acted with scienter to be liable for a violation of the Rule. Id. at P 52. "Scienter is a mental state embracing intent to deceive, manipulate, or defraud." City of Monroe Emples. Ret. Sys. v. Bridgestone Corp. , 399 F.3d 651, 682 (6th Cir. 2005) (internal citation and quotation marks omitted). Recklessness can satisfy the Rule's scienter element. Id. at P 53. Finally, this Court has already found that "entity" in this context includes natural persons. See Op. & Order 22–25, ECF No. 45.
As this Court previously explained, FERC relied heavily on the SEC Rules, and in fact, the Anti-Manipulation Rule is identical to SEC Rule 10b-5. See Op. and Order 42, ECF No. 45. The Supreme Court of the United States recently elaborated on the definitions used here, in the context of a SEA Section 10b-5 violation:
A " ‘device,’ " we have observed, is simply " ‘[t]hat which is devised, or formed by design’ "; a " ‘scheme’ " is a " ‘project,’ " " ‘plan[,] or program of something to be done’ "; and an " ‘artifice’ " is " ‘an artful stratagem or trick.’ " [Aaron v. Securities and Exchange Commission ] Id. , at 696, n. 13, 686, 100 S. Ct. 1945, 64 L. Ed. 2d 611 [(1980)] (quoting Webster's International Dictionary 713, 2234, 157 (2d ed. 1934) (Webster's Second)) ... The words "act" and "practice" in subsection (c) are similarly expansive. Webster's Second 25 (defining "act" as "a doing" or a "thing done"); id. , at 1937 (defining "practice" as an "action" or "deed"); see Rule 10b-5(c) (making it unlawful to "engage in a[n] act, practice, or course of business" that "operates ... as a fraud or deceit").
Lorenzo v. SEC , ––– U.S. ––––, 139 S. Ct. 1094, 1101, 203 L.Ed.2d 484 (2019).
To break it down, the elements of a market manipulation claim under § 1c.2 (a)(1) are as follows:
1. Use of a fraudulent device, scheme, or artifice (further defining "fraud" as "any action, transaction, or conspiracy for the purpose of impairing, obstructing or defeating a well-functioning market")
2. With the requisite scienter
3. In connection with the purchase or sale of electric energy within FERC's jurisdiction
See Prohibition of Energy Market Manipulation , Order No. 670, 114 FERC ¶ 61,047, at PP 49–53, 71 Fed. Reg. 4244-03 (2006).
Here, FERC contends that Defendants used or employed a fraudulent "device, scheme, or artifice," or "engage[d] in an[ ] act, practice, or course of business that operate[d] ... as a fraud or deceit" to profit not based on price spread arbitrage, as was the stated purpose of trading, but for the sole or primary purpose of diverting MLSA credits to themselves instead of other market participants who executed legitimate trades. FERC Compl. 2, ECF No. 1. This Court has already found that FERC sufficiently alleged that Defendants’ scheme that focused on collecting MLSA credits, rather than price arbitrage, could constitute a violation. The question on summary judgment is whether FERC has sufficient evidence that creates a genuine dispute of material fact that Defendants did in fact use or employ such a scheme.
1. "Sole or Primary Purpose" Scienter Requirement
a. The sole or primary purpose standard does not need to be part of the rule itself in order to apply
As an initial matter, the Court acknowledges Defendants’ argument that the "sole or primary purpose" language did not arise until the Commission's Penalty Order. See Jones’ and Wells Mot. Summ. J. 5–7, ECF No. 76; See e.g. 155 F.E.R.C. ¶ 61,204, P 5 (May 27, 2016). But the Rule allows for flexibility in order to cover novel frauds, just like the SEC's Rule 10b-5. See FERC v. Silkman , 177 F. Supp. 3d 683, 705–06 (D. Mass. 2016) ("As in any regulatory or statutory scheme, there is inevitably some tension between providing precise guidance and preserving the flexibility to address the often ingenious imaginations of those who would seek to evade regulatory strictures and take advantage of perceived loopholes."). And just like Rule 10b-5, there is no baked-in "sole purpose" requirement. Instead, recklessness can suffice to meet the scienter requirement for a Market Manipulation violation, just like it can in the Rule 10b-5 context. See SEC v. George , 426 F.3d 786, 792 (6th Cir. 2005). Thus, the fact that the Commission chose to employ a higher mental state than what the regulation required gives Defendants’ arguments less teeth.
Instead, this argument about sole or primary purpose in many ways appears is an exercise in futility. There is no dispute that violations of the market manipulation rule require scienter. Moreover, there is no dispute that recklessness can satisfy the scienter requirement for a market manipulation violation. Here, FERC is saying it applied a standard higher than recklessness to Defendants’ conduct and still found a violation of the Anti-Manipulation Rule. Specifically, FERC applied an exacting purpose requirement—that they had a sole or primary purpose to commit fraud through execution of the OCL Strategy. See United States v. Hackett , 762 F.3d 493 (6th Cir. 2014) (explaining the different types of purpose requirements and that "sole or primary" was the highest). Defendant's insistence that the "sole or primary purpose" be included in the Rule as an element of the offense would eliminate liability for reckless actions, which have been found to be sufficient in both this context and the SEC's corresponding Rule 10b-5. Accordingly, the Court rejects this argument.
b. The Sole or Primary Purpose Standard is Manageable
Defendants’ main argument is that FERC's "sole or primary purpose standard" is unmanageable and unclear because they were allowed to consider MSLA credits when placing their trades. Jones’ and Wells’ Mot. Summ. J. 5, ECF No. 76.
To a large extent, this Court has already addressed and dispensed with this argument in its previous Opinion and Order. As this Court already discussed, FERC is not pursuing civil penalties against Defendant because they "considered" MLSA credits:
Defendants point the finger at FERC, stating that it was the one that decided in 2009 to explicitly tie MLSA distributions to paid transmission reservations. Defendants aver that when Coaltrain received MLSA credits based on its own paid transmission reservations, it was thus engaging in conduct that FERC itself made permissible.
Yet again, Defendants’ argument misses the mark. It is not Defendants’ mere collection of MLSA credits that FERC asserts was unlawful. It was Defendants’ purported scheme to place UTC trades for the sole or primary purpose of obtaining those credits. For reasons already explained, such a scheme, if proved, would constitute market manipulation under FPA Section 222 and the Anti-Manipulation Rule. Cf. ATSI Commc'ns, [Inc. v. Shaar Fund, Ltd. ], 493 F.3d [87] at 101 [(2d Cir. 2007)].
Op. & Order 36, ECF No. 45. To reiterate, it is not Defendants’ collection of MLSA credits, in a vacuum, that FERC contends is actionable. It is the "OCL Strategy" employed by Defendants, which contravened their normal trading practices, deceived PJM into paying MLSA credits, and impaired the well-functioning of the market, that FERC contends violates the Anti-Market Manipulation Rule.
