Federal Energy Regulatory Commission v. Vitol Inc
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Opinion
Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 1 of 43
8 UNITED STATES DISTRICT COURT
9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10
11 Federal Energy Regulatory Commission, No. 2:20-CV-00040-KJM-AC 12 Plaintiff, ORDER 13 v. 14 Vitol Inc., et al., 15 Defendants. 16
17 The Federal Energy Regulatory Commission (FERC) found that Vitol Inc. (Vitol) and one
18 of its employees, Federico Corteggiano, manipulated wholesale electrical power prices to reduce
19 Vitol’s losses in California’s specialized electricity market allowing for the offsetting of risks of 20 high congestion costs. The Federal Power Act (FPA) permits FERC, as here, to seek this court’s
21 review of FERC’s finding and the civil penalties FERC assessed against Vitol and Corteggiano.
22 Vitol and Corteggiano have moved to dismiss and to stay. As explained in this order, Vitol’s
23 motion to dismiss is denied, its motion to stay is denied as moot, and Corteggiano’s motion is
24 denied for the most part, but granted to the extent the court finds FERC may not assess a
25 larger penalty than it previously proposed.
26 I. REQUEST FOR JUDICIAL NOTICE
27 The court begins by clarifying the record on which its decision rests, by addressing Vitol’s
28 requests for judicial notice of several documents. See Req. J. Notice, ECF No. 31 & Suppl. Req.
1 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 2 of 43
1 J. Notice, ECF No. 54. A court may “take judicial notice of adjudicative facts ‘not subject to
2 reasonable dispute.’” United States v. Chapel, 41 F.3d 1338, 1342 (9th Cir. 1994) (quoting Fed.
3 R. Evid. 201(b)). “Adjudicative facts are simply the facts of the particular case.” Advisory Notes
4 to Fed. R. Evid. 201. Judicial notice may be taken at any stage, Fed. R. Evid. 201(d), including
5 when resolving a motion to dismiss for failure to state a claim under Rule 12(b)(6), and doing so
6 does not convert such a motion into a motion for summary judgment, see United States v. Ritchie,
7 342 F.3d 903, 907–08 (9th Cir. 2003).
8 Although Rule 201 refers to facts, litigants often request judicial notice of documents
9 wholesale, as Vitol does here. This practice, although often an efficient method of avoiding 10 unnecessary evidentiary wrangling, can also lead to confusion and disputes. For example, Rule
11 201 permits judicial notice of facts that are “not subject to reasonable dispute” because they “can
12 be accurately and readily determined from sources whose accuracy cannot reasonably be
13 questioned,” and a document might serve as such a source. See Khoja v. Orexigen Therapeutics,
14 Inc., 899 F.3d 988, 999 (9th Cir. 2018). An investor conference call transcript submitted to a
15 regulator might therefore be an accurate and reliable source of information about when the
16 conference call occurred, for example. See id. at 999–1000. A litigant who wishes to rely on that
17 fact could request judicial notice of the date and could cite the transcript as a “source” under
18 Rule 201(b)(2). But a document that can serve as a proper source to “accurately and readily
19 determine” some facts might not be a proper source for other facts. For example, the investor call 20 transcript might not show what listeners actually learned on that call, so judicial notice of their
21 knowledge would not be appropriate, even if every word had been recorded accurately. See id.
22 The sheer volume of information that can often be derived from a “source” document presents
23 another problem. A great deal of that information might be irrelevant and thus outside the
24 boundaries of “adjudicative” facts. See id. at 1000 n.5.
25 To avoid these potential pitfalls, the court will not grant or deny Vitol’s request for
26 judicial notice generally; the court instead considers specific facts. When those facts are relevant,
27 when they are not subject to reasonable dispute, and when they can accurately and readily be
28 determined from the documents attached to Vitol’s requests for judicial notice, the court takes
2 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 3 of 43
1 judicial notice of them and relies on them. The court does not cite or rely on facts that do not
2 meet the Rule 201 standard. Vitol’s requests for judicial notice are granted in part and denied in
3 part to this extent.
4 Two parts of Vitol’s requests for judicial notice require more detailed discussion. First,
5 Vitol requests judicial notice that a certain pricing algorithm could produce “artificial” prices.
6 See Vitol Mot. at 10 n.6, ECF No. 30; Req. J. Not. Ex. A at 8, ECF No. 31-4. This request for
7 judicial notice can be resolved without considering the details of the algorithm or whether the
8 prices it produces are truly “artificial.” For now, it is enough to recognize that Vitol’s request is
9 part of its argument that “artificial” prices are not “market” prices, so if a trading strategy brings 10 an “artificial” price in line with a “market” price, that strategy would not be manipulative or
11 deceptive. See Mot. at 10. The source document Vitol cites does not establish the facts it wants
12 noticed beyond dispute. The document shows only that its author described certain prices as
13 “artificial.” See Req. J. Not. Ex. A at 8. FERC’s complaint will not stand or fall on that word
14 choice, but rather on the overall plausibility of its allegations that Vitol and Corteggiano
15 manipulated power markets. Nor does a word choice show beyond dispute that a price is truly
16 “artificial” in the sense Vitol contends.
17 Second, Vitol requests judicial notice that in another case, FERC described a “price-taker”
18 as “an individual or company that must accept prevailing prices in a market, lacking the market
19 share to influence market price on its own.” See PPL Elec. Util. Corp., 147 FERC ¶ 61,028 20 (2016), Req. J. Notice Ex. D at 2 n.5. The court takes judicial notice that FERC used this
21 definition of “price-taker” in its previous decision. The fact of usage is beyond dispute. It is also
22 relevant: FERC used the term “price-taker” in this case as well when it described Vitol’s
23 allegedly manipulative bids. See Penalty Order ¶ 101, ECF No. 1-1. Its previous definition can
24 show what it meant when it used that term. The court does not take judicial notice, however, that
25 “price-takers,” so defined, cannot violate the FPA’s antimanipulation rules. As described later in
26 this order, that is a disputed legal question not amenable to notice.
27 With these preliminary matters resolved, the court turns to FERC’s allegations against
28 Vitol and Corteggiano.
3 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 4 of 43
1 II. BACKGROUND
2 Traditionally, markets for wholesale electrical power were vertically integrated. See Fed.
3 Energy Reg. Comm’n, “Electric Power Markets” (July 20, 2021);1 F.E.R.C. v. Elec. Power
4 Supply Ass’n, 577 U.S. 260, 267 (2016). Utilities owned the power plants, the electrical lines and
5 other parts of the infrastructure that transmits power to the people who use it. Supply Ass’n, 577
6 U.S. at 267. But since the FPA was passed in the 1930s, “electricity has increasingly become a
7 competitive interstate business.” Id.
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Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 1 of 43
8 UNITED STATES DISTRICT COURT
9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10
11 Federal Energy Regulatory Commission, No. 2:20-CV-00040-KJM-AC 12 Plaintiff, ORDER 13 v. 14 Vitol Inc., et al., 15 Defendants. 16
17 The Federal Energy Regulatory Commission (FERC) found that Vitol Inc. (Vitol) and one
18 of its employees, Federico Corteggiano, manipulated wholesale electrical power prices to reduce
19 Vitol’s losses in California’s specialized electricity market allowing for the offsetting of risks of 20 high congestion costs. The Federal Power Act (FPA) permits FERC, as here, to seek this court’s
21 review of FERC’s finding and the civil penalties FERC assessed against Vitol and Corteggiano.
22 Vitol and Corteggiano have moved to dismiss and to stay. As explained in this order, Vitol’s
23 motion to dismiss is denied, its motion to stay is denied as moot, and Corteggiano’s motion is
24 denied for the most part, but granted to the extent the court finds FERC may not assess a
25 larger penalty than it previously proposed.
26 I. REQUEST FOR JUDICIAL NOTICE
27 The court begins by clarifying the record on which its decision rests, by addressing Vitol’s
28 requests for judicial notice of several documents. See Req. J. Notice, ECF No. 31 & Suppl. Req.
1 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 2 of 43
1 J. Notice, ECF No. 54. A court may “take judicial notice of adjudicative facts ‘not subject to
2 reasonable dispute.’” United States v. Chapel, 41 F.3d 1338, 1342 (9th Cir. 1994) (quoting Fed.
3 R. Evid. 201(b)). “Adjudicative facts are simply the facts of the particular case.” Advisory Notes
4 to Fed. R. Evid. 201. Judicial notice may be taken at any stage, Fed. R. Evid. 201(d), including
5 when resolving a motion to dismiss for failure to state a claim under Rule 12(b)(6), and doing so
6 does not convert such a motion into a motion for summary judgment, see United States v. Ritchie,
7 342 F.3d 903, 907–08 (9th Cir. 2003).
8 Although Rule 201 refers to facts, litigants often request judicial notice of documents
9 wholesale, as Vitol does here. This practice, although often an efficient method of avoiding 10 unnecessary evidentiary wrangling, can also lead to confusion and disputes. For example, Rule
11 201 permits judicial notice of facts that are “not subject to reasonable dispute” because they “can
12 be accurately and readily determined from sources whose accuracy cannot reasonably be
13 questioned,” and a document might serve as such a source. See Khoja v. Orexigen Therapeutics,
14 Inc., 899 F.3d 988, 999 (9th Cir. 2018). An investor conference call transcript submitted to a
15 regulator might therefore be an accurate and reliable source of information about when the
16 conference call occurred, for example. See id. at 999–1000. A litigant who wishes to rely on that
17 fact could request judicial notice of the date and could cite the transcript as a “source” under
18 Rule 201(b)(2). But a document that can serve as a proper source to “accurately and readily
19 determine” some facts might not be a proper source for other facts. For example, the investor call 20 transcript might not show what listeners actually learned on that call, so judicial notice of their
21 knowledge would not be appropriate, even if every word had been recorded accurately. See id.
22 The sheer volume of information that can often be derived from a “source” document presents
23 another problem. A great deal of that information might be irrelevant and thus outside the
24 boundaries of “adjudicative” facts. See id. at 1000 n.5.
25 To avoid these potential pitfalls, the court will not grant or deny Vitol’s request for
26 judicial notice generally; the court instead considers specific facts. When those facts are relevant,
27 when they are not subject to reasonable dispute, and when they can accurately and readily be
28 determined from the documents attached to Vitol’s requests for judicial notice, the court takes
2 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 3 of 43
1 judicial notice of them and relies on them. The court does not cite or rely on facts that do not
2 meet the Rule 201 standard. Vitol’s requests for judicial notice are granted in part and denied in
3 part to this extent.
4 Two parts of Vitol’s requests for judicial notice require more detailed discussion. First,
5 Vitol requests judicial notice that a certain pricing algorithm could produce “artificial” prices.
6 See Vitol Mot. at 10 n.6, ECF No. 30; Req. J. Not. Ex. A at 8, ECF No. 31-4. This request for
7 judicial notice can be resolved without considering the details of the algorithm or whether the
8 prices it produces are truly “artificial.” For now, it is enough to recognize that Vitol’s request is
9 part of its argument that “artificial” prices are not “market” prices, so if a trading strategy brings 10 an “artificial” price in line with a “market” price, that strategy would not be manipulative or
11 deceptive. See Mot. at 10. The source document Vitol cites does not establish the facts it wants
12 noticed beyond dispute. The document shows only that its author described certain prices as
13 “artificial.” See Req. J. Not. Ex. A at 8. FERC’s complaint will not stand or fall on that word
14 choice, but rather on the overall plausibility of its allegations that Vitol and Corteggiano
15 manipulated power markets. Nor does a word choice show beyond dispute that a price is truly
16 “artificial” in the sense Vitol contends.
17 Second, Vitol requests judicial notice that in another case, FERC described a “price-taker”
18 as “an individual or company that must accept prevailing prices in a market, lacking the market
19 share to influence market price on its own.” See PPL Elec. Util. Corp., 147 FERC ¶ 61,028 20 (2016), Req. J. Notice Ex. D at 2 n.5. The court takes judicial notice that FERC used this
21 definition of “price-taker” in its previous decision. The fact of usage is beyond dispute. It is also
22 relevant: FERC used the term “price-taker” in this case as well when it described Vitol’s
23 allegedly manipulative bids. See Penalty Order ¶ 101, ECF No. 1-1. Its previous definition can
24 show what it meant when it used that term. The court does not take judicial notice, however, that
25 “price-takers,” so defined, cannot violate the FPA’s antimanipulation rules. As described later in
26 this order, that is a disputed legal question not amenable to notice.
27 With these preliminary matters resolved, the court turns to FERC’s allegations against
28 Vitol and Corteggiano.
3 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 4 of 43
1 II. BACKGROUND
2 Traditionally, markets for wholesale electrical power were vertically integrated. See Fed.
3 Energy Reg. Comm’n, “Electric Power Markets” (July 20, 2021);1 F.E.R.C. v. Elec. Power
4 Supply Ass’n, 577 U.S. 260, 267 (2016). Utilities owned the power plants, the electrical lines and
5 other parts of the infrastructure that transmits power to the people who use it. Supply Ass’n, 577
6 U.S. at 267. But since the FPA was passed in the 1930s, “electricity has increasingly become a
7 competitive interstate business.” Id. In the 1990s, FERC also issued rules promoting competitive
8 change to the traditional structure. See supra “Electric Power Markets” (citing Fed. Energy Reg.
