Antitrust Alert: FTC’s New Market Manipulation Prohibits False Statements and Omissions in Petroleum Markets
The Federal Trade Commission has issued its long-awaited rule targeting "market manipulation" in wholesale petroleum markets. With high, daily penalties, the rule is likely to cause petroleum suppliers to develop cautious compliance programs that restrict information disclosed to the market. The final rule becomes effective November 4, 2009.
Under the Energy Independence and Security Act of 2007 (EISA) Congress granted the FTC authority to write and enforce regulations to prohibit "any manipulative or deceptive device or contrivance" in connection with wholesale petroleum transactions. Passed in part in response to concerns that manipulation had contributed to energy price volatility and increases in petroleum prices, this legislation sought to restrict various market activities.
The FTC rule prohibits companies from making (a) knowingly fraudulent statements or actions or (b) omissions that, although true, mislead market participants and distort or are likely to distort market conditions:
It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, to:
(a) Knowingly engage in any act, practice, or course of business – including the making of any untrue statement of material fact – that operates or would operate as a fraud or deceit upon any person; or
(b) Intentionally mislead by failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.
The rule covers all purchases or sales of gasoline or petroleum distillates at the terminal rack level or upstream of the terminal rack level and all purchases of jet fuel, but not retail sales of gasoline, diesel fuels, or fuel oils to consumers.
The FTC's stated goals of the new rule are to prohibit practices that inject false information into wholesale petroleum transactions, protect the integrity of the price discovery process, and prevent the types of fraudulent or deceptive practices that the SEC, the CFTC, and the FERC have pursued in the markets they regulate.
Paragraph (a) applies to knowing misstatements. The rule forbids "knowing" untrue statements and fraudulent or deceitful conduct. As examples of conduct that could violate this paragraph, the FTC has highlighted false public announcements of planned pricing or output decisions, false data reporting, and wash sales intended to disguise market liquidity or prices. Knowingly" is defined to mean that the person "knew or must have known that his conduct was fraudulent or deceptive"; the FTC does not have to prove intent to manipulate the market. The FTC has said it does not intend to pursue false statements in bilateral negotiations, but it may challenge those that result in the dissemination of false information to the broader market.
Paragraph (b) applies to misleading omissions. The rule prohibits statements from which material information intentionally has been omitted, with the further intent to make the statement misleading. The FTC provided as an example a person's reporting price information to a private data reporting company that is in the business of providing price reports to the marketplace, but intentionally omitting material facts that the reporting company required to be reported. The rule also would apply to any intentional omission of material information that makes other truthful statements (whether made voluntarily or mandated) misleading. A paragraph (b) violation does not require proof of a specific price effect, but only that it "distorts or is likely to distort market conditions," and this is a change from the "tends to distort" standard earlier proposed. Significantly, this standard does not require a showing that the person intended to manipulate a wholesale petroleum market or intended to have an impact on the larger market; it requires only that the person intended to make a statement misleading by means of an intentional omission of material fact.
The FTC has noted specifically that the new rule imposes:
- no specific new conduct requirements, such as a duty to supply product or a duty to provide access to pipelines or terminals,
- no new duty to disclose to the market at large information, such as price or volume data or business plans,
- no duty to update information, or
- no new recordkeeping requirements
The language of the EISA statute is almost identical to anti-manipulation authority of the Federal Energy Regulatory Commission (natural gas) and the Commodity Futures Trading Commission (commodities), which in turn borrowed from the Securities Exchange Act of 1934. The Commission generally modeled its rule on the anti-fraud approach of SEC Rule 10-b(5), but the FTC rule could affect more operations of petroleum suppliers than do the regulations enforced by the FERC and CFTC. The rule creates some possibilities for duplicative enforcement between the FTC and the CFTC, as the FTC explicitly covered futures transactions, over which the CFTC already had jurisdiction, although the FTC has stated it will coordinate with the CFTC to limit duplicative enforcement efforts.
The Commission adopted the rule by a 3-1 vote. In the announcement, Chairman Jon Leibowitz said that "this new Rule will allow the FTC to crack down on fraud and manipulation that can drive up prices at the pump. We will police the oil markets – and if we find companies that are manipulating the markets, we will go after them." Commissioner Bill Kovacic dissented, highlighting the burden the rule imposes on petroleum markets and predicting "that the contributions of a rule against market manipulation for petroleum products to the solution of the nation's larger energy problems are likely to be small." Concurring, Commissioner Tom Rosch stated that he agrees with many of Commissioner Kovacic's criticisms of the rule but that he would take those into account in decisions on enforcement actions.
The EISA also gave the FTC authority to prosecute reporting false information to the federal government. Section 812 prohibits "any person" from reporting information that is "required by law to be reported"—and that is "related to the wholesale price of crude oil gasoline or petroleum distillates"—to a federal department or agency if the person (1) "knew, or reasonably should have known, [that] the information [was] false or misleading," and (2) intended such false or misleading information "to affect data compiled by the department or agency for statistical or analytical purposes with respect to the market for crude oil, gasoline, or petroleum distillates."
Violations of the Commission's rule are punishable with civil penalties of $1 million per violation, and each day on which the misconduct continues is treated as a separate offense. The FTC also has taken the position that, under Section 13(b) of the FTC Act, it could file a federal court civil action seeking an injunction to prevent violation of the rule. In such a proceeding, the FTC also has indicated it would be able to secure corollary equitable relief, such as an asset freeze, disgorgement, and/or the appointment of a receiver. Moreover, Section 19 of the FTC Act permits the FTC to file a federal court civil action in its own name against anyone that "violates any rule…respecting unfair or deceptive acts or practices," and permits the court to grant a wide range of equitable relief. Furthermore, the FTC has also argued that the FTC Act permits the FTC, by referral to the DOJ, to file a federal court civil action to recover civil penalties of up to $11,000 per violation.
This new rule undoubtedly will lead to petroleum companies exercising special caution in their public statements and may reduce the communication of valuable information into the market. As a policy matter, the rule was criticized for burdening petroleum markets and market participants – even though the FTC has in numerous studies uncovered no evidence of significant or systemic fraud in participants' public statements. As a practical matter, the new rule will cover thousands of daily, routine transactions. Although the FTC announced that no new recordingkeeping procedures are required, many companies will independently seek to develop new procedures and other internal policies in response to the risk of challenges by the FTC or others.
Read more on the FTC's new rule at http://www.ftc.gov/opa/2009/08/mmr.shtm.
For more information, please contact your principal Jones Day representative or the lawyer listed below.
J. Bruce McDonald
Washington / Houston
+1.202.879.5570 / +1.832.239.3822
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