Nevertheless, Defendants attempt to repackage these arguments by contending there is no "bright line" to determine "how much a market participant can ‘consider’ MLSA before committing fraud." Mot. Summ. J. 15, ECF No. 75. Coaltrain points to FERC's own 30(b)(6) witness's testimony as proof of unmanageability because Matson testified that there is no "bright line as to the inflection point" and that "there was an inflection point somewhere, but we don't know exactly where that is, it's not quantified." Matson Dep. 73, 87, ECF No. 75-5. Thus, Coaltrain contends that "[i]f FERC does not know exactly where the line is, how could a market participant divine it without any clear guidance from FERC?" Mot. Summ. J. 16, ECF No. 16.
But bright-line tests are not a prerequisite for manageability or liability. As Matson elaborated,
[i]n the Coaltrain situation, what I would consider is that they increased the volume of their transactions. Those transactions were zero spread or nearly zero
spread transaction, and they were taking on the expense of transmission when that wasn't necessary. In consideration of all that versus the potential gain of additional MLSA surplus, I would say that the gain of the MLSA surplus was the — driving force or primary reason.
Id. In other words, Matson looked at the totality of the circumstances, a test courts often employ. See Prohibition of Energy Market Manipulation , Order No. 670, 114 FERC ¶ 61,047, at ¶ 50, 71 Fed. Reg. 4244-03 (2006) (what constitutes fraud "is a question of fact that is to be determined by all the circumstances of a case."). The question is whether Defendants’ actions, when taken together, indicate their sole or primary purpose was to obtain MLSA credits rather than place trades for the lawful purpose of arbitrage. Moreover, although the Court could potentially envision a set of facts where it is less clear whether a defendant's decision to place a trade was "primarily" motivated by a fraudulent purpose, that is not this set of facts.
Defendants’ unmanageability argument is also otherwise unpersuasive because courts and juries have been able to manage a standard that evaluates purpose and intent of the traders in the securities context for years. See, e.g. , SEC v. Masri , 523 F. Supp. 2d 361, 372 (S.D.N.Y. 2007) ("Indeed, ‘the only definition [of market manipulation] that makes any sense is subjective—it focuses entirely on the intent of the trader.’ " (citation omitted)); In re Amaranth Nat. Gas Commodities Litig. , 587 F. Supp. 2d 513, 534 (S.D.N.Y. 2008) ("[A] legitimate transaction combined with improper motive is ... manipulation."); see also City Power , 199 F. Supp. 3d at 235 (" Markowski [v. SEC , 274 F.3d 525, 529 (D.C. Cir. 2001) ] and Koch [v. SEC , 793 F.3d 147, 152–56 (D.C. Cir. 2015) ] thus reveal an important point: under Section 10(b), securities traders are not free to trade for whatever purpose they wish. Traders are presumed to be trading on the basis of their best estimates of a security's underlying economic value ... and to trade for other purposes can be deceptive."). Courts and juries alike are called upon in fraud cases to discern and decipher improper motives from proper ones.
Likewise, this Court has already rejected Defendants’ argument that the Anti-Manipulation Rule is vague—or "unclear" as they now repackage it. See Op. and Order 43, ECF No. 45 ("A regulation is not vague because it may at times be difficult to prove an incriminating fact but rather because it is unclear as to what fact must be proved."). This Court is unpersuaded by Defendants’ arguments now for the same reasons it has previously stated—Defendants are sophisticated parties, and any potential vagueness is balanced by the scienter requirement. See Op. and Order 53–54, ECF No. 45. The question a reasonable fact-finder must answer is whether Defendants placed certain trades, with the sole or primary purpose that they would recoup more MLSA credits than they would make on spreads from placing those trades, also while knowing full-well that the purpose of trading should be price arbitrage. This is not vague, amorphous, or unmanageable.
c. The Black Oak litigation does not alter the standard
Defendants argue that the Commission's decisions and positions in the Black Oak litigation saga that has spanned over ten years dictate summary judgment in their favor. Jones’ and Wells Mot. Summ. J. 2, ECF No. 76. Specifically, they argue that the Commission's June 2019 Black Oak decision permitted market participants to engage in UTC transactions that "they would not have entered but for the availability of" MLSA. Id.
The Court will not rehash the entire procedural history of the Black Oak litigation, but generally the litigation involved MLSA credits and who was eligible to receive them. See generally Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 136 F.E.R.C. ¶ 61,040 (2011) ; see also Black Oak Energy, LLC. v. PJM Interconnection, LLC , 167 F.E.R.C. ¶ 61,250 (June 20, 2019). As it relates to the June 2019 decision, the Commission determined that companies exporting from PJM to another region, Midcontinent Independent System Operator, Inc. ("MISO"), should be eligible to receive MLSA even though they did not pay for transmission (and thus did not contribute to the fixed costs of the transmission system). This decision also dealt with physical trades, not virtual ones at issue in this case. The Commission's reason for this was because the exporters "had a reasonable expectation of receiving at least some credit for line losses [(MLSA/OCL)], and their reliance would have factored into their business decisions." Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 167 F.E.R.C. ¶ 61,250, at P33 (June 20, 2019). Defendants argue the Commission's decision to allow "but-for" consideration of MLSA in placing trades completely undermines FERC's litigation position in this case. See Jones’ and Wells Mot. Summ. J. 3, ECF No. 76. This is because by allowing "but-for" consideration of MLSA, the "or primary purpose" of FERC's standard has been obliterated, and there is otherwise insufficient evidence that Defendants traded for the sole purpose of collecting MLSA. Jones’ and Wells Mot. Summ. J. 4–5, ECF No. 76.
But as FERC points out, the Commission in a subsequent order explicitly indicated that it did not in any way intend for the June 2019 Black Oak decision to alter its theory of liability against Coaltrain. Order Denying Rehr'g, Black Oak Energy, L.L.C. , 169 F.E.R.C. ¶ 61,075, P22 and P22 nn. 46–47 (Oct. 2019) ("The Commission has issued Orders Assessing Civil Penalties against three sets of respondents [one of them being Coaltrain], determining that they engaged in manipulative conduct requiring them to pay both disgorgement and civil penalties ... The Commission's determination in the [June 2019] Order on Remand does not affect these ongoing enforcement actions"). The October 2019 Commission opinion further clarified that the transactions eligible for refund were "good faith" export transactions. Id. at P22 n.45. The Court agrees with FERC's distinction between "but-for" and "sole or primary purpose" in that there can be multiple "but-for" factors behind a decision, yet those may not be the "sole or primary" factors. See FERC Resp. 7, and 7 n.3, ECF No. 88. Given this, the Court does not find that the Black Oak decisions in any way impact the standard here.