9 Comm’n Order No. 888, 75 FERC ¶ 61,000 (Apr. 24, 1996)). Its goal was to increase
10 competition in power markets by separating transmission from production and consumption. See
11 id. In response to these rules, separate entities began operating transmission systems; they are
12 known as independent system operators, or “ISOs.” See id. Today, about two thirds of the
13 electricity in the United States is distributed in areas managed by ISOs and similar regional
14 organizations. See id.
15 An ISO known as the California Independent System Operator, “CAISO” for short,
16 operates the power transmission infrastructure in most of California and some of Nevada. See id.;
17 Compl. ¶¶ 1, 15, ECF No. 1. CAISO also operates a market for power transmitted within, into,
18 and out of its borders. Id. ¶ 15. In these markets, buyers and sellers trade power transmitted to
19 and from specific locations. See id. ¶ 16. Trading locations within CAISO’s control are called
20 “nodes,” and trading locations at the borders between CAISO’s boundaries and areas controlled
21 by other entities are called “interties.” Id. At interties, power is exported when it leaves the area
22 controlled by CAISO, and it is imported when it enters. Id. These trading locations correspond
23 to real places: they are on the power grid in California and Nevada. See id. ¶ 24. The events
24 described in FERC’s complaint concern electricity transmissions at a node located in Siskiyou
25 and Shasta Counties and over an intertie with a neighboring zone. See id. ¶¶ 9, 24. That node,
1 https://www.ferc.gov/industries-data/market-assessments/overview/electric-power- markets, last visited July 21, 2021. The court takes judicial notice of this general history, as it is readily available and subject to no dispute. See Fed. R. Evid. 201(b)(2); Khoja, 899 F.3d at 999.
4 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 5 of 43
1 the “Cragview node,” is associated with the Cragview electrical bus,2 which connects CAISO’s
2 system to a neighboring grid via the “Cascade intertie,” which is a power transmission line with a
3 relatively small import and export capacity. Id. ¶ 24.
4 Markets for electricity are unlike many others. Electricity cannot be stored effectively in
5 large quantities, so it must be generated at almost exactly the moment it is consumed. See id.
6 ¶ 17. And unlike the demand for many other goods, the demand for electricity changes relatively
7 little in response to price changes. See id. People turn on their air conditioners when it is hot, no
8 matter what price signals might be flashing. See Elec. Power Supply Ass’n, 577 U.S. at 269–70.
9 This means CAISO must transmit exactly the amount of power that consumers demand exactly
10 when they demand it, even when prices are swinging. See Compl. ¶ 17. To do this, CAISO
11 forecasts the amount of electricity available for sale and demanded for purchase, and it schedules
12 generators on an hourly basis the day before power will be transmitted. Id. Buyers and sellers
13 are then matched in a “day-ahead” market. Id. Predictions are rarely perfect, so CAISO also
14 operates a second market for real-time transmissions, and it adjusts generation schedules to
15 account for the differences between the day-ahead market and real-time power needs. Id.
16 Trades in CAISO’s markets settle at prices determined by software algorithms. See id.
17 ¶ 18. These algorithms take into account the trading location, the bids CAISO receives for that
18 location, the limits of the infrastructure in that place, and the efficiency and reliability of the
19 infrastructure. Id. As a result, the prices have three basic components. Id. ¶ 19. The first is the
20 basic commodity price—the “system marginal cost of energy”—, which is the same at all
21 locations in the system, but which changes over time. Id. The second component incorporates
22 costs specific to the location. Id. These costs rise when the grid is “congested,” i.e., when
23 demand outstrips transmission capacity and CAISO must depart from the most efficient schedules
24 or lowest-cost power sources. See id. The second component is thus known as the “marginal cost
25 of congestion.” See id. The third price component accounts for power losses as electrical energy
2 An “electrical bus” is a physical location on the transmission system within the PacificCorp-West Balancing Authority Area. The Cragview electrical bus is connected to CAISO through a single, 115 kV transmission line, which is commonly referred to as the “Cascade intertie.” Penalty Order ¶ 6.
5 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 6 of 43
1 turns into heat energy en route to its destination, and it is known as the “marginal loss cost.” See
2 id. The second congestion component is the primary reason prices differ from one location to the
3 next; the loss component is “typically very small” in comparison. Id.
4 In addition to the markets for physical power, CAISO also operates a market for a
5 financial product known as a “congestion revenue right” or “CRR.” See id. ¶ 21. CRRs can
6 offset the risks of high congestion costs. Id. Each CRR is specific to a location, time and
7 direction of power transmission. Id. CRRs can either pay returns or incur charges. See id. ¶¶ 2,
8 21–22. If congestion is high at the specified location and time and in the specified direction, then
9 the CRR pays a return to its holder. See id. If congestion runs in the opposite direction at the 10 specified location and time, then the holder incurs a charge. See id. ¶ 22. Buying a CRR thus
11 amounts to a bet that a given transmission path will be congested, or not, at a particular time. Id.
12 CRRs are available at annual and monthly auctions and are traded on a secondary market. Id.
13 This case is about a trading strategy that overlaps CAISO’s wholesale electric markets:
14 “day ahead,” real time and CRR on the one hand, and physical power trades on the other. The
15 story starts more than a decade ago, in early 2010, when FERC learned that traders at Deutsche
16 Bank had used physical power trades to reduce losses in positions the bank held in the CRR
17 market. See id. ¶¶ 26–27. The trading strategy relied on the effects of restrictions that CAISO
18 sometimes places on the maximum import and export capacities of an intertie. See id. These
19 restrictions are known in the business as “derates.” See id. ¶ 26. Derates can be partial. See id. 20 That is, capacity may be restricted to zero or partially derated, but in only one direction. See
21 id. ¶ 46. Consider the market for power transfers over a derated intertie: it might seem as though
22 asking for bids to buy and sell power over an intertie with zero capacity would be an exercise in
23 futility, but it is not. CAISO can clear bids to transfer power over a derated intertie if the import
24 and export bids are equal in the derated direction. Id. In other words, the net effect of a
25 megawatt transmitted in one direction plus a megawatt transmitted in the opposite direction is
26 zero megawatts transmitted. See id. As a result, bids to transfer power over a derated intertie
27 might not clear, meaning CAISO will not import the power over the intertie, but will still accept
28 the bid. See id. ¶ 58.
6 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 7 of 43
1 In 2010, CAISO’s pricing algorithm incorporated these uncleared bids into market prices
2 for the partially derated intertie. See id.; see also id. Ex. 1 ¶ 38; Req. J. Not. Ex. A at 8–9, ECF
3 No. 31-1. Because CAISO also calculated congestion by reference to these uncleared bids, even
4 a partially derated intertie could be congested, a somewhat counterintuitive result in light of the
5 fact that no power was flowing. See id. ¶ 26. Some have described this effect as “phantom
6 congestion.” See id. ¶ 26; id. Ex. A ¶ 53 & n.157.
7 Deutsche Bank’s trading strategy at issue here relied on a quirk in the congestion prices
8 that occurred when power transmissions at derated interties were very low. If the conditions were
9 right, then a single bid to transmit electricity, even a relatively tiny amount, could eliminate most 10 of the reported congestion cost. See id. This fact had lucrative implications for a holder of a
11 CRR who was set to incur charges if congestion prices were high at a partially derated, low-
12 volume intertie. A trader could wipe away most of the congestion cost, and therefore the looming
13 CRR charge, by paying a relatively small amount of money for a relatively small amount of
14 electricity to flow over that intertie. See id. ¶¶ 26–27. Congestion costs would plummet, and
15 expected losses along with them. See id.
16 According to FERC, Federico Corteggiano successfully executed this strategy in 2010 at
17 Deutsche Bank. See id. ¶ 27. FERC pursued a regulatory claim against Deutsche Bank for
18 manipulative trading, and that claim eventually settled. See id. (citing Deutsche Bank Energy
19 Trading, LLC, 142 FERC ¶ 61,056 (2013)). The bank agreed to pay a civil penalty and disgorge 20 its profits from the trade. See id. CAISO then condemned the strategy as price manipulation in a
21 public presentation to market participants. See id. ¶ 26.
22 A few years later, in late 2013, someone approached FERC confidentially with a tip that a
23 different firm had used the same cross-market strategy to reduce its CRR losses. See id. ¶ 28.
24 FERC opened an investigation. Id. It learned that the same trader who had been a part of the
25 Deutsche Bank investigation, Federico Corteggiano, had moved to a new firm—Vitol—and had
26 again used unprofitable trades in the physical power market to defray losses in the financial
27 markets.
7 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 8 of 43
1 The foundation of Corteggiano’s allegedly manipulative trading scheme was laid in late
2 2012, when he purchased CRRs on Vitol’s behalf for the year 2013, including for congestion at
3 the Cragview node and Cascade intertie, the Siskiyou and Shasta County trading locations noted
4 above. Id. ¶ 45. Several months after Corteggiano bought the CRRs, in October 2013, CAISO
5 partially derated the Cascade intertie. See id. ¶¶ 46–47. Congestion prices jumped even though
6 no power had flowed. See id. Vitol incurred hundreds of thousands of dollars in losses in a
7 matter of hours. See id. ¶ 46.
8 More derates were scheduled in the coming weeks, and Vitol’s losses would mount if
9 Corteggiano did nothing. See id. ¶ 49. He acquired CRRs in the opposite direction to 10 counterbalance some of these expected losses, but it was not enough; about a week before the
11 next scheduled derate, Vitol was still set to lose at least $1 million. See id. ¶¶ 49, 51.
12 Corteggiano decided to try the strategy that had worked at Deutsche Bank: erasing high
13 congestion costs by importing a small amount of power over the Cascade intertie. See id.
14 Corteggiano had no authority to buy or sell physical power. Id. ¶ 52. He enlisted another
15 Vitol trader and a manager from Vitol’s operations group. See id. Vitol’s policies also required
16 Corteggiano to consult its general counsel before trading in two related products. Id. ¶ 53. He
17 asked his supervisor to talk as soon as possible. Id. When the two spoke, however, Corteggiano
18 did not explain his true goal. He instead explained the plan as an attempt at price arbitrage:
19 buying physical power outside CAISO’s territory at a low price and selling it inside CAISO’s 20 territory at a high price. See id. To the uninitiated, this was a plausible story. Prices at Cragview
21 were extraordinarily high. See id. If Corteggiano was correct, an arbitrage attempt would fail
22 miserably, because even a relatively tiny transmission could erase the high reported price, but his
23 supervisor did not know this. See id.
24 The supervisor told Corteggiano to check with legal. See id. Corteggiano told Vitol’s
25 legal and compliance personnel the same story. Id. ¶ 54. He said nothing about looming losses in
26 the CRR market or the likely effect of his proposed imports. See id. ¶ 55. A compliance officer
27 told him to check with CAISO: was the high price a glitch or an error? Id. ¶ 54. Corteggiano did
28 not ask that question of CAISO. Id. Instead, he asked questions designed to confirm his theory
8 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 9 of 43
1 that the high prices were the result of an uncleared bid. See id. It worked. Corteggiano learned
2 there was no demand for power at the reported price. Id. Prices in nearby areas were much
3 lower, about ten times lower. See id.
4 Vitol’s legal department blessed the proposed trades, but it limited Corteggiano to five
5 megawatts per hour, believing incorrectly that a bid of that volume would not affect market
6 prices. See id. ¶ 56. This was no problem for Corteggiano; even one megawatt would suffice for
7 his purposes. See id. ¶¶ 56–57. Vitol’s physical power traders arranged for the proposed trades.
8 See id. ¶ 57. They seemed to care little about the terms of these transactions, offering to accept a
9 single megawatt and to sell their imports for as little as a dollar per megawatt hour. At least one 10 entity on the other side of these trades later claimed it was suspicious. See Staff Report at 17–18,
11 Req. J. Not. Ex. E at 27–28, ECF No. 31-5.3 It said it had taken note of Vitol’s willingness to pay
12 high prices and suspected Vitol had an ulterior motive. See id.
13 After the trades went through, congestion prices at the Cascade intertie dropped, just as
14 Corteggiano had expected. See id. ¶¶ 58–59. So, in exchange for a few small, unprofitable trades
15 in the physical power market, Vitol avoided more than $1 million in losses in its CRR positions.
16 See id. As noted above, however, FERC got wind of this success and began an investigation into
17 whether Vitol and Corteggiano had violated the FPA, which prohibits manipulative and deceptive
18 trading in markets within FERC’s jurisdiction. See id. ¶ 28; 16 U.S.C. § 824v(a); 18 C.F.R.
19 § 1c.2(a). 20 FERC’s Enforcement Office investigated the matter for about three years. See Compl.
21 ¶¶ 28–29. The investigation included document subpoenas, requests for data from Vitol and
22 others, taking sworn testimony from Corteggiano and other Vitol employees, and conducting
23 informal interviews with CAISO and other market participants. See id. ¶ 28. After its
24 investigation, the Enforcement Office concluded preliminarily that Vitol and Corteggiano had
25 both violated the anti-manipulation statute relevant here, FPA section 222(a).4 It informed Vitol
3 The court takes judicial notice of this fact, which the parties do not dispute, and which satisfies the conditions of Rule 201(b)(2). 4 “It shall be unlawful for any entity . . . to use or employ, in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the
9 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 10 of 43
1 and Corteggiano of that conclusion. Three more years passed as FERC collected more
2 information, took more sworn testimony, and reviewed Vitol’s and Corteggiano’s responses.
3 Id. ¶¶ 29–33. FERC, Vitol and Corteggiano also attempted to negotiate a settlement agreement.
4 See id. ¶¶ 30–34. After their negotiations were unsuccessful, FERC decided to pursue a civil fine
5 and a disgorgement of profits from both Vitol and Corteggiano. See id. ¶¶ 32–34.
