A recent district court order highlights the importance of maintaining a strong compliance program with effective compliance controls and practices, while highlighting the risk of employee misconduct for the enterprise itself. Specifically, on December 20, a California district court denied a motion to dismiss a FERC complaint that seeks to enforce a penalty against a company and one of its traders. In addition to finding that FERC’s claims were not time barred, the court also found that the employer can be held liable for the trader’s actions even though the trader withheld information from the company regarding the trading activity at issue. However, in a win for the company, the court limited the civil penalties that may be sought in a complaint to the proposed penalty set forth in FERC’s order to show cause. This limits FERC’s ability to penalize a defendant for choosing to contest a proposed sanction in district court.
Although the facts themselves remain contested in the ongoing court proceeding, FERC determined that the company and its trader violated the Anti-Manipulation Rule and the Federal Power Act by selling physical power at a loss for the purpose of defraying losses in the financial markets. In the order to show cause, FERC directed the company and the trader to show cause as to why they should not be assessed civil penalties of $6 million and $800,000, respectively, and directed the company to disgorge unjust profits. Subsequently, FERC issued an order assessing civil penalties of about $1.5 million against the company and $1 million against the trader. After the company and the trader failed to pay the assessed amounts within the 60-day period, FERC filed a complaint in district court to enforce the penalty assessment.
Statute of Limitations
The defendants argued that FERC’s complaint was not timely under the applicable five-year statute of limitations in 28 USC § 2462 (which the parties had mutually agreed to extend by one year). The court rejected this argument, finding that the behavior FERC was penalizing occurred less than six years prior to the order to show cause. The timing of the filing of the district court action was not relevant.
Imputation of Employee Actions
The company argued that even if FERC’s complaint stated a claim for manipulation based on the trader’s intentions, the company should not be held liable for the trader’s actions. The company reasoned that others at the company did not share the trader’s intent and the trader attempted to withhold the purpose of the trading activity from legal and compliance personnel. The company also noted that the trader was required to seek approval to enter into the physical trades not only because the trader lacked the authority to enter into physical trades but also because the trading activity would result in the trader engaging in trading in two related products. However, the trader did not disclose the true purpose of his proposed trading activity—i.e., to avoid losses in its financial positions—when seeking and obtaining the necessary approvals.
The court rejected these arguments and held that the trader’s allegedly manipulative and deceptive actions and purposes can be imputed to the company because the employee was not acting contrary to the company’s interests. Importantly, the court specifically rejected the argument that the company should avoid liability because the trader withheld information from the company’s legal and compliance team.
Although the Federal Power Act does not contain any explicit instruction on when an employee’s actions and intentions are to be imputed as those of the company, the Ninth Circuit has held that employers can be liable for their employees’ actions under the principles of agency law and the “general rule of imputation.” In this case, the court held that allowing the company to avoid liability “would flout the Ninth Circuit’s decision that principals cannot ‘avoid secondary liability simply by showing ignorance, purposeful or negligent,’ of what their agents have done.” Further, the court found that the trader in this case was acting within the scope of his employment when executing the alleged scheme and obtained the company’s authorization to engage in the physical trades. The rogue agent exception, or the adverse interest exception, which prevents the employee’s actions or knowledge from being imputed to the principle, did not apply because the trader was not acting solely for his own purposes or to benefit a third party. Rather, the trader’s intent was to reduce the company’s financial exposure.
Prohibition on Increasing a Penalty When Seeking District Court Enforcement
Finally, the court held that FERC acted outside its statutory authority by assessing the trader a $1 million civil penalty, which exceeds the penalty proposed in the order to show cause. Before FERC can assess a civil penalty, it must provide notice of the charges and proposed penalties. In this case, through its order to show cause, FERC provided notice of a proposed penalty of $800,000 against the trader. The court held that if FERC seeks to impose a higher penalty, it must provide further notice and cannot unilaterally increase penalties after assessing them.
Although this decision is likely to be appealed, the order provides an important reminder of the importance of establishing, implementing, and enforcing strong and effective compliance practices. Although having a strong compliance program on paper provides a good foundation, effective implementation and enforcement of the compliance program throughout the company is essential. Compliance personnel must be well-versed in the company’s current trading activities and strategies in order to effectively monitor for and identify potential misconduct. Supervisors must know who to turn to with any compliance questions or potential issues. All compliance rules and restrictions must be strictly enforced, and a company and its personnel must be diligent in following up on and resolving all identified potential issues, misconduct, or noncompliance.