2. Defendants Had Notice that Trading for the Sole or Primary Purpose of Obtaining MLSA credits was Impermissible
Defendants argue they did not have notice that trading for the sole or primary purpose of obtaining MLSA credits would violate the Anti-Manipulation Rule, and thus, they cannot be liable. See Jones’ and Wells’ Mot. Summ. J. 6, ECF No. 76; Coaltrain Mot. Summ. J. 16, ECF No. 75. As the Court discussed in its prior Opinion:
Although the Anti-Manipulation Rule does not specifically define every type of scheme that will be considered fraudulent, it places market participants on notice that conduct intended to impair, obstruct, or defeat a well-functioning market would be considered fraudulent and that whether conduct is fraudulent would be considered on a case-by-case basis upon full consideration of the facts. 114 FERC ¶ 61,047, at ¶ 50. It is not hard to see how trading only for the benefit of MLSA credits subverts a well-functioning
market. As FERC's allegations make clear, the transmission reservations necessary to make those trades render unavailable those same transmission lines for other trades—both physical and financial. And because MLSA credits are distributed on a pro rata share, logically, traders who place larger volumes of MLSA trades will receive a larger share of the MLSA credits—regardless of whether the eligible trades were made for arbitrage to the market's benefit.
Op. and Order 39, ECF No. 45. Moreover, as early as 2008 FERC provided notice to Defendants that the purpose of UTC transactions was for price arbitrage. See id. at 40. FERC also expressed "clear disapproval of the possibility that virtual traders might seek to profit by simply maximizing MLSA instead of reacting to price differences." Id. (quoting City Power , 199 F. Supp. 3d at 235 ). Indeed, that is initially why the Commission rejected any payment of MLSA credits for any type of financial transaction, because the benefits of arbitrage should result from spotting "divergences between markets", but "[i]f arbitrageurs can profit from the volume of their trades, they are not reacting only to perceived price differentials in LMP or congestion, and may make trades that would not be profitable based solely on price differentials alone." Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 122 F.E.R.C. ¶ 61,208, at P 51 (Mar. 6, 2008). When the Commission later permitted UTC trades to recoup MLSA credits for paid transmission, it still made clear it did not want arbitrageurs to "conduct trades simply to receive a larger credit." See Black Oak Energy, L.L.C. v. PJM Interconnection, L.L.C. , 125 F.E.R.C. ¶ 61,042, at P38 n.46, P43 and P43 n.51 (Oct. 16, 2008) ("payment of the surplus to arbitrageurs that is unrelated to the transmission costs could distort arbitrage decisions and reduce the value of arbitrage by creating an incentive for arbitrageurs to engage in purchase decisions, not because of price divergence, but simply to increase marginal line loss payments.").
Finally, in 2009 and 2010, in four different filings, firms owned by Sheehan and P. Jones (Energy Endeavors and Coaltrain) told the Commission that there was "no merit" to the concerns that virtual traders would improperly focus on MLSA credits if allowed to collect them for UTC transactions. See e.g. , Financial Marketers’ Req. for Reh'g, Docket No. EL10-40-000, at 20 n. 23 (June 9, 2010), ECF No. 88-24, at PAGED # 12607; see also Compl. of Financial Marketers, Docket No. EL10-40-000, at 2 n.3, 15 n.20 (Feb. 2, 2010), ECF No. 88-23, at PAGEID ## 12640, 12653.
Although Defendants contend that they did not read or know the representations made to the Commission, and thus those representations do not show they had notice, the filings were made on behalf of companies P. Jones and Sheehan owned where millions, if not billions, of dollars were at stake. At the very least a dispute of fact remains as to whether Defendants were aware of these representations made to FERC in their companies’ briefing, and therefore were on notice that the specific type of trading was impermissible.
In sum, Defendants do not need to expressly be told that some specific action is impermissible in order to have notice that some particular action would constitute market manipulation. Defendants knew that the purpose of UTC trading was arbitrage and that actions taken to undermine the well-functioning market would be impermissible.
3. Sheehan and Miller's Liability
Sheehan and Miller both also argue, mostly in their replies, that the Court should dismiss the hundreds of claims relating to OCL transactions with which there is no specific evidence of their involvement. The Court will not do so because this case has been presented, at least up until this point, as one claim for Market Manipulation in which all Defendants were alleged to have engaged in a scheme to defraud, which included placing certain OCL Strategy trades for the sole or primary purpose of obtaining MLSA credits, and not for the proper purpose of arbitrage. It is not, at least to the Court's knowledge, a distinct claim for each OCL trade.
Sheehan and Miller each move separately for summary judgment but both argue essentially the same thing—that they are not liable because there is no evidence they actually "used or employed" the purportedly fraudulent scheme by placing OCL Strategy trades. Sheehan Mot. Summ. J., ECF No. 83-1; Miller Mot. Summ. J., ECF No. 81. This Court previously addressed Sheehan's and Miller's potential liability and determined that they can be liable only as primary violators, rather than as aiders and abettors, and explained that prohibited conduct is only "the actual ‘use’ or ‘employment’ of a manipulative or deceptive device, scheme, or artifice, 18 C.F.R. § 1c.2(a)(1), or the actual ‘use’ or ‘employment’ of a manipulative or deceptive ‘act, practice, or course of business,’ id. § 1c.2(a)(3)." Op. and Order 46, ECF No. 45. Likewise, the Court rejected FERC's argument that "developing, strategizing about, researching, or designing" the scheme was sufficient for primary liability in this case. See id. at 48–49. Instead, this Court explained that "FERC needs to allege that Miller and Sheehan were involved in the perpetration of the fraudulent scheme." Id. at 50 n.12.
Nevertheless, the Court allowed the claims against Sheehan and Miller to proceed because it found that FERC had plausibly alleged primary liability, in that both Defendants "participated in the decision to execute the OCL Trades." Id. at 50. Specifically, Miller "made decisions to execute certain "OCL Strategy" trades by directing or recommending trades, and Sheehan actually made a few trades himself. Id. at 49–50. This Court found those actions were sufficient to constitute "indirectly" using or employing the scheme to defraud to constitute primary liability. Id. at 51. The Court will now evaluate whether FERC has presented sufficient evidence against Sheehan and Miller such that a reasonable jury could find them primarily liable for using or employing the scheme to defraud.
a. Sheehan
Sheehan argues that he should be dismissed from this lawsuit because he placed only two trades on the PJM market, labeled them as spread-trades, and someone later re-labeled them as OCL-trades. Sheehan Mot. Summ. J. 1, ECF No. 83-1. Sheehan further argues that he cannot be held liable merely because FERC lumps all "defendants" into all alleged wrongdoing. Rather, he contends that FERC is required to show that he placed the OCL-trades, something FERC cannot do. Id. at 2–3. Meanwhile, FERC contends that it has evidence that the two trades Sheehan placed on June 17, 2010, were OCL trades, and that alone is sufficient for a jury to hold him liable as a primary violator.
Upon review, the Court finds that a genuine dispute of material fact exists as to whether Sheehan actually placed OCL trades on June 17, 2010, thereby using or employing the scheme to defraud.
It is undisputed that on June 17, 2010, Sheehan placed trades in the PJM market and labeled them as "Spread Trades." See Sheehan Mot. Summ. J. 14, ECF No. 83-1; FERC Resp. 6–7, ECF No. 90. It is further undisputed that R. Jones later changed the label of Sheehan's trades, as well as other trades, from "Spread trades" to "OCL trades" on June 29, 2010. See Sheehan Decl. ¶ 9, ECF No. 83-2, at PAGEID # 9708; First Req. for Admis. No. 11, ECF No. 88-109, at PAGED # 15217. However, it is also undisputed that the "OCL trade" label did not exist as a label option in the Market Interface menu at the time Sheehan placed the trades. See Sheehan Mot. Summ. J. 4, ECF No. 83-1, citing Commission Order Assessing Civil Penalties, Docket No. IN16-4-000, P175 (May 27, 2016), ECF No. 1-1, at PAGEID # 139 ("Coaltrain's OCL label became available on its internal systems only around June 23, 2010, after Mr. Sheehan placed the 7,700 MWh of trades.").