6 The FPA requires FERC to give notice before imposing any civil penalties. See 16 U.S.C.
7 § 823b(d)(1). FERC complies with this statute by issuing “orders to show cause.” See 18 C.F.R.
8 § 385.209(a)(2); Compl. ¶ 35. In this case, FERC ordered Vitol to show cause why it should not
9 pay a civil penalty of $6 million and disgorge about $1.2 million in profits, and it ordered 10 Corteggiano to show cause why he should not pay a civil penalty of $800,000. Id. ¶ 35.
11 An order to show cause starts a process FERC’s regulations describe as a “contested on-
12 the-record proceeding.” 18 C.F.R. § 385.2201(b); see also id. § 385.2201(c)(1). As this moniker
13 implies, FERC prohibits off-the-record communications between any third parties and the FERC
14 employees deciding whether a violation occurred. See id. § 385.2201(b). FERC’s regulations
15 also separate its staff by function during contested on-the-record proceedings. See id. § 385.2202.
16 If a FERC employee, officer or agent is a part of the commission’s efforts to “work upon the
17 proceeding or to assist in the trial thereof,” that person may not advise the agency’s decision
18 makers about the case except as a witness or counsel in a public hearing. See id. § 385.2202.
19 An order to show cause must inform its recipient of two possible paths to a resolution. 20 See 16 U.S.C. § 823b(d)(1). First, if the alleged violator does nothing, an administrative law
21 judge conducts a hearing on the record and decides whether to assess a penalty. See id.
22 § 823b(d)(2)(A). If a penalty is assessed, the violator has 60 days to begin an action contesting
23 the penalty in the federal court of appeals for the appropriate circuit. See id. § 823b(d)(2)(B).
24 Because this first procedure occurs if the alleged violator does nothing, it is often described as the
25 “default” procedure. E.g., FERC v. Powhatan Energy Fund, LLC, 949 F.3d 891, 894 (4th Cir.
jurisdiction of the Commission, any manipulative or deceptive device or contrivance . . . ” 16 U.S.C. § 824v.
10 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 11 of 43
1 2020). A case follows the second path if an alleged violator elects to forego the administrative
2 procedure. See id. § 823b(d)(1). If the alleged violator chooses this “alternate” option, FERC
3 must assess a penalty “promptly.” Id. § 823b(d)(3)(A). If the alleged violator does not pay the
4 penalty within 60 days, the FPA permits FERC to file an action against the alleged violator in the
5 appropriate United States district court. Id. § 823b(d)(3)(B). The district court reviews the law
6 and facts de novo and can enforce the penalty as assessed, enforce a modified penalty or set the
7 penalty aside. See id. Appellate review is then available under the generally applicable federal
8 law and civil rules. See, e.g., Powhatan, 949 F.3d at 896 (reviewing interlocutory appeal of
9 action following this “alternate” path). The alleged violator has thirty days to decide which path 10 to pursue after it receives an order to show cause. See 16 U.S.C. § 823b(d)(1).
11 Here, Vitol and Corteggiano opted for the “alternate” procedure. Compl. ¶ 39. FERC
12 issued a penalty order. See id. ¶ 41. It found Vitol and Corteggiano had violated section 222(a)
13 and the antimanipulation rule. Id. It ordered Vitol to pay a civil penalty of about $1.5 million
14 and to disgorge about $1.2 million, and it ordered Corteggiano to pay a $1 million civil penalty.
15 Id. Vitol and Corteggiano did not pay the penalties, so FERC filed this action under
16 § 823b(d)(3)(B). Id. ¶ 42.
17 III. MOTION TO DISMISS
18 As noted above, Vitol and Corteggiano move to dismiss FERC’s complaint. See Vitol
19 Mot.; Corteggiano Mot., ECF No. 33. Vitol also moves to stay this case until the court resolves
20 the motions to dismiss. Mot. Stay, ECF No. 36. FERC opposes all three motions. Opp’n
21 Dismiss, ECF No. 38; Opp’n Stay, ECF No. 40. Vitol and Corteggiano have replied. Vitol
22 Reply, ECF No. 55; Corteggiano Reply, ECF No. 56; Stay Reply, ECF No. 52. The court has
23 also received and permitted an amicus curiae brief in support of Vitol’s motion, filed by the
24 Edison Electric Institute (EEI), Electric Power Supply Association (EPSA) and Energy Trading
25 Institute (ETI). See Amicus Br., ECF No. 42-1; Order, ECF No. 60.
26 The court heard arguments on August 27, 2020 by videoconference. Minutes, ECF
27 No. 59; Aug. 27 Hr’g Tr., ECF No. 65. Damon Taaffe, Kevin Dinan, Carol Clayton, John
28 Matson and Mark Koehn appeared for FERC. Paul Pantano, Thomas Millar, Stephanie Miner,
11 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 12 of 43
1 Kevin Clark and Ernie Kohnke appeared for Vitol. Charles Mills and Karen Bruni appeared for
2 Corteggiano. P. Todd Mullins appeared for amici EEI, EPSA and ETI. At hearing, FERC relied
3 on Ash Grove Cement Co. v. F.T.C., 577 F.2d 1368 (9th Cir. 1978), which it had not previously
4 cited in its briefs, so the court permitted the defendants to respond in a supplemental filing, which
5 they have done. See Hr’g Tr. at 38:20–23; Resp. Suppl. Auth., ECF No. 67. The court has
6 considered the supplemental briefing, but finds the Ash Grove Cement case inapplicable to the
7 questions resolved by this order, without the need for further discussion.
8 A. Personal Jurisdiction, Venue and Individual Liability 9 The court begins with Corteggiano’s arguments that he is not subject to this court’s 10 exercise of personal jurisdiction, that this District is an improper venue and that FERC cannot
11 assess civil penalties for market manipulation against natural persons.
12 “For a court to exercise personal jurisdiction over a defendant, there must be an
13 ‘applicable rule or statute [that] potentially confers jurisdiction over the defendant.’” Action
14 Embroidery Corp. v. Atl. Embroidery, Inc., 368 F.3d 1174, 1177 (9th Cir. 2004) (alterations in
15 original) (quoting Amba Mktg. Sys., Inc. v. Jobar Int’l, Inc., 551 F.2d 784, 787 (9th Cir. 1977)).
16 “Further, ‘[a] federal court obtains personal jurisdiction over a defendant if it is able to serve
17 process on him.” Id. (alterations in original) (quoting Butcher’s Union Loc. No. 498, United
18 Food & Com. Workers v. SDC Inv., Inc., 788 F.2d 535, 538 (9th Cir. 1986)); see also Fed. R. Civ.
19 P. 4(k)(1)(C). “A statutory basis for exercising personal jurisdiction may be found in a statute
20 providing for service of process.” Action Embroidery, 368 F.3d at 1177. The FPA includes such
21 a provision. See 16 U.S.C § 825p. And in this Circuit, if a federal statute permits nationwide
22 service of process, federal courts have personal jurisdiction over parties with sufficient contacts
23 with the United States as a whole, regardless of whether venue is proper in the particular district.
24 See id. at 1179–80; Sec. Investor Prot. Corp. v. Vigman, 764 F.2d 1309, 1315 (9th Cir. 1985).
25 This court therefore has personal jurisdiction over the claims against Corteggiano.
26 Corteggiano contends, contrary to Action Embroidery, that proper venue is a prerequisite
27 to this court’s exercise of personal jurisdiction under the FPA. See Corteggiano Mot. at 22–23.
28 The Ninth Circuit’s decision in Action Embroidery is binding and rests on reasoning that applies
12 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 13 of 43
1 equally here. “It has long been recognized that the question of a federal court’s competence to
2 exercise personal jurisdiction over a defendant is distinct from the question of whether venue is
3 proper.” 368 F.3d at 1178–79. “Without a clear indication from Congress that it intended” to
4 “blur the basic, historic difference between these discrete concepts and what is required for their
5 satisfaction,” id. at 1179, this court will not do so. In any event, the court also finds that venue is
6 appropriate in this District as explained below.
7 Venue in a case seeking to confirm fines or penalties under the FPA is proper in a district
8 where the defendant resides or where “any act or transaction constituting the violation occurred.”
9 16 U.S.C. § 825p. Although Corteggiano is not a resident of this District, the trades described in 10 FERC’s complaint all concerned power transmission within this District. See Compl. ¶ 9.
11 According to the complaint, Corteggiano conceived of and orchestrated the scheme that sent
12 power over an intertie located within this District’s boundaries, and FERC alleges Corteggiano’s
13 goal was to manipulate wholesale power prices within this District. See Compl. ¶¶ 51, 57, 59,
14 66–73. These allegations support this District as an appropriate venue. See, e.g., Fed. Energy
15 Regul. Comm’n v. Barclays Bank PLC (Barclays I), 105 F. Supp. 3d 1121, 1134–36 (E.D. Cal.
16 2015) (finding venue appropriate in this District given “FERC’s position that the conduct . . .
17 involved [the defendants’] transactions at California wholesale electricity prices,” which in turn
18 caused “utilities, generators, other power marketers, or individual traders in California and this
19 District” to make “transactions according to those prices”). 20 Corteggiano also argues natural persons are not subject to liability under the FPA’s
21 antimanipulation rules. See Corteggiano MTD at 28. Other courts have rejected this argument
22 based on the wording of the statute and their reasoning is persuasive. See, e.g., FERC v.
23 Coaltrain Energy, L.P., No. 16-732, 2018 WL 7892222, at *9–10 (S.D. Ohio Mar. 30, 2018)
24 (reviewing rationale and collecting authority). For example, the FPA itself uses the word “entity”
25 in referencing natural persons, id. (focusing on text of 18 U.S.C. § 824(f) and § 824v(a) read in
26 concert, as well as §§ 824o-1(b)(3)-(4), 824u, 824k(h)), and FERC has interpreted the term
27 “entity” “‘to include any person or form of organization, regardless of its legal status, function or
28 activities,’” id. at *10 (quoting 114 FERC 61,047, at **6 ¶ 18 (2006); finding FERC’s
13 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 14 of 43
1 interpretation warrants Chevron5 deference). As a natural person, Corteggiano is subject to
2 liability under the FPA.
3 B. Statute of Limitations 4 Vitol next argues FERC’s complaint was filed after the statutory limitations period had
5 expired. Vitol Mot. at 13–25. A claim may be dismissed under Rule 12(b)(6) if it is “apparent on
6 the face of the complaint” that the relevant statute of limitations bars the claim. Huynh v. Chase
7 Manhattan Bank, 465 F.3d 992, 997 (9th Cir. 2006) (quoting Von Saher v. Norton Simon Museum
8 of Art at Pasadena, 592 F.3d 954, 969 (9th Cir. 2010)).
9 Although the parties advance starkly different interpretations of the relevant statutory and 10 regulatory landscape, they agree FERC’s enforcement actions are subject to a five-year statutory 11 limitations period beginning at the time a claim accrues, see Vitol Mot. at 13; Opp’n at 18; they
12 also agree the parties extended that period by one year, see Vitol Mot. at 2; Opp’n at 4; and no
13 one disputes the timeline alleged in FERC’s complaint:
October 25 & 28, 2013 Vitol submitted the allegedly manipulative bids. Compl. ¶¶ 58–59.
December 16, 2013 FERC’s Enforcement Office received information about the trades from a confidential source. Id. ¶ 28. FERC began investigating. See id.
December 12, 2016 The Enforcement Office sent a letter to Vitol and Corteggiano to inform them of its preliminary findings. Id. ¶ 29.
March 8, 2017 Vitol and Corteggiano sent a joint response to the preliminary findings. Id. FERC investigated further. Id. ¶ 30.
June 7, 2017 Vitol and Corteggiano sent a further joint response. Id.
June 20, 2017 The parties agreed to toll the five year limitations period for FERC to issue an order to show cause for one year. Id. ¶ 43.
June 22, 2018 The Enforcement Office told Vitol and Corteggiano that it intended to begin a public enforcement action. Id. ¶ 33.
August 10, 2018 Vitol and Corteggiano sent a joint response. Id.
December 18, 2018 Vitol and Corteggiano revised their joint response. Id.
5 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
14 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 15 of 43
April 4, 2019 Vitol and Corteggiano updated their revised joint response. Id.
July 10, 2019 FERC issued an order to show cause to Vitol and Corteggiano, including proposed penalties of $6,000,000 and $800,000, respectively. Id. ¶¶ 12, 35.
July 24, 2019 Vitol and Corteggiano asked for a four-week extension of the 30-day deadline to respond to the order to show cause. Id. ¶ 38.
August 5, 2019 FERC granted Vitol and Corteggiano a two week extension. Id.
August 23, 2019 Vitol and Corteggiano filed a joint answer to the order to show cause, electing the “alternate” option under 16 U.S.C. § 823b(d)(3). Id. ¶¶ 3, 40.
October 25, 2019 FERC determined that Vitol and Corteggiano had violated section 222(a) and assessed penalties under 16 U.S.C. § 823b(d)(3)(A). Id. ¶ 41.
December 25, 2019 The parties agreed to toll the limitations period for filing a district court case between this date and January 8, 2020. Id. ¶ 44.
January 6, 2020 FERC filed its complaint in this case. See generally id.
