In an order issued on March 7, 2017, the United States District Court for the Eastern District of California (“District Court”) rejected arguments from FERC regarding the scope of review and applicable procedural rules governing the District Court’s review of a market manipulation enforcement proceeding. The District Court held that the Federal Rules of Civil Procedure (“FRCP”) applied to the action and rejected arguments that it was limited to “de novo” review of the administrative record as compiled by FERC. As a result, the District Court ordered FERC to provide discovery to the opposing parties.
In 2011, FERC’s Office of Enforcement began investigating an allegedly fraudulent scheme perpetuated by the financial trading firm Etracom LLC and its founder and principal owner, Michael Rosenberg (the “Respondents”). Eventually, FERC Enforcement issued an order to show cause on December 16, 2015, thereby initiating an enforcement proceeding at FERC. Shortly thereafter, the Office of Enforcement submitted to FERC its findings and conclusion that the Respondents had engaged in an unlawful scheme to manipulate energy markets in California.
As required by Section 31(d) of the Federal Power Act (“FPA”), FERC offered the Respondents two options for contesting the Office of Enforcement’s findings. Under Option 1, the Respondents would have a formal public hearing on the record before a FERC administrative law judge. Under Option 2, there would be a streamlined proceeding after which, if FERC concluded that a penalty was appropriate, FERC would analyze any aggravating or mitigating factors. As noted in the District Court’s order, FERC has consistently interpreted Option 2 as not requiring any procedural protections, except in rare cases. As a result, FERC rejected the Respondents’ request for discovery after they elected to proceed under Option 2, and the Commission ultimately assessed civil penalties of $2.4 million against Etracom, $100,000 against Mr. Rosenberg, and a disgorgement of $315,072 in unjust profits plus applicable interest. FERC filed the present action in the District Court following the Respondents’ refusal to pay the penalties.
The parties immediately disputed the scope of review and applicable procedural rules at the outset of the District Court case. At the heart of the matter was whether the FRCP applied, such that Respondents could seek discovery from FERC and more effectively contest the enforcement penalty.
In its analysis of the issue, the District Court cited Ninth Circuit precedent holding that the FRCP applies to all litigants in federal court—including the United States government. The only exception to this general rule, the District Court noted, is in cases where a statute sets out a “clear expression of congressional intent to exempt actions” from the FRCP. Upon analyzing the plain text of the FPA, the District Court found that there was “no clear expression of congressional intent to exempt actions pursuant to FPA § 31(d)(3), Option 2, from the application of the FRCP.” Accordingly, the District Court found that the FRCP governed the action and that it would review FERC’s penalty order “de novo” as to both the law and the facts of the case. The District Court found further that this holding was supported by the legislative history of similarly-worded federal statutes and was consistent with three recent and “highly persuasive” federal district court decisions reaching the same conclusion.
Going forward, the District Court ordered the parties to stipulate to a discovery schedule or request a discovery conference. The case now moves forward in the litigation process toward a resolution on the merits.
The District Court’s March 7th order can be found in Federal Energy Regulatory Commission v. ETRACOM LLC and Michael Rosenberg, Case No. 2:16-cv-01945-SB.