And in any case, simply labeling the trades as spread trades does not absolve Sheehan. Contrary to Sheehan's argument that "no reasonable juror could infer [his] intent at the time of the trades on June 17, 2010 from someone else's unrelated act [of relabeling the trades as OCL trades] twelve days later," Sheehan Mot. Summ. J. 14, ECF No. 83-1, a jury could do exactly that. It is not the OCL label that FERC contends made the trades fraudulent, it is the purpose for which they were placed—to obtain MLSA credits. Coaltrain would not have needed to label any trades as OCL trades in order for FERC's theory of liability to apply. Instead, the Court must look beyond the label and examine the facts and circumstances surrounding this trade to determine whether a reasonable jury could infer Sheehan had the requisite intent to place OCL trades regardless of the label. Here, the relabeling of these trades as OCL trades is some evidence that those trades were made for the purpose of furthering the scheme to defraud, especially because it was not just Sheehan's trades that were changed after the OCL trade label was added, but others as well. Moreover, although Sheehan argues he did not intend for the trades to be OCL trades, that does not mean the Court must grant him summary judgment, that simply highlights a dispute of fact. Finally, as FERC contends, the trades have other indicia that they were part of the OCL strategy that focused on collecting MLSA credits. Sheehan placed the trades only in hours with high loads (when MLSA payments were highest), he voluntarily chose to pay for transmission, and there is evidence Sheehan was aware of the OCL strategy—including discussions with other employees about it, asking when OCL data would be added to their software, and looking at the "LossFinder" spreadsheet created by IT staff to aid the OCL research. See e.g. Hughes Snapshot, June 17, 2010, ECF No. 88-46, at PAGEID # 13472. (Hughes sent the SOUTHEXP-SOUTHIMP path to Sheehan, who responded: "da da perfectly 0."); June 7, 2010 Screenshot, ECF No. 88-110, at PAGEID # 15235.(Sheehan asking Hughes when the loss credits would be added to the database).
Additionally, there is also evidence that Sheehan submitted other OCL trades, albeit trades that others had selected in the Market Interface, to PJM. See ECF No. 88-117, at PAGEID ## 15286–89; see also FERC Resp. 9, ECF No. 90 (explaining that the trades Sheehan submitted were listed in the OCL Strategy Spreadsheet). Even though Sheehan argues he did not select those trades, that is sufficient to show he still participated in and employed the scheme by taking the final step in submitting them (or reserving transmission for them).
Aside from the circumstantial evidence that Sheehan actually placed OCL Strategy trades, FERC further contends that a reasonable juror could infer that Sheehan approved the OCL Strategy trades, even if he did not place them himself. FERC Resp. 10–13, ECF No. 90. As this Court found in its prior Opinion and Order, "actually making the OCL Strategy trades oneself is not the only manner in which one could use or employ the OCL Strategy trading scheme" making or participating in decisions to execute certain OCL Strategy trades could be sufficient. Op. and Order 50, ECF No. 45. Here, Coaltrain's co-owner, P. Jones, indicated that Sheehan "approved" at least some of Coaltrain's OCL Strategy trades, including on the SOUTHIMP-SOUTHEXP path, and NCMPAIMP-NCMPAEXP path, among others. P. Jones’ Resp. to Req. for Admis. Nos. 6, 8, 10, ECF No. 88-70, at PAGEID ## 14432–33.
Finally, FERC contends that Sheehan participated in the "cover-up" of the scheme, which is evidence of his wrongful intent. Specifically, FERC points to the evidence which shows Coaltrain's employees engaged in little to no research on the SOUTHIMP-SOUTHEXP trades (in direct contrast to when they placed spread trades). See supra l.c.(a)–(b), discussion of Coaltrain's Spread Strategy and OCL Strategy. However, two weeks after Coaltrain had stopped using its OCL Strategy and a day after FERC began its investigation into its trading, Sheehan asked Hughes to find "the total number of 5 minute pricing intervals when southimp and southexp had different prices" since 2007. Aug. 19 Screenshots, ECF No. 88-112, at PAGEID # 15251. Hughes relayed to Sheehan that "since 7/1/2007, 118027 out of 316863 ticks SOUTHIMP and SOUTHEXP priced differently" or "37%". Id. at PAGEID # 15252. A month later, P. Jones used those same statistics when he testified before FERC, which FERC contends was an attempt to create the false impression that Coaltrain new about the price differences when placing trades. See P. Jones’ Dep. (Sep. 16, 2010) 81, ECF No. 88-19, at PAGEID # 12301; see also FERC Resp. 13, ECF No. 90 (further explaining that Sheehan and P. Jones spoke frequently about the investigation and talked about P. Jones’ testimony the morning of the September 16, 2010 deposition). Also, after FERC's investigation started, Sheehan directed the IT staff to change the OCL label to "Low Risk Reward." See ECF No. 88-115, at PAGEID # 15276 (one trader asked Hughes, "wtf is this constraint "Low Risk Reward," to which Hughes responded, Take thing Shawn made me add ... so he could save trades to it" and admitting that he did not like it either but "it was the easiest solution"). The Court finds that this additional evidence is sufficient for a reasonable juror to find that Sheehan had the requisite intent and participated in decisions to execute certain OCL Strategy trades.
Accordingly, Sheehan's motion for summary judgment on FERC's Market Manipulation claim is DENIED . ECF No. 83-1.
b. Miller
Similarly, Miller argues that FERC has not presented any evidence that he "helped choose or mandated" any specific trades at issue. Miller Mot. Summ. J. 6, ECF No. 81 (modifications omitted). This Court previously noted that Miller did not "actually execute any of the OCL Strategy trades" nor did FERC allege otherwise. Op. and Order 50, ECF No. 45. Nevertheless, the Court found sufficient FERC's allegations that Miller directed and recommended traders to execute OCL Strategy trades such that Miller "partook in the decision to execute specific OCL Strategy trades." Id. On summary judgment, Miller argues that he did not have supervisory authority to direct trades and that he did not help choose any of the OCL trades. Miller Mot. Summ. J. 7, ECF No. 81.