1 1. 28 U.S.C. § 2462 2 The limitations period for the commencement of FERC proceedings is prescribed in
3 28 U.S.C. § 2462. Under that section, unless another statute provides otherwise, “an action, suit
4 or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise,
5 shall not be entertained unless commenced within five years from the date when the claim first
6 accrued.” 28 U.S.C. § 2462. To determine whether FERC’s complaint was timely under that
7 section, then, the court must identify the “action, suit or proceeding,” “the claim,” and the date
8 that claim “first accrued.” To do so the court first interprets the language of the statute based on a
9 plain reading while noting other courts’ interpretations as relevant. The court also addresses
10 defendants’ arguments in testing its conclusions.
11 a) Statutory Interpretation
12 i. “Action, Suit or Proceeding”
13 The court begins with what is an “action, suit or proceeding” and what is not. Other
14 courts have reached two conflicting interpretations. One, as Vitol argues, there is just one
15 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 16 of 43
1 “action”—the civil action FERC filed in this court. See Vitol Mot. at 14, 19–24. That is the
2 interpretation another judge of this court adopted in Federal Energy Regulatory Commission v.
3 Barclays Bank PLC (Barclays II), No. 13-02093, 2017 WL 4340258, at *10–13 (E.D. Cal. Sept.
4 29, 2017). See also United States v. Core Labs., Inc., 759 F.2d 480 (5th Cir. 1985) (reasoning
5 similarly in another statutory context). Two, as FERC contends, there is a second “action, suit or
6 proceeding” that can trigger the statute of limitations, namely the proceeding that begins with
7 FERC’s issuance of an order to show cause. See Opp’n at 7–13. The Fourth Circuit and two
8 district courts within the First Circuit have adopted this interpretation. See Powhatan, 949 F.3d at
9 904; Fed. Energy Reg. Comm’n v. Silkman (Silkman II), 359 F. Supp. 3d 66 (D. Me. 2019); Fed. 10 Energy Reg. Comm’n v. Silkman (Silkman I), 177 F. Supp. 3d 683 (D. Mass. 2016); see also
11 United States v. Meyer, 808 F.2d 912 (1st Cir. 1987) (reasoning similarly in another statutory
12 context).
13 Courts appear to agree that for a process to qualify as a “proceeding,” the moniker most
14 applicable to an administrative matter, it must include “some adversarial adjudication, be it
15 administrative or judicial.” Capozzi v. United States, 980 F.2d 872, 874 (2d Cir. 1992) (emphasis
16 omitted); see also Powhatan, 949 F.3d at 902; Barclays II, 2017 WL 4340258, at *11; Silkman II,
17 359 F. Supp. 3d at 121–22; Silkman I, 177 F. Supp. 3d at 700. Courts disagree regarding whether
18 the administrative enforcement process provided by the FPA can be a “proceeding.” Those on
19 which the defense relies have found that the Act’s administrative process is nonadversarial and 20 nonadjudicatory and akin to a prosecutor’s grand jury presentation or charging letter. See, e.g.,
21 Silkman II, 359 F. Supp. 3d at 121–22; Vitol Mot. at 20. Vitol emphasizes the absence of
22 discovery and hearings, and the unavailability of cross-examination and presentation of expert
23 testimony if a party elects the “alternate” option, see Vitol Mot. at 20; see also Silkman I,
24 177 F. Supp. 3d at 700. Other courts acknowledge the regulatory process here is “less formal”
25 than a judicial action and offers fewer “procedural protections,” but find it “significantly” more
26 adversarial and adjudicative than a unilateral, discretionary decision to prosecute or impose a fine.
27 See Powhatan, 949 F.3d at 902; Barclays II, 2017 WL 4340258, at *12.
16 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 17 of 43
1 To fairly assess whether the FERC administrative process is a “proceeding,” the court
2 takes account of its uniquely diverging structure as established by statute and regulation:
3 depending on the alleged violator’s response to a FERC investigation, the process may be
4 adversarial and adjudicatory or perfunctory and prosecutorial. See generally 16 U.S.C. § 823b;
5 18 C.F.R. §§ 385.1501-385.1511.
6 If the alleged violator does nothing in response to an order to show cause, and thus
7 submits to the “default” process, that process takes an adjudicatory path. As one court explains,
8 “[t]he FERC Commissioners act as neutral decisionmakers, while FERC Enforcement staff
9 present the factual and legal bases supporting imposition of a civil penalty.” Powhatan, 949 F.3d 10 at 902 (citing 18 C.F.R. §§ 385.2201 & 385.2202). Also, “FERC’s ex-parte communications rule
11 applies, prohibiting ‘any off-the-record communications between (i) Commissioners and the staff
12 that may advise them (decisional staff) and (ii) Enforcement prosecutorial staff involved in the
13 investigation or show cause proceeding.’” Id. (quoting Silkman II, 359 F. Supp. 3d at 99); see
14 also 18 C.F.R. § 385.2201(c)(1)(i). The FERC enforcement staff and the alleged violator “submit
15 formal briefing and relevant documentary evidence to FERC, which then determines whether to
16 impose civil penalties.” Id. (citing Silkman II, 259 F. Supp. 3d at 100, 106). Even those who
17 question the “adjudicatory” nature of this enforcement path describe this “default” process as “an
18 adjudication” and “‘agency proceeding.’” See Barclays II, 2017 WL 4340258, at *7 (quoting
19 FERC v. City Power Mktg., LLC, 199 F. Supp. 3d 218, 230 (D.D.C. 2016)); see also Vitol Mot. at 20 18 n.14 (“If the respondent does not make an election to adjudicate FERC’s Liability Claim under
21 the Federal Civil Action option within 30 days of the notice, FERC’s Liability Claim by default
22 will be adjudicated in an evidentiary, on-the-record hearing before an Administrative Law Judge
23 that affords respondents full discovery and procedural due process rights.”).
24 If, by contrast, the alleged violator elects the “alternate” option, as Vitol and Corteggiano
25 did here, the process is truncated, no hearing takes place and FERC assesses a penalty. See
26 16 U.S.C. § 823b(d)(3). “[N]othing in the statute” requires that this determination follow “a
27 neutral adjudicative decision-making process.” Barclays II, 2017 WL 4340258, at *14 (citation
28 omitted). It “is simply a mechanism for getting the case into district court.” Id. (citation
17 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 18 of 43
1 omitted). The process bears little resemblance to an adjudication until FERC begins an
2 enforcement action in a federal district court. Cf. City Power, 199 F. Supp. 3d at 232 (treating
3 action for de novo review in federal district court “like a normal civil action governed by the
4 Federal Rules”).
5 By its express terms, the FPA creates both processes and gives an alleged violator its
6 choice between them. FERC cannot know which path a matter will take until the alleged violator
7 decides. In Silkman II, the district court observed an alleged violator has only itself to blame if it
8 receives no hearing before an administrative law judge and if, instead of a hearing, FERC simply
9 assesses a penalty under the “alternate” option. See 359 F. Supp. 3d at 122 n.133. Alleged 10 violators may in fact prefer to avoid a hearing before an administrative law judge. And according
11 to the amici here, the majority of alleged violators in fact take the alternate path. See Amicus Br.
12 at 13–14.
13 And that is the decisive fact: FERC acts most like a prosecutor and least like an
14 adjudicator when an alleged violator affirmatively requests it to do so. See 16 U.S.C.
15 § 823b(d)(3). Because an alleged violator can pursue an adjudicatory hearing if it chooses, the
16 court finds the enforcement process that begins with FERC’s issuance of an order to show cause
17 and terminates with the assessment of a penalty is a “proceeding for the enforcement of a civil
18 fine, penalty or forfeiture” under 28 U.S.C. § 2462. A rough analogy to default judgment in a
19 civil case illustrates the point: after receiving service of a complaint, a defendant may appear, 20 respond to the allegations against it, and defend itself vigorously; or alternatively it may ignore
21 the complaint and wait for the plaintiff to obtain and attempt to enforce a default judgment. The
22 option to forgo litigation does not make a civil case any less of an adjudicatory “action” or “suit.”
23 Neither does an alleged violator’s choice to forgo an administrative hearing strip the regulatory
24 process of its adjudicatory and adversarial character. The administrative process here is a
25 “proceeding,” initiated by FERC’s issuance of an order to show cause.
26 ii. “Claim”
27 The next task is to identify “the claim” that accrues for this “proceeding.” The D.C.
28 Circuit offers a persuasive insight in 3M Co. v. Browner, 17 F.3d 1453 (D.C. Cir. 1994). In that
18 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 19 of 43
1 case, an administrative law judge had held that the five-year limitations period of § 2462 applied
2 only to the commencement of judicial proceedings, not administrative proceedings. See id. at
3 1455. The D.C. Circuit disagreed, finding as this court has above that the five-year limitations
4 period applied to both, including in particular the administrative proceeding because it was an
5 “action, suit or proceeding” under § 2462. See id. at 1455–57. The court then had to decide
6 whether that administrative “action, suit or proceeding” was “for the enforcement of” a civil
7 penalty and found it was. See id. at 1457. In so finding, the court looked for guidance to a prior
8 version of § 2462, which used different language but had the same meaning. See id. at 1458; see
9 also, e.g., Gabelli v. S.E.C., 568 U.S. 442, 448 (2013) (interpreting modern text of § 2462 by 10 reference to its predecessors). Specifically, the prior version of § 2462 did not use the word
11 “enforcement” at all. Instead, it provided that “[n]o suit or prosecution for any penalty or
12 forfeiture” could be maintained unless brought within five years. Id. (citation omitted). For the
13 D.C. Circuit, a reading of these two versions of § 2462 resolved the question. The phrase in the
14 modern statute -- “for the enforcement of a penalty” -- did not mean anything different than the
15 simpler phrase in the previous statute — “for any penalty”—; a procedure aiming to assess or
16 impose a penalty was indisputably a proceeding “for a penalty,” so it was in the updated
17 terminology a procedure to “enforce” a penalty. See id. at 1458–59 & n.7.
18 A similar comparison between the current text of § 2462 and its predecessor also sheds
19 light on the definition of “claim.” Just as the previous version of § 2462 did not refer to the 20 “enforcement” of a penalty, it did not refer to any “claim.” See id. at 1458 n.7 (quoting previous
21 text). Under the previous version of § 2462, a “penalty” or “forfeiture” accrued, not a claim. See
22 id. Again, because the modern and previous versions of § 2462 have the same meaning, the
23 “claim” that accrues under § 2462 is synonymous with “fine, penalty, or forfeiture.” The basis
24 for the penalty FERC pursues against Vitol and Corteggiano is the bid activity in October 2013.
25 The claim seeking the penalty was, in the first instance, included in the order to show cause
26 FERC issued in July 2019. Having then assessed penalties against defendants in October 2019,
27 FERC filed the instant complaint in this court to enforce its manipulation claims against
28 defendants, which also are claims contemplated by § 2462. See generally Compl. ¶¶ 79-80
19 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 20 of 43
1 (“claim” FERC asserts in this action is the unpaid civil penalty); see also 3M Co., 17 F.3d at 1459
2 (“Applying the five-year limitations period to administrative proceedings in which liability is
3 determined and a penalty imposed, does not preclude also applying § 2462 to later collection
4 actions in district court . . . .”).
5 iii. When Does Claim “Accrue”
6 The question remains, then, when the claim for the civil penalty accrued. An action
7 cannot “accrue” as contemplated by the terms of § 2462 until a plaintiff has a “complete and
8 present cause of action.” Gabelli, 568 U.S. at 448.
9 The Supreme Court in Crown Coat Front Co. v. United States, 386 U.S. 503 (1967) 10 addressed when a claim submitted to a regulatory process accrues. In Crown Coat, a contractor
11 disputed a price reduction the government had imposed on a canteen contract. See id. at 508.
12 Under the contract, an executive officer would first review that claim, and a regulatory board
13 could then entertain an appeal. Id. at 505. The officer denied the contractor’s claim, and the
14 board affirmed. Id. at 508. The contractor then challenged the regulatory decision in federal
15 district court. Id. at 507. The applicable statute of limitations was set forth in 28 U.S.C.
16 § 2401(a), providing that “every civil action commenced against the United States shall be barred
17 unless the complaint is filed within six years after the right of action first accrues.” Id. The
18 district court decided the claim was untimely because the claim had accrued when the contract
19 had been completed more than six years before, longer than the relevant limitations period, and 20 the appeals court affirmed. See id. at 507, 514. The Supreme Court disagreed. See id. at 522. It
21 held that the claim in question had “first accrued . . . upon the completion of the administrative
22 proceedings contemplated and required by the provisions of the contract.” Id. at 510. The
23 plaintiff could not have filed his district court complaint before the administrative decision was
24 final. See id. at 512, 514.
25 The First Circuit’s opinion in United States v. Meyer, supra, applied Crown Coat in
26 determining when a claim accrued in a case involving a statute of limitations mirroring § 2462.