FERC contends that there is now evidence Miller actually submitted 11,700 MWh of SOUTH IMP-SOUTH EXP trades on July 26, 2010, from data Coaltrain produced in 2018. FERC Resp. 13, ECF No. 91; July 26, 2010 Submission, ECF No. 88-77, at PAGEID # 14558. Miller does not contest he "press[ed] the button to trigger the software" to upload the bids; instead, he argues that that "ministerial act" is insufficient for primary liability and that FERC is mischaracterizing the evidence because he was submitting transmission reservation, not trades. See Miller Reply 8–9, ECF No. 102. Miller argues, "an individual might submit a batch of trades for upload to the system without any knowledge of the contents of the batch, much less any substantive input into the trades themselves." Miller Mot. Summ. J. 12, ECF No. 81. This argument would be more persuasive, however, if the SOUTHIMP-SOUTHEXP trades (or transmission reservations) were not the only ones Miller submitted on July 26, 2010. See Hamal Decl. ¶ 20, ECF No. 88-2, at PAGEID # 10643. At the very least, there is a dispute of fact as to whether he knew what trades he was submitting or reserving transmission for.
FERC further contends that Miller approved trades, despite Miller's argument that he did not have supervisory authority to do so. The first interaction that FERC contends is evidence Miller approved a trade is when R. Jones sent a message in the Daily Blotter to get feedback on a "test-run" for an OCL path. See FERC Resp. 10, ECF No. 91. Miller responded with an "ok." July 2, 2010 Screenshot, ECF No. 88-92, at PAGEID # 14692. The Court agrees with Miller that this is insufficient to constitute approving or directing a certain OCL Strategy trade.
The second trade FERC contends Miller approved was a SOUTHIMP-SOUTHEXP trade on July 16, 2010. Wells was ready to place a large volume of SOUTHIMP-SOUTHEXP trades at 8:07 a.m. Wells Screenshot July 16, 2010, ECF No. 88-93, at PAGEID ## 14694–95. Wells messaged Miller at 8:08 a.m. and said, "Good Morning Sir. Any reason I should not submit the OCL plays?". July 16, 2010 Screenshot, ECF No. 88-94, at PAGEID # 14697. To which Miller responded at 8:09 a.m., "no go ahead ... thx". Id. At 8:10 a.m. Wells submitted SOUTHIMP-SOUTHEXP trades. July 16, 2010 Screenshot, ECF No. 88-95, at PAGEID # 14699. The Court also finds a dispute of fact exists as to whether Miller was a supervisor. Wells and R. Jones testified that he was, despite Miller's assertion to the contrary. Compare Wells Dep. (July 18, 2019) 87, ECF No. 88-32 ; R. Jones Dep. (Nov. 19, 2014) 19–20, ECF No. 88-99, at PAGEID 14750; and Miller Decl. ¶ 8, ECF No. 81-4, at PAGEID # 8528. That is not a "mere scintilla" of evidence that he was a supervisor, as Miller contends, that is a genuine dispute. See Miller Mot. Summ. J. 9, ECF No. 81; Miller Reply 10, ECF No. 102.
After the July 18, 2019 deposition, Wells sent a letter to the court reporter explaining that he could not sign the testimony because "I did my best to provide truthful testimony. But I had physical and mental health issues in 2010. I still suffer with these physical and mental health problems, and I take a lot of medications. Because of this, my memory is limited and generally not reliable. These issues affected both my original deposition on July 19, 2013, and the recent deposition on July 18, 2019." Wells Aug. 16, 2019 Letter, ECF No. 85-1, at PAGEID # 10573. Although the Court in no way means to diminish Wells’ conditions, he cannot simply negate sworn testimony by sending a letter after the fact. At the very least this letter creates a dispute of fact, and the trier of fact will be able to evaluate the credibility of his testimony—both past and recent—at trial.
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Regardless, Miller makes no argument that he can be primarily liable only if he had official authority to approve a trade. In sum, the Court finds this evidence sufficient to create a genuine dispute of material fact as to whether Miller approved an OCL trade, which satisfies primary liability. Finally, a reasonable fact-finder could conclude Miller had the requisite intent to engage in the scheme to defraud. As FERC details with evidentiary citations in its response, Miller researched OCL payments in early June 2010. FERC Resp. 8–9, ECF No. 91. This included looking up OCL calculations on PJM's website, Miller Dep. (July 23, 2019) 78, ECF No. 88-11 , and discussions about OCL trades. See June 10, 2010 IM between Sheehan and Miller, ECF No. 88-85, at PAGEID # 14580 (Miller saying to Sheehan, "if you pay too much than you may be higher than the OCL number" to which Sheehan replied, "if is the same source sink in and out then its purely the ocl value"). Although researching is insufficient for primary liability, it is some evidence of Miller's intent when submitting the bids to PJM and approving Wells’ July 26, 2010 trade.
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Accordingly, the Court DENIES Miller's motion for summary judgment as to FERC's Market Manipulation claim. ECF No. 81.
c. Joint and Several Liability
The Court finds it is still premature to decide the issue of joint and severability and DENIES WITHOUT PREJUDICE these portions of Sheehan's and Miller's motions. See Op. and Order 58–59, ECF No. 45 (finding the debate premature until there is a finding of liability).
d. Evidence of Market Manipulation
i. Circumstantial evidence is sufficient
Defendants contend there is no "direct evidence" that they engaged in market manipulation. Instead, since Coaltrain's owners affirmatively state that they did not place UTC trades for the sole or primary purpose of obtaining MLSA credits, they contend FERC should lose as a matter of law. Moreover, Defendants’ insistence that there needs to be direct evidence of wrongdoing is misplaced. Defendants argue FERC's evidence "is entirely circumstantial, based on evidence that does not directly prove a particular point, but rather requires the fact-finder to rely on possible inferences from the evidence." MSJ 15, ECF No. 76.
But requiring a fact-finder to make an inference from the evidence is not improper; indeed, that is exactly the point of using circumstantial evidence. Circumstantial evidence has the same weight as direct evidence, even in the fraud context, despite Defendants’ desire and arguments to the contrary. See Desert Palace, Inc. v. Costa , 539 U.S. 90, 100, 123 S.Ct. 2148, 156 L.Ed.2d 84 (2003) ("The reason for treating circumstantial evidence and direct evidence alike is both clear and deeply rooted: ‘Circumstantial evidence is not only sufficient, but may also be more certain, satisfying and persuasive than direct evidence.’ " (internal citation omitted)); see also New England Health Care Emps. Pension Fund v. Ernst & Young, LLP , 336 F.3d 495, 502 (6th Cir. 2003) ("[D]irect evidence of scienter is not necessary to a determination of fraud.").
Tellingly, although Defendants argue that the Court should not consider circumstantial evidence in this case, despite conceding that circumstantial evidence is not "an inherently invalid or low-grade form of proof" see Coaltrain Motion for Summ. J. 15, ECF No 76, they do not provide a single case that suggests disregard of circumstantial evidence here is appropriate. Additionally, if circumstantial evidence is sufficient to uphold a criminal conviction, the Court does not see why it should be any less probative here. See e.g. , United States v. Gandy , 926 F.3d 248, 257 (6th Cir. 2019) ("Although there was no direct evidence proving [defendant's] intent [to commit mail fraud], the jurors heard ample circumstantial evidence from which they could conclude that she knew that the trusts were created for an illicit purpose ... [indeed] [i]ntent to defraud can be proven by circumstantial evidence and inferences drawn from the scheme itself." (internal citation omitted)).
ii. FERC has presented sufficient evidence to survive summary judgment
Finally, the Court finds that FERC has adduced sufficient evidence to create a genuine dispute of material fact as to whether Defendants engaged in market manipulation. The Court is presented with is two competing narratives. FERC argues that Defendants used and employed a scheme to defraud PJM by placing trades along certain paths for the sole or primary purpose of obtaining MLSA credits—an improper purpose—instead of placing the trades for arbitrage—a proper purpose. Defendants contend they did not trade for the sole purpose of collecting MLSA, that their trades did have some risk (i.e. they could lose money), and did at times earn spread profits. See e.g. Jones’ and Wells Mot. Summ. J. 8, ECF No. 76.