27 808 F.2d at 916 (statute provided that civil action “shall be barred unless the complaint is filed
28 within six years after the right of action first accrues . . . ” 28 U.S.C. § 2401(a)). In Meyer, the
20 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 21 of 43
1 Department of Commerce had pursued an administrative enforcement action under the Export
2 Administration Act. See Meyer, 808 F.2d at 913. After several years of “skirmishing,” an
3 administrative law judge imposed a civil penalty. Id. The defendant did not pay, so the
4 Department of Commerce sued in federal court to enforce the penalty. Id. More than five years
5 had passed since the alleged violations, but less than five years had passed since the penalty was
6 assessed. Id. The First Circuit held the district court case was timely filed based on its reading of
7 statute’s “unambiguous language”: “[A] claim for ‘enforcement’ of an administrative penalty,” it
8 held, “cannot possibly ‘accrue’ until there is a penalty to be enforced.” Id. at 914; see also id. at
9 922. 10 As signalled above, a number of federal appellate courts other than the Ninth Circuit have
11 reached the same conclusion with respect to § 2462 specifically. See, e.g., Powhatan, 949 F.3d at
12 898–99 (“Only upon satisfaction of [the requirements in § 823b(d)] did Congress direct that
13 FERC ‘shall institute an action’ in federal district court. And only then did § 2462’s statutory
14 limitations period for filing suit commence.”); see also S.E.C. v. Mohn, 465 F.3d 647, 654 (6th
15 Cir. 2006) (“The parties agree that a claim accrues . . . on any collection proceeding to which §
16 2462 applies once the underlying administrative action establishing liability becomes final.”);
17 United States v. Godbout-Bandal, 232 F.3d 637, 640 (8th Cir. 2000) (“[W]here an Act which
18 authorizes the assessment of a civil penalty also provides for an administrative procedure for
19 assessing that penalty, the statute of limitations period set out in § 2462 will not begin to run until 20 that administrative process has resulted in a final determination.”); compare U.S. Dep’t of Lab. v.
21 Old Ben Coal Co., 676 F.2d 259, 261 (7th Cir. 1982) (“In the context of the [Federal Coal Mine
22 Health and Safety Act of 1969] the district court claim accrues only after the administrative
23 proceeding has ended, a penalty has been assessed, and the violator has failed to pay the
24 penalty.”); Lins v. United States, 688 F.2d 784, 786 (Ct. Cl. 1982) (“If disputes are subject to
25 mandatory administrative proceedings, then the claim does not accrue until their conclusion.”).
26 Of those to address the question, only the Fifth Circuit has disagreed. See United States v.
27 Core Labs., Inc., 759 F.2d 480 (5th Cir. 1985). In Core Labs., the Fifth Circuit distinguished
28 Crown Coat by noting the Supreme Court in that case was interpreting and applying a statute of
21 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 22 of 43
1 limitations other than that provided in § 2462; it also cited the Crown Coat decision’s caution
2 against generalizing the definition of “accrual” without attention to the statutory context and
3 practical consequences. See id. at 481-82. In finding a claim “accrues at the time of the
4 underlying violation,” id. at 483, the Fifth Circuit invoked a particular concern about a party’s
5 “right to be free of stale claims,” id. at 483, given the government’s control of “[t]he progress of
6 administrative proceedings,” id. at 482. Other courts have declined to follow Core Labs. in
7 reasoned decisions, including the First Circuit in Meyer. See Meyer, 808 F.2d at 915–16, 920–21;
8 see also, e.g., United States v. Worldwide Indus. Enters., Inc., 220 F. Supp. 3d 335, 339–46
9 (E.D.N.Y. 2016) (summarizing split thoroughly and declining to follow Core Labs.). The court 10 in Meyer discounted staleness as a concern, observing any “footdragging” by the government
11 “would tend to reduce the [] chances of proving its case and collecting monetary sanctions.”
12 Meyer, 808 F.2d at 922.
13 While the Ninth Circuit has not addressed the question of when a claim accrues as
14 relevant here, it has agreed in principle with the majority view summarized above. See DLS
15 Precision Fab LLC v. U.S. Immigr. & Customs Enf’t, 867 F.3d 1079, 1086 (9th Cir. 2017) (per
16 curiam). In DLS, the Ninth Circuit was asked to review an Administrative Law Judge’s finding
17 that DSL was liable to pay civil penalties for numerous violations of section 274A(b) of the
18 Immigration and Nationality Act (INA), which requires employers to verify that their employees
19 are legally authorized to work in the United States. See id. at 1085. Specifically, the Ninth 20 Circuit was asked to pass on the “timeliness of the administrative proceeding [under § 2462] that
21 imposed the penalty in the first place.” Id. In doing so, it distinguished cases including Meyer,
22 which addressed a “separate judicial action to enforce a penalty imposed in an earlier
23 administrative suit.” Id. (citing Mohn, 465 F.3d at 653–64; Godbout–Bandal, 232 F.3d at 639–
24 40; Meyer, 808 F.2d at 922). But the Circuit agreed that “the language of § 2462 speaks directly
25 to establish the limitations period for filing an action to collect a previously imposed penalty.” Id.
26 “[T]he limitations period for a subsequent penalty enforcement claim does not begin until the
27 penalty has been imposed,” id., which in other words is when the claim accrues.
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1 Taking account of the decision in DLS, this court is persuaded ultimately by Meyer,
2 Powhatan and the other like-minded decisions reviewed above that its understanding of when a
3 claim accrues is correct. The rule derived from these cases arguably is binding under Crown
4 Coat. But even if it is not, the majority rule is most persuasively reasoned. An action cannot
5 “accrue” as contemplated by the terms of § 2462 until a plaintiff has a “complete and present
6 cause of action.” Gabelli, 568 U.S. at 448. FERC can have no “complete and present cause of
7 action” seeking review or affirmation of a civil fine under the FPA until FERC has first assessed
8 that fine through its administrative process.
9 As the court in Meyer trenchantly pointed out, a contrary conclusion would permit 10 individuals to misuse the statute of limitations:
11 [The government] would have a total of five years from the date of a 12 statutory violation within which to uncover the infraction, conduct 13 the necessary investigation, issue a charging letter, and wend its way 14 through the (often lengthy) administrative process. A suspected 15 violator would . . . have considerable incentive to employ the 16 available procedures to work delay—not a particularly difficult task 17 in view of the marked resemblance between the conduct of modern 18 administrative litigation and King Minos’s labyrinth in ancient Crete.
19 Meyer, 808 F.2d at 920. Or as the Supreme Court observed in Crown Coat, from the point of
20 view of a party opposing the government:
21 The [plaintiff] is compelled to resort to administrative proceedings 22 which may be protracted and which may last not only beyond the 23 completion of the contract but continue for more than [the limitations 24 period]. If the time bar starts running from the completion date, the 25 contractor could thus be barred from the courts by the time his 26 administrative appeal is finally decided. This would be true whether 27 he wins or loses [in the administrative proceedings]. Even if he 28 prevailed there and was granted the equitable adjustment he sought, 29 the [defendant] would be immune from suit to enforce the award if 30 more than six years had passed since the completion of the contract.
31 386 U.S. at 514.
32 FERC’s “claim” that it pursued in the regulatory process accrued in October 2013, when
33 the grounds for issuing an order to show cause had crystallized. But its claim in the complaint
23 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 24 of 43
1 before this court “first accrued” when FERC’s administrative process was complete on October
2 25, 2019.
3 iv. Counterarguments by Defendants 4 The defendants and amici advance several counterarguments, but none is persuasive.
5 First, Vitol argues that under Gabelli, all actions to enforce civil fines or penalties must be filed
6 within five years of the allegedly wrongful conduct. See Vitol Mot. at 14–17 (citing 568 U.S.
7 442). As discussed above, the enforcing agency in Gabelli was the Securities and Exchange
8 Commission and, unlike FERC, it could file its claim in a district court without first completing
9 any administrative process. See 568 U.S. at 445 (citing 15 U.S.C. § 80b-9(d)).6
10 Vitol would also distinguish this case from Meyer and the other federal decisions cited
11 above by arguing these cases “involved an administrative adjudication on the merits and a final
12 judgment followed by a collection or similar action.” Vitol Reply at 8 (emphasis omitted). As
13 discussed above, that is a distinction of Vitol’s own creation. FERC proposed a penalty and
14 offered an adversarial adjudication before an administrative law judge, but Vitol declined. See
15 Silkman II, 259 F. Supp. 3d at 121–22 n.133 (reasoning similarly).
16 Vitol also argues briefly in the margin of its reply that this court should not follow Crown
17 Coat. See Reply at 7 n.10. In the same footnote, Vitol mentions that the contractor plaintiff in
18 Crown Coat was not entitled to de novo review of its claim. See Vitol Reply at 7 n.10; 386 U.S.
19 at 512–13. Under the FPA, by contrast, a federal district court does conduct a de novo review
20 when an alleged violator elects the alternate option. See 16 U.S.C. § 823b(d)(3)(B). Vitol does
21 not explain why that distinction would lead to a different result in this case. It does not. No
22 matter what standard of review a federal court must use, no “review” is possible without a
6 “Whenever it shall appear to the Commission that any person has engaged, is engaged, or is about to engage in any act or practice constituting a violation of any provision of this subchapter, or of any rule, regulation, or order hereunder, or that any person has aided, abetted, counseled, commanded, induced, or procured, is aiding, abetting, counseling, commanding, inducing, or procuring, or is about to aid, abet, counsel, command, induce, or procure such a violation, it may in its discretion bring an action in the proper district court of the United States, or the proper United States court of any Territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices and to enforce compliance with this subchapter or any rule, regulation, or order hereunder.” 15 U.S.C. § 80b-9(d).
24 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 25 of 43
1 decision to review. Because FERC cannot have filed this case before the administrative process
2 was complete, Vitol’s argument amounts to one of two possible positions: (1) FERC was required
3 to file a protective action in federal district court while the administrative process wound its way
4 to completion, or (2) FERC was required to begin the administrative process soon enough to
5 guarantee it could file a judicial complaint in time. The Supreme Court rejected the first position
6 expressly in Crown Coat. See 386 U.S. at 521 (“Since it would remain quiescent until the
7 administrative decision is rendered, the protective suit would be a sheer formality in any event—a
8 procedural trap for the unwary and an additional complication for those who manage the dockets
9 of the courts.”). And the Court rejected the second position by unambiguous implication. See id. 10 at 514 (rejecting the government’s position that the claim accrued before the administrative
11 process began because if it did, then the aggrieved contractor could “be barred from the courts by
12 the time his administrative appeal is finally decided”).
13 Vitol and the amici also argue FERC’s interpretation of § 2462 would permit the same
14 claim to accrue twice. See Vitol Mot. at 22–24; Vitol Reply at 7–8; Amicus Br. at 4. If it did,
15 Vitol and the amici argue, then FERC would have two five-year limitations periods to pursue the
16 same claim, a novel result that Congress could not have intended. See id. The court disagrees.
17 To start, this result is not novel. As summarized above, since the 1980s, federal courts have
18 recognized that a statute of limitations might set the same cut-off for initiating an action that
19 applies at two points in the process, first administratively and then to the initiation of a judicial 20 enforcement action. Nor is FERC pursuing the same “claim” twice. It is pursuing two different
21 claims, both expressly created by statute: one seeking to assess a proposed civil penalty,
22 16 U.S.C. § 823b(d)(1), (d)(3)(A), and the other to review and affirm that penalty, id.
23 § 823b(d)(3)(B). Congress passed § 823b(d) after § 2462 and its predecessors had been on the
24 books for more than a hundred years. See Electric Consumers Protection Act of 1986 § 12, Pub.
25 L. 99-495, 100 Stat. 1243 (Oct. 16, 1985). Congress could have provided a distinct limitations
26 period for the two “actions, suits or proceedings” described in § 823b(d), particularly given that
27 this subsection indeed sets several specific deadlines. But Congress did not create different
25 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 26 of 43
1 limitations periods and it is presumed to have acted with full knowledge of its options. See
2 Gabelli, 568 U.S. at 453.
3 Finally, defendants and amici decry FERC’s interpretation as bad policy. They argue
4 FERC should bear the risk that an alleged violator will elect the alternate process, and therefore
5 move more quickly. See, e.g., Vitol Reply at 3–4, 9; Amicus Br. at 4–9. The court declines to
6 impose a restriction contrary to the unambiguous terms of § 823b(d) and § 2462. If the FPA is
7 inefficient or creates too much uncertainty, or grants FERC too much time if an alleged violator
8 elects the alternate option, then the defendants and amici may elect the default administrative
9 hearing under the law as it stands, on a parallel track, and urge Congress to modify § 823b(d) and 10 § 2462. Moreover, whether the current statute effects good policy is not for this court to decide.
11 After all, “courts aren’t free to rewrite clear statutes under the banner of our own policy
12 concerns.” Azar v. Allina Health Servs., 139 S. Ct. 1804, 1815 (2019).
13 v. Conclusion
14 In sum, FERC could not have entertained the regulatory process seeking to impose a civil
15 fine or penalty against Vitol and Corteggiano unless that process began within six years of their
16 allegedly manipulative trading, given the five-year statute of limitations plus one year extension
17 the parties agreed to, as discussed above. The underlying trades were completed in late October
18 2013, and FERC began its proceeding by sending Vitol and Corteggiano an order to show cause
19 in July 2019, less than six years later. FERC’s regulatory proceedings seeking to assess a civil 20 fine were not time-barred.
21 Additionally, it is not “apparent on the face of the complaint” that the relevant statute of
22 limitations bars FERC’s claim. Huynh, 465 F.3d at 997 (quoting Von Saher, 592 F.3d at 969).
23 The motions to dismiss are denied to the extent they raise violations of the applicable statute of
24 limitations. The court need not and does not decide whether the 60-day waiting period tolled the
25 statute of limitations, see Opp’n at 18–20 (citing 16 U.S.C. § 823b(d)(3)(B); noting period of time
26 FERC must give respondent to pay the civil penalty before filing its complaint in federal court),
27 or whether § 2462 applies to disgorgement claims, see id. at 20–22.