Defendants also emphasize a 2015 PJM publication that "recognized their low cost/high volume positions." See Jones’ and Wells Mot. Summ. J. 16–17, ECF No. 76. But because that publication was issued after PJM was no longer paying MLSA for UTC trades and dealt with very small trades, in contrast to Coaltrain's large volume trades, the Court does not find this argument persuasive. See FERC Reply 5–6, ECF No. 96.
The Court will not rehash all the evidence FERC presented, that was already discussed in the factual recitation, or to large extent the Commission's May 2016 Penalty Order. However, the Court does find that FERC has presented sufficient evidence such that a reasonable juror could conclude Defendants engaged in this scheme to defraud with the requisite scienter. For example, the evidence shows that in early June 2010, Coaltrain's owners received notice about how much they were getting in retroactive MLSA/OCL payments from PJM. P. Jones Dep. (Sept. 5, 2013) Vol. II 106–08, ECF No. 88-35, at PAGEID ## 13170–72. The evidence shows that the next two weeks, Coaltrain's employees began researching OCL payments. Miller Dep. (July 23, 2019) 78, ECF No. 88-11 ; see June 10, 2010 IM between Sheehan and Miller, ECF No. 88-85, at PAGEID # 14580. Defendants, who all knew the proper purpose of UTC trades was price arbitrage, (i.e., betting on the spread differential) began focusing on paths with little to no price spreads. See Hughes Snapshot, June 15, 2010, ECF No. 88-45, at PAGEID ## 13459–73 (Hughes finding the SOUTHIMP-SOUTHEXP path, which had $0.00 price spreads the past week, and sending it to Sheehan, who responded "da [day ahead] da [day ahead] perfectly 0"). Not only that, Hughes was asked to "create an application to find deals for [OCL] loss credits," which he did. Hughes Snapshot, June 15, 2010, ECF No. 88-45, at PAGEID # 13459; See Hughes Snapshot, June 17, 2010, ECF No. 88-46, at PAGEID # 13462. Defendants further created an "OCL" label in their Market Interface tool in addition to their "Spread" and "Physical" labels. R. Jones Snapshot, June 29, 2010, ECF No. 88-31, at PAGEID # 12735. As FERC explained it, a path with little to no price spreads is not ideal for Spread strategy trading because there is no likelihood of a price disparity from which you can profit. However, these paths with little to no price fluctuation are ideal for trading that focuses on MLSA credits because Coaltrain could safely place large volumes of trades without risking that a spread loss would negate the MLSA payments. Coaltrain's trading on one path in particular, the SOUTHIMP-SOUTHEXP path, raised red flags for FERC. Prior to June 18, 2010, Coaltrain had never traded on the SOUTHIMP-SOUTHEXP path. Hamal Decl. ¶ 2, ECF No. 88-2, at PAGEID # 10632. Starting on June 18, 2010, and continuing through July 26, 2010, Coaltrain placed more than 2.8 million MWh of trades and generated $5.08 million solely in MLSA payments on the SOUTHIMP-SOUTHEXP path. Id. The SOUTHIMP-SOUTHEXP trades produced $0.00 in spread gains because the spreads on that path were $0.00 at all times in both the day ahead and real time markets on the days when Coaltrain placed the trades. Id. at ¶ 5. Even though the spreads were not profitable—in fact it cost Coaltrain $2.4 million in transaction fees with no spread gains—Coaltrain still net more than $2.6 million from the SOUTHIMP-SOUTHEXP trades solely from MLSA payments. Id. During Market Days between June 19 and July 27, 2010, when Coaltrain placed trades on the SOUTHIMP-SOUTHEXP path, MLSA credits for hours between 9:00 a.m. and 10:00 p.m. (referred to as "Hours Ending 10 to Hours Ending 22," or "HE 10-22") averaged $1.78/MWh. Hamal Dec. ¶¶ 9, 11, ECF No. 88-2, at PAGEID ## 10638–39.
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FERC discusses additional paths at issue in its Order Assessing Civil Penalties, ECF No. 1-1, but represents that it focuses on the SOUTHIMP-SOUTHEXP trades by way of example and to not over-burden the Court with a longer filing.
Despite no evidence of profitable price spreads, Defendants continued to place higher amounts of trades on this path. The trades on the SOUTHIMP-SOUTHEXP path started on June 18, 2010, when P. Jones reserved transmission on OASIS for that path between the hours of 10:00 a.m. and 10:00 p.m. Resp. to Req. No. 53, ECF No. 88-47, at PAGEID # 13514. The total volume of trades on June 18, 2010, was 12,000 MWh. Hamal Decl. ¶ 5, ECF No. 88-2, at PAGEID # 10635. The next morning, at 8:39 a.m., R. Jones submitted another set of SOUTHIMP-SOUTHEXP trades. Screenshots June 19, 2010, ECF No. 88-49, at PAGEID # 13583. A minute later, at 8:40 a.m. R. Jones sent a message to P. Jones saying: "OCL plays are in, btw load is up 128K on Wednesday." Id. at PAGEID # 13586. P. Jones responded that "it may be worth trying to put another 1000 on the southimp-exp play. We didn't move prices at all with what we put out for today." Id. at 13588. R. Jones placed the additional trades for a total volume of 22,000 MWh for June 19, 2010. Id. at 13590; Hamal Decl. ¶ 5, ECF No. 88-2, at PAGIED # 10635.
The SOUTHIMP-SOUTHEXP path made $0.00 in spread gains, but Coaltrain continued to increase their volumes of trade on that path each day, to 40,000 MWh (for Market Day June 21, 2010), 56,000 MWh (for Market Day June 22), and 77,830 MWh (for Market Day June 23, 2010). Hamal Decl. ¶ 5, ECF No. 88-2, at PAGIED # 10635. According to Hamal, absent OCL payments, Coaltrain would have lost $191,215.00 on these trades, but with OCL payments, it still profited $173,246.00. Id.
Starting with the trades placed on the SOUTHIMP-SOUTHEXP path on June 20, 2010, through July 26, 2010, (with the exception of Market Days July 1-3, 2010) the volume of Coaltrain's trades on that path was always greater than all of Coaltrain's Spread Trades combined . Hamal Decl. ¶¶ 3, 5, ECF No. 88-2, at PAGIED ## 10634–35. For example, the average daily volume of trades on SOUTHIMP-SOUTHEXP was 83,532 MWh, while the average daily volume of Coaltrain's Spread Trades combined was 30,389 MWh. Id. at ¶¶ 3, 4. Most of the trades on the SOUTHIMP-SOUTHEXP were placed earlier in the morning (as early as 6:55 a.m.) with the median submission time between 8:00 a.m. to 9:00 a.m. Hamal Decl. ¶¶ 19, 21, ECF No. 88-2, at PAGEID # 10643. In contrast, the median submission time for Spread trades was between 11:00 a.m. to 11:30 a.m. Id. at ¶ 21. The SOUTHIMP-SOUTHEXP constraints were never discussed on the Daily Blotter. Hamal Decl. ¶ 18, ECF No. 88-2, at PAGEID # 10643. Among all of Coaltrain's OCL trades, over 60% of the MWh volume were conducted on the SOUTHIMP-SOUTHEXP path. Id. at ¶ 5, at PAGEID # 10635. Wells testified that the analysis for OCL trades was "almost exactly the opposite of a normal analysis." Wells Dep. (July 19, 2013), ECF No. 88-64, at PAGEID # 14221.
PJM was forecasting lower loads for July1-3, 2010, because of cooler weather, and lower loads equated to less OCL payments. See e.g. , ECF No. 88-58, at PAGEID ## 13910–20.
The trades placed on the SOUTHIMP-SOUTHEXP path did not follow Coaltrain's typical Spread Strategy trading either. There was no discussion about the path's profitability on the Daily Blotter, they placed the trades earlier in the morning than their Spread trades, and they continued to place higher volumes of trades despite no indications of profitable price spreads.
In sum, at this stage of the litigation a reasonable juror could find that Defendants placed UTC trades with the sole or primary purpose of collecting MLSA (or OCL) credits.
The parties, for the most part, all join in on each other's briefing as to the affirmative defenses. For the sake of simplicity, the Court will refer to their arguments collectively, even if it is advanced primarily in one set of briefing.
Coaltrain also moves for partial summary judgment as to Defendants’ affirmative defenses of estoppel, waiver, selective prosecution, laches, unclean hands, and fault of others. FERC Mot. for Partial Summ. J. 14–20, ECF No. 74. Defendants have the burden of proof for their affirmative defenses. Fonseca v. Consol. Rail Corp. , 246 F.3d 585, 590–91 (6th Cir. 2001). The Court will briefly address each in turn.
1. Waiver
Defendants contend that FERC waived its right to prosecute in this case by conceding in the Black Oak litigation that Defendants’ conduct was permissible. For the reasons already discussed supra , the Court finds that the Black Oak's decisions do not contradict FERC's litigation theory in this case, and thus, rejects Defendants’ waiver arguments out of hand. The Court GRANTS summary judgment to FERC on this affirmative defense.
2. Estoppel
FERC likewise moves for summary judgment on Defendants’ estoppel affirmative defense.
The elements of the equitable doctrine of estoppel are:
(1) misrepresentation by the party against whom estoppel is asserted; (2) reasonable reliance on the misrepresentation by the party asserting estoppel; and (3) detriment to the party asserting estoppel.
Mich. Express, Inc. v. United States , 374 F.3d 424, 427 (6th Cir. 2004).
However, there is another element that must be met when the affirmative defense is being asserted against the Government. "Although the Supreme Court has left open the question of whether equitable estoppel may ever lie against the government[,] In re Gardner , 360 F.3d 551, 559 (6th Cir. 2004), the government "may not be estopped on the same terms as any other litigant." Heckler v. Cmty. Health Servs. , 467 U.S. 51, 60, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984). "A party attempting to estop the government bears a very heavy burden" because "[a]t the very minimum, some affirmative misconduct by a government agent is required as a basis of estoppel." Fisher v. Peters , 249 F.3d 433, 444 (6th Cir. 2001). "Affirmative misconduct is more than mere negligence. It is an act by the government that either intentionally or recklessly misleads the claimant." Mich. Express , 374 F.3d at 427.
Here, Defendants argue that PJM's and IMM's failure to notify market participants about changes or incorrect data on the SOUTHIMP-SOUTHEXP path and misleading statements from an IMM employee in particular, can be extended to FERC, primarily because FERC asserted a work product protection for its communications with PJM and the IMM. Sheehan/Miller Resp. 6, ECF No. 95. In essence, Defendants are attempting to argue that PJM and the IMM are FERC's agents. See id. at 8 ("If FERC somehow enjoys privilege for its communications with PJM and the IMM, then PJM and the IMM are fairly characterized as state actors for purposes of analyzing estoppel.") Even assuming these actions could be imputed to FERC, failure to correct erroneous data, or statements by the IMM that it did not see certain trades as a violation of the tariff is not evidence that any actions by PJM or the IMM amount to affirmative misconduct or are otherwise attributable as FERC's misconduct. This is not to say Defendants cannot use such evidence at trial to attempt to negate their intent, but it does not warrant estoppel of the entire case.
Defendants contend that PJM and the IMM are state actors and their actions can be imputed to FERC under the "public functions test," and "nexus test." Sheehan/Miller 8, ECF No. 95. The Court sees many problems with this argument, namely that those tests are typically used for bringing affirmative 42 U.S.C. § 1983 claims against state actors or Bivens claims against federal ones. Defendants provide no caselaw support for applying these tests in the context of the affirmative defense of estoppel. Moreover, the Supreme Court has held that liability under Bivens does not extend to federal agencies. See FDIC v. Meyer , 510 U.S. 471, 473, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994). So even if the test could otherwise be applied in this context, it seems like FDIC v. Meyer would preclude relief.
As FERC points out in its reply, Coaltrain stopped trading on those paths only after the IMM's call, and moreover, in any event, FERC has not alleged that Defendants violated the tariff; rather, FERC brings this action under the FPA's anti-manipulation provision. Reply 9–10, ECF No. 98.
Defendants also argue that FERC should be estopped because the agency "did not in 2010 or anytime beforehand prohibit market participants from considering MLSA as a factor in the economic analysis of a trade." Coaltrain Resp. to Interrog. No. 65, ECF No. 74-38, at PAGEID # 2968. The Court has already addressed this and found Defendants’ arguments wanting. Accordingly, the Court GRANTS summary judgment to FERC on Defendants’ estoppel affirmative defense.
3. Selective Enforcement
Next, Defendants appear to construe their affirmative defense of waiver as that of an Equal Protection selective prosecution defense. Sheehan/Miller Resp. 3–6, ECF No. 95. Defendants contend FERC has selectively chosen to pursue actions against them yet has ignored similar actions against similarly situated parties. Id. at 4. In doing so, Defendants argue their Fourteenth Amendment equal protection rights have been violated by arbitrary state action. Id. Selective enforcement or prosecution is a cause of action arising out the Fourteenth Amendment Equal Protection Clause. Boone v. Spurgess , 385 F.3d 923, 932 (6th Cir. 2004). In order to support an equal protection selective enforcement defense, "a [party] must demonstrate that someone similarly situated but for the illegitimate classification used by the government actor was treated differently." Id. When raised by a party not connected to a class or group, e.g. a "class of one," the party must demonstrate either discrimination by a government actor for some "bad reason," or that the "actor had no reason at all – that the action had no rational basis." Id. "[T]here is a strong presumption that the state actors have properly discharged their official duties, and to overcome that presumption, the plaintiff must present clear evidence to the contrary; the standard is a demanding one." Lofties v. Grabel , 826 Fed.Appx. 539, 542 (6th Cir. 2020). Defendants are not pleading connection to a class or group and are therefore considered a class of one.