26 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 27 of 43
1 C. Violation of Antimanipulation Rule 2 Vitol and Corteggiano also argue FERC’s complaint does not state a claim for
3 manipulation under the FPA and move to dismiss based on Federal Rule of Civil Procedure
4 12(b)(6).
5 1. Rule 12(b)(6) Standard 6 Rule 12(b)(6) permits motions to dismiss for “failure to state a claim upon which relief
7 can be granted.” Fed. R. Civ. P. 12(b)(6). The motion may be granted only if the complaint lacks
8 a “cognizable legal theory” or if its factual allegations do not support a cognizable legal theory.
9 Hartmann v. Cal. Dep’t of Corr. & Rehab., 707 F.3d 1114, 1122 (9th Cir. 2013). The court 10 assumes all factual allegations are true and construes “them in the light most favorable to the
11 nonmoving party.” Steinle v. City & Cty. of San Francisco, 919 F.3d 1154, 1160 (9th Cir. 2019).
12 If the complaint’s allegations do not “plausibly give rise to an entitlement to relief,” the motion
13 must be granted. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).
14 A complaint need ordinarily contain only a “short and plain statement of the claim
15 showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), not “detailed factual
16 allegations,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). But when a plaintiff asserts a
17 fraud claim, the complaint “must state with particularity the circumstances constituting fraud.”
18 Fed. R. Civ. P. 9(b). Courts have evaluated manipulation claims under the FPA against this
19 standard. See, e.g., Coaltrain, 2018 WL 7892222, at *4; Silkman I, 177 F. Supp. 3d at 706–07.
20 “Particularity,” as that word is used in Rule 9(b), means the complaint must explain the
21 circumstances of the alleged fraud specifically enough to give the defendants “notice of the
22 particular misconduct” so “they can defend against the charge and not just deny that they have
23 done anything wrong.” Id. at 1124 (quoting Bly-Magee v. California, 236 F.3d 1014, 1019
24 (9th Cir. 2001)). A common gloss on this standard explains that a complaint must detail “the
25 who, what, when, where, and how” of the alleged fraud. See, e.g., Vess v. Ciba–Geigy Corp.
26 USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir.
27 1997)). “Malice, intent, knowledge, and other conditions of a person’s mind,” by contrast, “may
28 be alleged generally.” Fed. R. Civ. P. 9(b).
27 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 28 of 43
1 2. FPA’s Antimanipulation Provision 2 FERC alleges Vitol and Corteggiano violated section 222(a) of the FPA, codified at
3 16 U.S.C. § 824v(a) as follows:
4 It shall be unlawful for any entity . . . directly or indirectly, to use or 5 employ, in connection with the purchase or sale of electric energy or 6 the purchase or sale of transmission services subject to the 7 jurisdiction of the Commission [i.e., FERC], any manipulative or 8 deceptive device or contrivance (as those terms are used in section 9 10(b) of the Securities Exchange Act of 1934 . . . ), in contravention 10 of such rules and regulations as the Commission may prescribe as 11 necessary or appropriate in the public interest or for the protection of 12 electric ratepayers.
13 16 U.S.C. § 824v(a). As authorized by this section, FERC has promulgated an anti-manipulation
14 rule:
15 (a) It shall be unlawful for any entity, directly or indirectly, in 16 connection with the purchase or sale of electric energy or the 17 purchase or sale of transmission services subject to the jurisdiction 18 of the Commission,
19 (1) To use or employ any device, scheme, or artifice to 20 defraud,
21 (2) To make any untrue statement of a material fact or to omit 22 to state a material fact necessary in order to make the 23 statements made, in the light of the circumstances under 24 which they were made, not misleading, or
25 (3) To engage in any act, practice, or course of business that 26 operates or would operate as a fraud or deceit upon any entity.
27 18 C.F.R. § 1c.2(a).
28 To properly understand the statutory antimanipulation provision, it helps to review its
29 origins. “Congress passed section 824v as part of the Energy Policy Act of 2005 in response to
30 the ‘Western Energy Crisis’ of 2000 to 2001.” FERC v. Powhatan Energy Fund, LLC,
31 345 F. Supp. 3d 682, 688 n.9 (E.D. Va. 2018), aff’d and remanded, 949 F.3d 891 (4th Cir. 2020).
32 That crisis arose after the deregulation and restructuring of California utilities in the 1990s,
33 followed by abuses and manipulation by traders, spikes in energy prices, power outages,
34 bankruptcies, and extensive litigation. See, e.g., Pac. Gas & Elec. Co. v. FERC, 464 F.3d 861,
28 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 29 of 43
1 863–66 (9th Cir. 2006); California ex rel. Lockyer v. FERC, 383 F.3d 1006, 1008–10 (9th Cir.
2 2004); Enron Power Mktg., Inc., et al., 103 FERC ¶ 61343 (2003). Section 824v is modeled on
3 section 10(b) of the Securities Exchange Act of 1934, and FERC’s related rule is modeled on the
4 Securities and Exchange Commission’s Rule 10b-5. Section 10(b) and Rule 10b-5 prohibit
5 manipulative or deceptive devices or contrivances in securities markets. See 15 U.S.C. § 78j(b);
6 17 C.F.R. § 240.10b-5(a). For this reason, courts often have consulted the extensive case law
7 interpreting section 10(b) when faced with disputes about the interpretation of § 824v(a). See,
8 e.g., City Power, 199 F. Supp. 3d at 234; Barclays I, 105 F. Supp. 3d at 1146–47.
9 That case law is instructive here as well. Private plaintiffs must normally prove six 10 elements to establish a violation of section 10(b). See Desai v. Deutsche Bank Sec. Ltd., 573 F.3d
11 931, 939 (9th Cir. 2009). The government must normally prove only three in civil cases, and
12 those three elements can readily be adapted to FERC’s claim here:
13 (1) The defendants used or employed a manipulative or deceptive device or
14 contrivance;
15 (2) The defendants acted with a wrongful state of mind, i.e., scienter; and
16 (3) The defendants’ actions were connected to the purchase or sale of electric energy
17 or the purchase or sale of transmission services subject to FERC’s jurisdiction.
18 See United States v. Vilar, 729 F.3d 62, 88 (2d Cir. 2013);7 see also Vitol Mot. at 27 (agreeing
19 these are elements of claim for manipulation under FPA); Opp’n at 23–37 (arguing Complaint 20 satisfies these elements). Here, the parties do not dispute the third element, that the allegedly
21 manipulative and deceptive power trading was connected to the purchase and sale of electric
22 energy and subject to FERC’s jurisdiction. They dispute only whether FERC’s allegations permit
23 a plausible inference that Vitol and Corteggiano used a manipulative or deceptive device or
24 contrivance and whether these defendants acted with scienter.
7 Only the third element is different here; in securities cases, the government must prove the defendant’s actions were “in connection with the purchase or sale of a security.” Id. (quoting VanCook v. S.E.C., 653 F.3d 130, 138 (2d Cir. 2011)).
29 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 30 of 43
1 Cases interpreting section 10(b) and Rule 10b-5 again offer helpful guidance, for the
2 court’s analysis. Courts have often emphasized that section 10(b) “was designed as a catch-all
3 clause” to prevent a wide variety of fraudulent practices. Chiarella v. United States,
4 445 U.S. 222, 226 (1980). The Supreme Court thus has interpreted the section and rule
5 “flexibly,” not “technically and restrictively.” S.E.C. v. Zandford, 535 U.S. 813, 819 (2002)
6 (quoting Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972)). So read, the
7 statute prohibits both “garden variety” frauds and novel frauds. Arrington v. Merrill Lynch,
8 Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981) (quoting Superintendent of Ins. v.
9 Bankers Life and Cas. Co., 404 U.S. 6, 10 n.7 (1971)). In applying this flexible approach to 10 section 10(b) itself, the Supreme Court has held, for example, that both silence and affirmative
11 conduct, alone, may be fraudulent or deceptive. See Stoneridge Inv. Partners, LLC v. Sci.-
12 Atlanta, 552 U.S. 148, 158 (2008); Chiarella, 445 U.S. at 230.
13 Lower courts also have held that facially legitimate trades might be “manipulative” under
14 section 10(b) if those trades were intended to deceive. Suppose, for example, that a firm
15 underwrites an initial public offering of securities. Then, after shares hit the markets, the
16 underwriter dominates the market for the newly offered securities, maintains bid prices above
17 prevailing market prices, and absorbs any unwanted shares into its inventory, all in an attempt to
18 falsely portray the security as stable and valuable. Even if every one of these trades were facially
19 legitimate and actually fulfilled, the overall scheme might be deceptive, and thus violate section 20 10(b), “solely because of the actor’s purpose.” See Markowski v. S.E.C., 274 F.3d 525, 528, 529
21 (D.C. Cir. 2001) (finding this interpretation of 10(b) reasonable under Chevron U.S.A., Inc. v.
22 Natural Resources Defense Council, Inc., 467 U.S. 837, 843–44 (1984)); see also, e.g., Koch v.
23 S.E.C., 793 F.3d 147, 154–16 (D.C. Cir. 2015) (holding that buying and selling stock at end of
24 trading day in attempt to artificially inflate stock’s value would violate section 10(b)). Or
25 suppose an investor buys and sells stock at a loss in an attempt to influence the prices of
26 corresponding options contracts, and then trades the stock for a profit. This would be
27 manipulative even if the stock transactions were “real” and facially legitimate. See S.E.C. v. Lek
28 Sec. Corp., 276 F. Supp. 3d 49, 56, 64 (S.D.N.Y. 2017) (denying motion to dismiss manipulation
30 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 31 of 43
1 claims based on such allegations). Even unsuccessful attempts to manipulate a market might run
2 afoul of section 10(b) if motivated by a deceptive intent. See Koch, 793 F.3d at 155 (declining to
3 require “market impact”). Intent may be “the only factor that distinguishes legitimate trading
4 from improper manipulation.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 102
5 (2d Cir. 2007).
6 Federal district courts have carried these principles over to energy markets and the FPA’s
7 anti-manipulation provision. See, e.g., Coaltrain, 2018 WL 7892222, at *11; City Power,
8 199 F. Supp. 3d at 234–35; Barclays I, 105 F. Supp. 3d at 1147. In Coaltrain, the defendants had
9 bought and sold financial products that permitted traders to earn profits by correctly predicting 10 transmission costs at different trading nodes. See 2018 WL 7892222, at *2. If used correctly,
11 these products would permit price arbitrage. Id. FERC alleged in a complaint filed in federal
12 district court that the defendants had not intended to earn money by correctly predicting price
13 differences. Id. They had not made any profits at all. Id. Instead, according to FERC, the
14 defendants had made many useless trades in an attempt to pump up their trading volume and
15 inflate payouts tied to that trading volume. Id. After reviewing cases interpreting section 10(b),
16 the district court found for purposes of pleading a claim that the alleged scheme was
17 manipulative. See id. at *11–12. The defendants had placed legal but senseless and unprofitable
18 trades, and they had done it for an improper purpose. See id. at *12; accord City Power,
19 199 F. Supp. 2d at 224–25, 235–36 (reaching same conclusion about same alleged trading 20 scheme). It did not matter that the deceptive trading could have been legitimate if the defendants
21 had acted with an innocent purpose. That was not what happened. The trades were “sham
22 transactions” with “the outward form” of legitimacy “but none of the economic substance.”
23 City Power, 199 F. Supp. 2d at 236; see also Barclays I, 105 F. Supp. 3d at 1146–47 (holding
24 facially legitimate power trades were manipulative when undertaken with intent to influence
25 value of financial product in parallel market).
26 FERC’s manipulation claim, as pled, falls neatly within the foregoing precedent. FERC
27 alleges Corteggiano and Vitol used unprofitable trades in the physical power markets to reduce
28 Vitol’s exposure to CRR losses. Compl. ¶ 2. FERC says these transactions may have been “real”
31 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 32 of 43
1 in the sense they involved willing buyers and sellers, but they were a sham at their core. FERC
2 alleges specifically and plausibly that power prices, price differences and losses were irrelevant to
3 Corteggiano’s strategy and that congestion prices were his only target. For example, according to
4 the complaint, Vitol’s traders cared little about the terms of the transactions they entered, offering
5 to accept a single megawatt and to sell their imports for as little as a dollar per megawatt hour.
6 Compl. ¶¶ 57–58. Transactions lost money, but traders pushed ahead. See id. ¶ 59. When
7 Vitol’s CRR losses were no longer uncovered, the unprofitable trades ceased. See id. ¶ 60. And
8 Corteggiano had never traded in physical power before, except when he had used the same cross-
9 market strategy to reduce CRR losses at Deutsche Bank. Id. ¶ 63. 10 FERC’s allegations also are particularized, as required by Rule 9(b). FERC identifies
11 specific people, places, times, prices, and other details. See, e.g., Compl. ¶¶ 57–59; Penalty Order
12 ¶¶ 35–57. It also alleges Vitol and Corteggiano acted with an improper intent to avoid losses in a
13 different market and illustrates that allegation with specific factual allegations about the two
14 defendants’ goals. See Compl. ¶¶ 46–51, 66–73, 79.