To the extent necessary, the Court construes this as a challenge brought under the Fifth Amendment rather than the Fourteenth Amendment. See Martial-Emanuel v. Holder , 523 F. App'x 345, 349 n.1 (6th Cir. 2013) (explaining that the Fourteenth Amendment applies only to the states and their instrumentalities but construing the Fourteenth Amendment equal protection claim brought against the federal government as one brought under the Fifth Amendment).
The pleading party in an equal protection claim must also identify parties who are "similarly situated." Doe v. Miami Univ. , 882 F.3d 579, 595 (6th Cir. 2018). The "similarly situated" entity must be "similar in all of the relevant respects." Arendale v. City of Memphis , 519 F.3d 587, 604 (6th Cir. 2008). Most courts, however, have held parties in a class-of-one setting to a higher, particularized standard when identifying "similarly situated" companies. See Leib v. Hillsborough Cty. Pub. Trans. Comm'n , 558 F.3d 1301, 1307 (11th Cir. 2009) ; Clubside, Inc. v. Valentin , 468 F.3d 144, 159 (2d Cir. 2006) ; United States v. Moore , 543 F.3d 891, 896 (7th Cir. 2008) ; Cordi-Allen v. Conlon , 494 F.3d 245, 251 (1st Cir. 2007) ; JDC Mgmt., LLC v. Reich , 644 F. Supp. 2d 905, 926–27 (W.D. Mich. 2009) (compiling cases).
Here, Defendants assert that FERC had no reason at all to seek relief against them and not others. But FERC has brought enforcement claims against several other firms. FERC Reply 5, ECF No. 98 (listing other entities as Powhatan Energy, HEEP Fund, CU Fund, Houlian Chen (owner of CU Fund and HEEP Fund), City Power Marketing, K. Stephen Tsingas (owner of City Power), Oceanside Power, and Robert Scavo (owner of Oceanside)). Defendants, however, contend that this is not enough, and that there is no reason why FERC did not pursue claims against the other 40 or so firms identified in IMM's referral. Moreover, Defendants argue that they are not similar to the other six entities FERC pursued enforcement action against because unlike in those other cases, this case does not involve "wash trades", a specific type of MLSA trading scheme employed by the other investigated firms. Sheehan/Miller Resp. 4–5, ECF No. 95. Whether or not FERC provided a reason before, it provides a convincing one in its reply. FERC Reply 5, ECF No. 98.
As FERC points out in its reply, however, the IMM referral report that Defendants reply on refers only seven market participants to FERC for further investigation. FERC Reply 5, ECF No. 98; IMM Referral 29 (App'x A), ECF No. 95-1, at PAGEID # 15817. The Report further stated that IMM will "continue to investigate additional market participants" and "will either refer these participants or inform the Commission if the Market Monitor does not plan to refer" them. Id. at 28, at PAGEID # 15816. Defendants cannot argue that they are similarly-situated to the uncharged market participants when it is clear from this document that those other market participants were not referred to FERC for further investigation. The Court GRANTS FERC's motion for summary judgment as to this affirmative defense.
4. Laches
FERC next moves for summary judgment on Defendants’ affirmative defense of laches. Defendants concede laches does not normally apply to actions brought by the government within the statute of limitations. Jones’ and Wells Resp. 19, ECF No. 93. Nevertheless, Defendants then attempt to argue that "whether called laches or refutation of the claim that Coaltrain delayed the investigation, the controlling principle is the same: [FERC] cannot pin responsibility for its own delay on Defendants. Id. That argument is entirely irrelevant to the affirmative defense of laches, and Defendants otherwise fail to offer any law why laches would apply here. FERC's action is brought in a sovereign capacity pursuant to federal law, and no Defendant alleges this action comes outside the statute of limitations or offers any caselaw contest that point either. Compl. 1, ECF No. 1; 16 U.S.C. § 823b(d)(3)(B). Therefore, FERC receives immunity from laches. See Costello v. United States , 365 U.S. 265, 281, 81 S.Ct. 534, 5 L.Ed.2d 551 (1961) ("laches is not a defense against the sovereign"); United States v. Summerlin , 310 U.S. 414, 416, 60 S.Ct. 1019, 84 L.Ed. 1283 (1940) ("It is well settled that the United States is not ... subject to the defense of laches in enforcing its rights."); United States v. Peoples Household Furnishings, Inc. , 75 F.3d 252, 254 (6th Cir. 1996) ("The ancient rule ... that the sovereign is exempt from the consequences of its laches ... has enjoyed continuing vitality for centuries.") (citation and quotation marks omitted); United States v. Weintraub , 613 F.2d 612, 618 (6th Cir. 1979). Accordingly, the Court GRANTS Plaintiff's motion for summary judgement with respect to Defendants’ defense of laches.
5. Unclean Hands
FERC moves for summary judgment on Defendants’ affirmative defense of unclean hands on the basis that "the great weight of authority" precludes this defense against the government "in an enforcement action to protect the public interest." FERC Mot. for Partial Summ. J. 19, ECF No. 74 (citing CFTC v. Kraft Foods Grp., Inc. , 195 F. Supp. 3d 996, 1009 (N.D. Ill. 2016) (collecting cases)); see also United States v. Am. Elec. Power Serv. Corp. , 218 F. Supp. 2d 931, 938 (S.D. Ohio 2002) (striking unclean hands defense because it "may not be used against the United States to prevent it from enforcing its laws to protect the public interest"). Here, there is no dispute that FERC is acting pursuant to its enforcement authority to protect the public interest. This Court is convinced by the reasoning from this Court and other courts that have stricken a defense in such cases. Accordingly, the Court will not delve into the parties’ arguments any further and GRANTS summary judgment to FERC on Defendants’ unclean hands defense.
6. Fault of Others
Defendants fail to provide any legal basis for their fault of others defense. See Sheehan/Miller Resp. 19–20, ECF No. 95. It is their burden to prove their affirmative defense, and seeing no legal basis on which to rely, the Court GRANTS FERC's motion for summary judgment as to this affirmative defense.
IV. CONCLUSION
For the foregoing reasons, the Court GRANTS FERC's partial motion for summary judgment on Defendants’ affirmative defenses of waiver, estoppel, selective prosecution, laches, unclean hands, and fault of others, and FERC's § 35.41(b) claim against Coaltrain. ECF No. 74. The Court DENIES Defendants’ motions for summary judgment, ECF Nos. 75, 76, 80, 83-1, and likewise DENIES WITHOUT PREJUDICE Defendants’ motion to file under seal. ECF No. 94.
The Court GRANTS Sheehan's motion, ECF No. 83, for the limited purpose of filing ECF No. 83-1, an amended motion for summary judgment. ECF No. 83.