15 Vitol and Corteggiano have not distinguished this case from Coaltrain, City Power, and
16 Barclays I. Vitol does not cite Coaltrain, and its discussions of Barclays I and City Power do not
17 address the core holding discussed above, that FPA section 222 “proscribes deception not only in
18 the form of misleading statements but also in the form of misleading [c]onduct itself . . . ”
19 Coaltrain, 2018 WL 7892222, at *12 (alteration in original). See Vitol Mot. at 22 n.12, 13–14, 20 22, 27. Corteggiano argues only briefly that this case is distinguishable from Coaltrain and City
21 Power because it includes no allegations of “wholly uneconomic” bids or offers or similar
22 manipulative conduct. See Corteggiano Mot. at 14. As summarized above, however, FERC does
23 allege Corteggiano and Vitol both were indifferent to the profits or losses they would make
24 importing power over the Cascade intertie. See Compl. ¶¶ 57–59. Nor do Vitol and Corteggiano
25 support their generic assertions that FERC’s complaint falls short of Rule 9(b). See Vitol Mot. at
26 26–27; Corteggiano Mot. at 1, 5–6, 10; Vitol Reply at 15.
27 Vitol and Corteggiano focus instead on other points. They contend their actions were not
28 deceptive because they did not misrepresent any facts, disclose false information, withhold any
32 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 33 of 43
1 information in the face of a duty to disclose, or impair any markets. Vitol Mot. at 31–34; Vitol
2 Reply at 11–13; Corteggiano Mot. at 11–13. Their trades, they say, actually corrected an
3 “artificial” or “phantom” price that was the result of an algorithm rather than economic forces.
4 See, e.g., Vitol Mot. at 30–31; Vitol Reply at 12; Corteggiano Mot. at 12. Given FERC’s
5 allegations, the court cannot at this stage determine that Corteggiano’s and Vitol’s trading
6 actually drove power prices toward any competitive economic equilibrium.
7 Vitol’s and Corteggiano’s arguments also depend on the implicit premise that the “true” or
8 “correct” prices for their transactions were not those set by the CAISO algorithm. Perhaps
9 CAISO could have devised a better pricing system for partially derated, low-volume nodes. 10 Perhaps not. But at this stage, the court must draw inferences in FERC’s favor based on the
11 pleadings. Given FERC’s allegations, the court must infer the “true” or “correct” price is the
12 value determined by CAISO’s algorithm, however counterintuitive that price might have been.
13 See Compl. ¶¶ 19, 25–27, 46–60.
14 With this inference, FERC’s allegations make out a plausible claim of manipulation.
15 According to FERC’s complaint, defendants’ scheme was not intended to reveal information or
16 restore prices to a demand-meets-supply equilibrium. It was not even a plan to make money by
17 trading power; Vitol’s and Corteggiano’s only goal was to avoid losses in another market. If it
18 were viable, the defendants’ argument would justify every cross-market scheme and preclude
19 litigation of a claim. For example, a trader could buy and sell in market A at whatever price and 20 quantity it took to make money in market B, then avoid liability by arguing the true “market
21 prices” were those that maximized its returns in market B.
22 Next, Vitol and Corteggiano argue FERC cannot succeed on this claim because FERC has
23 not alleged they “controlled or artificially affected the price of power at Cragview.” Vitol Mot. at
24 28 (quotation marks, alterations, and emphasis omitted); see also Corteggiano Mot. at 16, 21.
25 They derive this argument from a passage in the Supreme Court’s decisions in Ernst & Ernst v.
26 Hochfelder, 425 U.S. 185, 199 (1976), and Santa Fe Industries, Inc. v. Green, 430 U.S. 462
27 (1977), as well as later decisions among the lower courts on the scope of section 10(b) and Rule
28 10b-5. See, e.g., Silkman I, 177 F. Supp. 3d at 706–07; Coaltrain, 2018 WL 7892222, at *4;
33 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 34 of 43
1 Barclays I, 105 F. Supp. 3d at 1147. The first problem with this argument is that it contradicts
2 FERC’s complaint. FERC alleges market prices changed as a result of Vitol’s and Corteggiano’s
3 trading. See Compl. ¶¶ 58–59. The defendants’ argument also reads too much into the Supreme
4 Court’s decisions in particular. Some context helps to explain why.
5 In Ernst & Ernst, the president and majority owner of a small brokerage firm had tricked
6 some of the firm’s customers into investing in what he described as “escrow” accounts. 425 U.S.
7 at 189. He was instead simply spending their money. See id. After the fraud came to light, the
8 investors sued the firm’s accountants under section 10(b) and Rule 10b-5, alleging the
9 accountants should have discovered and revealed the fraud. See id. at 189–90. The Supreme 10 Court granted certiorari to decide “whether a private cause of action will lie under [section 10(b)
11 and Rule 10b-5] in the absence of any allegation of ‘scienter’ intent to deceive manipulate, or
12 defraud.” Id. at 193. Several lower courts had reached conflicting decisions, with some
13 permitting 10(b) cases to proceed on what amounted to allegations of mere negligence. See id.
14 at 193 n.12.
15 The Court decided section 10(b) “was intended to proscribe knowing or intentional
16 misconduct,” id. at 197, not “negligent conduct alone,” id. at 201. In reaching this conclusion, the
17 Court responded to an argument the Securities and Exchange Commission had offered in an
18 amicus curiae brief: that “nothing in the language ‘manipulative or deceptive device or
19 contrivance’ limits [section 10(b)’s] operation to knowing or intentional practices.” Id. at 197–98 20 (quoting 15 U.S.C. § 78j(b)). In the Court’s view, this argument was simply incorrect. The
21 words “manipulative,” “device,” and “contrivance” left no doubt that Congress was describing
22 more than mere negligence. See id. at 199. In explaining this conclusion, the Court wrote the
23 passage on which Vitol and Corteggiano now rely:
24 Use of the word “manipulative” is especially significant. It is and was virtually a 25 term of art when used in connection with securities markets. It connotes intentional 26 or willful conduct designed to deceive or defraud investors by controlling or 27 artificially affecting the price of securities. 28 Id.
34 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 35 of 43
1 The Court’s holding in Santa Fe is similar. In that case, a 90 percent stakeholder had
2 acquired the remaining 10 percent of the company’s shares under Delaware’s short-form merger
3 statute. See 430 U.S. at 465. That statute did not require consent from or advance notice to the
4 minority shareholders, and they had received none. See id. at 465–66. The Second Circuit held
5 the plaintiffs could proceed because they had alleged the majority shareholders had breached
6 fiduciary duties. See id. at 469–70. Section 10(b), in the circuit’s view, did not require
7 allegations of deception or manipulation. See id. The Supreme Court took the case to decide
8 whether this was so. See id. at 471. It reversed and held that manipulation or deception is a
9 necessary element of any claim under section 10(b). See id. at 471, 473–74. Among other 10 arguments, the Court rejected the minority shareholders’ contention that breaches of fiduciary
11 duty might be “manipulative.” See id. at 476–77. To explain why, the Court quoted its
12 observation in Ernst & Ernst that “manipulation” was “virtually a term of art in connection with
13 securities markets” and did not always encompass every breach of a fiduciary duty. Id. at 476–77
14 (quoting 425 U.S. at 199); see also Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir.
15 2009).
16 In short, Ernst & Ernst and Santa Fe impose two straightforward requirements on private
17 plaintiffs who assert claims under section 10(b): the defendant’s conduct must be (1) knowing or
18 intentional and (2) manipulative or deceptive. In neither case did the Court consider whether a
19 “device” or “contrivance” might be “deceptive” or “manipulative” and thus violate section 10(b) 20 even if it does not control or affect the price of a security. As summarized above, lower courts
21 have held that even lawful trading might be “manipulative” or “deceptive,” and courts have not
22 demanded that public sector plaintiffs prove a manipulative or deceptive scheme affected
23 markets. See, e.g., Koch, 793 F.3d at 155 (declining to require “market impact”); GFL Advantage
24 Fund, Ltd. v. Colkitt, 272 F.3d 189, 206 (3d Cir. 2001) (“[P]roof of price movement is not
25 necessary to establish a violation of Section 10(b) and Rule 10b–5 . . . .”); Chemetron Corp. v.
26 Bus. Funds, Inc., 718 F.2d 725, 728 (5th Cir. 1983) (“[T]he 10(b) claim is not defeated by the fact
27 that the jury found the activities did not have an ‘affect’ on Chemetron’s purchase price of the
28 stock . . . .”); Barclays I, 105 F. Supp. 3d at 1147 (holding similarly after reviewing Santa Fe and
35 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 36 of 43
1 other authorities). The Ninth Circuit’s decision in Desai is not to the contrary. In that case, the
2 Circuit simply summarized case law on the scope of private section 10(b) actions and held that
3 courts have “generally categorized deceptive and manipulative devices into misrepresentations,
4 omissions by those with a duty to disclose, or manipulative acts.” 573 F.3d at 938. It did not
5 hold that lawful trading can never violate section 10(b) or that a plaintiff must prove the
6 defendant controlled or artificially affected prices, and it did not address a regulator’s
7 enforcement action.
8 The argument Vitol and Corteggiano make also depends on two implicit and doubtful
9 premises: (1) that “manipulative” is a “term of art” in markets for wholesale electrical power just 10 as it is a term of art in securities markets and (2) that the word has the same definition in those
11 markets. See, e.g., Vitol Mot. at 35; Vitol Reply at 17; Corteggiano Mot. at 23. Electrical power
12 markets are unlike many others, for example because as noted above electricity must usually be
13 produced at almost exactly the moment it is consumed, regardless of price. Vitol and
14 Corteggiano have not described any parallels between the unusual characteristics of the products
15 traded on CAISO’s markets, such as CAISO’s algorithmic prices and the determinants of those
16 prices, and the products traded on securities markets. Also, Congress expressly delegated FERC
17 authority to decide what is “deceptive” and “manipulative” in the markets under its jurisdiction,
18 see 16 U.S.C. § 824v(a), and FERC has determined that cross-market schemes like the one
19 alleged here violate the FPA, see Compl. ¶ 10. Vitol and Corteggiano have not explained why the 20 regulations here, or FERC’s interpretation of those regulations, are unreasonable or wrong. At
21 this stage of the case, the court sees no reason to preclude FERC from proceeding on its claim.
22 See, e.g., United States v. Haggar Apparel Co., 526 U.S. 380, 391 (1999) (“Deference can be
23 given to the regulations without impairing the authority of the court to make factual
24 determinations, and to apply those determinations to the law, de novo.”); Greene Cty. Plan. Bd. v.
25 Fed. Power Comm’n, 559 F.2d 1227, 1239 (2d Cir. 1976) (“[The] interpretation of the Federal
26 Power Act by the agency charged with its administration is entitled to great deference from this
27 Court.”).
36 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 37 of 43
1 In sum, given the early stage of this litigation, FERC’s specific factual allegations, the
2 broad language in the FPA’s antimanipulation rules, and support in the case law interpreting
3 analogous provisions of the Securities Exchange Act, the court concludes the complaint states a
4 claim under the FPA’s antimanipulation provision.
5 D. Vitol’s Liability as Employer and Principal 6 Vitol argues that even if the complaint states a claim for manipulation based on
7 Corteggiano’s intentions, it does not allege that other people at the firm shared his knowledge or
8 intent. See Vitol Mot. at 34–35; Vitol Reply at 17–19. Vitol cites FERC’s allegations about
9 Corteggiano’s attempts to withhold the truth from legal and compliance personnel. See, e.g., 10 Vitol Mot. at 35. In response, FERC argues Corteggiano was acting as Vitol’s agent, so his intent
11 is imputed to Vitol. See Opp’n at 36–37. FERC does not cite any provision of the FPA under
12 which an agent’s mental state can be imputed to its principal. Instead, it relies on case law
13 interpreting section 10(b) and Rule 10b-5. See id. For the same reasons discussed above, the
14 court agrees that analogy is reasonable given the FPA’s express reference to section 10(b) in
15 defining the phrase “manipulative or deceptive device or contrivance.” Cf. In re ChinaCast Educ.
16 Corp. Sec. Litig., 809 F.3d 471, 478 (9th Cir. 2015) (applying agency principles from antitrust
17 case law in securities action because reasoning of that case law “not limited to [the antitrust]
18 context”).
19 Like the FPA, “the Securities Exchange Act and accompanying regulations do not contain
20 any explicit instructions on when an employee’s acts and intent are to be imputed as those of the
21 company.” In re ChinaCast Educ. Corp. Sec. Litig., 809 F.3d at 475. The Ninth Circuit has
22 nevertheless held that employers can be liable for their employees’ actions under principles of
23 agency law. See Hollinger v. Titan Cap. Corp., 914 F.2d 1564, 1577 (9th Cir. 1990) (en banc).
24 Otherwise, a firm could “avoid secondary liability simply by showing ignorance, purposeful or
25 negligent, of the acts of its registered representative.” Id. (quoting Paul F. Newton & Co. v.
26 Texas Com. Bank, 630 F.2d 1111, 1118 (5th Cir. 1980)). That result would “contravene[]
27 Congress’ intent to protect the public, particularly unsophisticated investors, from fraudulent
28 practices.” Id. (quoting Newton, 630 F.2d at 1118).
37 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 38 of 43
1 The Ninth Circuit has thus adopted “the general rule of imputation” in cases of alleged
2 fraud under section 10(b). See ChinaCast, 809 F.3d at 476. Under that rule, an employer can be
3 liable for an employee’s “fraud committed ‘within the scope of his employment’ or ‘for a
4 misleading statement made by an employee or other agent who has actual or apparent authority.’”
5 Id. (quoting Hollinger, 914 F.2d at 1577 n.28). But a “rogue agent’s actions or knowledge are
6 ‘not imputed to the principle if the agent acts adversely to the principle in a transaction or matter,
7 intending to act solely for the agent’s own purposes or those of another person.’” Id. (quoting
8 Restatement (Third) of Agency § 5.04 (2006)). The rogue agent exception is known as the
9 adverse interest exception. See id. 10 Here, as pled, Corteggiano’s allegedly manipulative and deceptive actions and purposes
11 can be imputed to Vitol under these principles. Corteggiano was acting within the scope of his
12 employment when he devised and executed the alleged scheme to manipulate prices in the
13 physical power market. Although physical power transmission was normally not his
14 responsibility, he obtained Vitol’s authorization. See Compl. ¶¶ 53–56. He was not acting solely
15 for his own purposes or to benefit some third party, so this is not a case for the adverse interest
16 exception. According to the complaint, Corteggiano’s intent was to reduce Vitol’s CRR
17 exposure. See, e.g., id. ¶ 51.
18 This conclusion withstands Vitol’s arguments that Corteggiano did not truly “act.” See
19 Vitol Reply at 18. FERC alleges Corteggiano devised the alleged scheme, obtained Vitol’s 20 authorization to move forward with his plan, and instructed others what trades to make. See
21 Compl. ¶¶ 56–57. Staub v. Proctor Hospital, which Vitol cites, is not to the contrary. See Vitol
22 Reply at 18 (citing 562 U.S. 411 (2011)). In Staub, the Supreme Court expressly declined to
23 decide “what the background rule of agency law may be.” 562 U.S. at 418. And in any event,
24 FERC alleges both wrongful intent and wrongful actions by the same employee, Corteggiano, so
25 the question that went unresolved in Staub is irrelevant. Cf. id. (describing conflict about whether
26 one agent’s malicious intent can combine with another agent’s malicious actions to impose
27 liability on their shared principal).
38 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 39 of 43
1 Nor may Vitol avoid liability by arguing Corteggiano withheld information from Vitol’s
2 legal and compliance team. See Vitol Reply at 18. Such a holding would flout the Ninth
3 Circuit’s decision that principals cannot “avoid secondary liability simply by showing ignorance,
4 purposeful or negligent,” of what their agents have done. Hollinger, 914 F.2d at 1577 (quoting
5 Newton, 630 F.2d at 1118). As explained above, FERC’s allegations foreclose Vitol’s successful
6 reliance on the “adverse interest” exception, at least at this stage.
7 E. Corteggiano as Primary Violator 8 Corteggiano contends similarly that others are actually responsible for the allegedly
9 fraudulent scheme. He points out he did not personally perform the allegedly wrongful trades and 10 that Vitol approved the trades ahead of time. See Corteggiano Mot. at 6–10. As a result, he
11 contends, he was not the “primary violator,” but rather only an aider or abettor, and so cannot be
12 liable for the primary role. See id. at 6–7.
13 Corteggiano’s argument in this respect again draws on case law interpreting section 10(b)
14 and Rule 10b-5. The Supreme Court has held these provisions do not impose liability on those
15 who aid and abet securities fraud, known as secondary violators, but rather only on those who
16 themselves commit frauds, the primary violators. See Cent. Bank of Denver, N.A. v. First
17 Interstate Bank of Denver, N.A., 511 U.S. 164, 177 (1994); see also, e.g., Janus Capital Group,
18 Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) (holding “maker of a statement is the
19 person or entity with ultimate authority over the statement, including its content and whether and
20 how to communicate it”). In response to the Court’s decision in Central Bank, Congress
21 amended the securities laws to permit the government, but not private parties, to pursue claims for
22 aiding and abetting securities frauds. See Stoneridge Inv. Partners, LLC v. Sci.-Atlanta,
23 552 U.S. 148, 158 (2008) (citing 15 U.S.C. § 78t(e)). Congress did not amend the FPA similarly.
24 Federal courts expressly relying on the lack of amendment have interpreted the FPA as restricting
25 liability to those who themselves violate its antimanipulation rules, and not extending to those
26 who aid and abet. See Coaltrain, 2018 WL 7892222, at *17–20; Silkman I, 177 F. Supp. 3d at
27 707–08.
39 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 40 of 43
1 Assuming without deciding that secondary violators are not liable under the FPA, the
2 decisions referenced above do not show the claims against Corteggiano must be dismissed.
3 FERC alleges Corteggiano conceived of the alleged scheme, proposed transactions to Vitol’s
4 legal and compliance teams, secured their approval, and gave instructions to others at the
5 company, who executed the trades FERC now claims were manipulative and deceptive. See
6 Compl. ¶¶ 51–59. If these allegations are not read as saying Corteggiano was a primary violator,
7 then there would be a violation but no primary violator, only aiders and abettors. Imposing
8 liability on Corteggiano also is consistent with the Supreme Court’s later interpretation of its
9 decisions in Central Bank and Janus Capital Group. See Lorenzo v. S.E.C., 139 S. Ct. 1094, 10 1100–01, 1103–04 (2019) (holding person who disseminated false statement in his own name was
11 primary violator even though he had not composed false statement, distinguishing Janus and
12 Central Bank).
13 F. Fair Notice 14 Corteggiano also argues FERC gave him no fair notice that his trades would violate the
15 FPA. See Corteggiano Mot. at 1–15. His argument rests on the general constitutional rule that
16 requires the government to “give the person of ordinary intelligence a reasonable opportunity to
17 know what is prohibited, so that he may act accordingly.” Grayned v. City of Rockford,
18 408 U.S. 104, 108 (1972). This rule applies to regulations. See F.C.C. v. Fox Television Stations,
19 Inc., 567 U.S. 239, 253 (2012). “[I]n the absence of notice—for example, where the regulation is
20 not sufficiently clear to warn a party about what is expected of it—an agency may not deprive a
21 party of property by imposing civil or criminal liability.” United States v. Approximately 64,695
22 Pounds of Shark Fins, 520 F.3d 976, 980 (9th Cir. 2008) (quoting Trinity Broadcasting of
23 Florida, Inc. v. Fed. Commc’n Comm’n, 211 F.3d 618, 628 (D.C. Cir. 2000)).
24 FERC’s allegations permit the court to infer that Corteggiano had notice that his trading
25 strategy violated the FPA: (1) Corteggiano had used a similar cross-market trading strategy in the
26 past, and FERC had pursued an enforcement action alleging the strategy violated the FPA,
27 Compl. ¶ 27; (2) CAISO publicized the risk of this type of “manipulation,” id. ¶ 26; (3) when
28 Corteggiano implemented his strategy at Vitol, he attempted to conceal his purpose from Vitol’s
40 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 41 of 43
1 legal and compliance personnel, who were aware of his prior involvement in the Deutsche Bank
2 matter, id. ¶¶ 53–55; Penalty Order ¶ 53 n.157; (4) at least one other company suspected
3 Corteggiano and Vitol were using an illegal scheme, see Staff Report at 17–18, Req. J. Not. Ex. E
4 at 27–28; and (5) Corteggiano turned to the cross-market strategy only after others failed, see
5 Compl. ¶¶ 46–51, which suggests he understood it posed legal risks. Federal courts have rejected
6 similar challenges to claims in a civil complaint resting on the FPA’s antimanipulation provisions
7 and FERC’s antimanipulation rule in cases based on similar allegations. See Coaltrain, 2018 WL
8 7892222, at *15; City Power, 199 F. Supp. 3d at 238–39; Silkman I, 177 F. Supp. 3d at 702–06.
9 G. Increasing the Penalty Against Corteggiano 10 Lastly, Corteggiano argues FERC acted outside its statutory authority by assessing a
11 penalty against him, of $1,000,000, which was larger than the $800,000 penalty it originally
12 proposed in the order to show cause initiating the regulatory process. See Compl. ¶¶ 2, 35;
13 Corteggiano Mot. at 15–17. The FPA supports this position. Before “assessing a civil penalty,”
14 FERC must “provide . . . notice of the proposed penalty.” 16 U.S.C. § 823b(d)(1) (emphasis
15 added). Then, if the alleged violator elects the default option, FERC “shall assess the penalty”
16 after holding an administrative hearing. Id. § 823b(2)(A) (emphasis added). “In the case of any
17 civil penalty with respect to which” the alleged violator elects the alternate option, FERC “shall
18 promptly assess such penalty, by order, after the date of the receipt of the notice . . . of the
19 proposed penalty.” Id. § 823b(d)(3)(A) (emphasis added). By referring consistently to a singular
20 “penalty,” by using the definite article, and by referring to “such penalty,” Congress made clear it
21 was consistently referring to the same penalty—the proposed penalty—and intended the assessed
22 penalty to be no greater than the proposed penalty.
23 This interpretation reinforces the purposes of the notice required by § 823b(d)(1): putting
24 “a party on notice of the charges against which it must defend and the penalties that it might
25 incur.” Clifton Power Corp. v. F.E.R.C., 88 F.3d 1258, 1268 (D.C. Cir. 1996). If FERC could
26 assess a larger penalty than it proposed, then the notice would not serve this purpose. The D.C.
27 Circuit has thus taken for granted that a “proposed penalty” is “the maximum penalty [FERC]
28 may impose.” Id.
41 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 42 of 43
1 The possibility for appellate or de novo review does not eliminate the harm that would
2 result if FERC could impose larger penalties than it originally proposes, especially when, as here,
3 the increase does not appear to rest on any new or different facts or allegations. See Clifton
4 Power Corp., 294 F.3d at 113 (“[FERC] must calculate any penalty according to the statutory
5 factors set out in 16 U.S.C. § 823b(c)”). Nor does FERC’s express authority to “compromise,
6 modify, or remit” a penalty mean it can increase a penalty. See 16 U.S.C. § 823b(d)(4). The
7 context of that language shows it was intended as a safety valve for settlement negotiations and to
8 recognize an alleged violator’s “efforts . . . to remedy the violation in a timely manner.” Id.
9 Otherwise, FERC could bypass the notice procedures required by § 823b(d) and unilaterally 10 increase penalties after assessing them. FERC’s proposed approach does not lead to a reasonable
11 result. See American Tobacco Co. v. Patterson, 456 U.S. 63, 71 (1982) (“[s]tatutes should be
12 interpreted to avoid . . . unreasonable results whenever possible.”).
13 Applying the statute faithfully here does not hamstring FERC’s efforts to impose
14 appropriate penalties. FERC must take account of how serious a suspected violation is and what
15 the suspected violator has done to remedy that violation before proposing a penalty. 16 U.S.C.
16 § 823b(d)(1) (“Before issuing an order assessing a civil penalty against any person under this
17 section, the Commission shall provide to such person notice of the proposed penalty.”) If FERC
18 discovers new evidence suggesting a higher penalty is appropriate, it can seek to impose the
19 higher amount after giving further notice under § 823b(d)(1) by amending its complaint in federal 20 court. See 18 C.F.R. § 385.1510(c) (“The Commission’s authority to compromise, modify or
21 remit a civil penalty may be exercised at any time prior to a final decision by . . . the United
22 States District Court.”).
23 The record here suggests that in practice, FERC obtains most of the information it relies
24 on before it proposes a penalty, subject to following defined procedures before imposing an
25 assessment. See, e.g., Penalty Order ¶¶ 10–20; 16 U.S.C. § 825o-1(b) (civil penalties “shall be
26 assessed by the Commission, after notice and opportunity for public hearing”). When alleged
27 violators, as here, choose the alternate option, which bypasses an administrative hearing and
28 corresponding development of the record, there is little opportunity for FERC to identify bases for
42 Case 2:20-cv-00040-KJM-AC Document 74 Filed 12/20/21 Page 43 of 43
1 increasing proposed penalties. Ultimately, FERC’s penalty assessment against Corteggiano is
2 based on its evaluation of the “seriousness of the violation” as well as “mitigating culpability
3 factors.” See Penalty Order ¶¶ 232–244. FERC argues that if it must give a new notice before
4 increasing any proposed penalty, it could be trapped in a vicious cycle of new penalties and new
5 notices before proceeding to seek an appropriately higher amount. See Opp’n at 41. That danger
6 appears remote. FERC cites only one other administrative case in which it assessed a greater
7 penalty than proposed. See id. at 43 (citing Lincoln Paper and Tissue, LLC, 144 FERC ¶ 61,162
8 (2013) (assessing $5 million penalty after initially proposing $4.4 million penalty without
9 providing new notice)). And as FERC acknowledges, it can compensate for evidentiary
10 uncertainties by seeking this court’s de novo review of its penalty assessment. See id. at 44
11 (citing Preston v. Yeutter, No. 95-35837, 1994 WL 447284, at *1 (9th Cir. Aug. 19, 1994)
12 (holding “[t]he de novo review conducted by the district court was sufficient to provide
13 [defendants] with an adequate hearing” despite alleged lack of notice before the agency)). For the
14 reasons discussed above, the court does not find FERC’s arguments in this respect persuasive.
15 Corteggiano’s motion will be granted to the extent it challenges the assessed penalty.
16 IV. CONCLUSION
17 As explained above, defendants’ requests for judicial notice are granted in part. Vitol’s
18 motion to dismiss is denied. Corteggiano’s motion to dismiss is granted in part to the extent the
19 court holds that FERC may not at this time pursue a greater penalty than the previously proposed
20 penalty of $800,000. Corteggiano’s motion is otherwise denied. The motion to stay is denied as
21 moot.
22 The parties are directed to meet and confer and file a supplemental joint status report
23 within fourteen days of this order, proposing a schedule for discovery and dispositive motion
24 practice.
25 This order resolves ECF Nos. 30, 33, 31, 36, 54.
26 IT IS SO ORDERED.
27 DATED: December 20, 2021.
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