A recent district court order emphasizes the importance of maintaining a strong compliance program with effective compliance controls and practices, while highlighting the risk of employee misconduct to the company itself. Specifically, on December 20, a California district court dismissed a motion to dismiss a FERC complaint seeking a sanction against a company and one of its traders. In addition to concluding that the FERC claims were not statute-barred, the court also concluded that the employer can be held liable for the actions of the trader even though the trader withheld information from the company regarding the business activity. in question. However, in a gain for the company, the court limited the civil penalties that could be sought in a complaint to the proposed penalty set out in the FERC show cause order. This limits the ability of FERC to penalize a defendant for choosing to challenge a proposed sanction in a district court.
Although the facts themselves remain disputed in the ongoing legal proceedings, FERC has determined that the company and its merchant violated the anti-manipulation rule and federal electricity law by selling physical electricity at a loss. with the aim of covering losses in the financial markets. In the show cause order, FERC ordered the company and the trader to justify why they should not face civil penalties of $ 6 million and $ 800,000, respectively, and ordered the company to return unfair profits. Subsequently, the FERC issued an order assessing civil penalties of approximately $ 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 with the district court to enforce the imposition of the penalty.
The defendants argued that the FERC complaint was not timely under the applicable five-year limitation period in 28 USC § 2462 (which the parties mutually agreed to extend by one year). The court rejected this argument, ruling that the behavior the FERC penalized had occurred less than six years before the show cause order. The timing of the filing of the action in the district court was irrelevant.
Imputation of employee actions
The company argued that even if the FERC complaint included a manipulation complaint based on the intentions of the merchant, the company should not be held responsible for the actions of the merchant. The company felt that other members of the company did not share the merchant’s intention and the merchant attempted to conceal the purpose of the business activity from legal and compliance staff. The company also noted that the trader was required to seek approval to enter into physical transactions not only because he did not have the authority to enter into physical transactions, but also because the business activity would cause the trader to engage in the trade of two related products. However, the trader did not disclose the true purpose of his proposed business activity, i.e. to avoid losses in his financial positions, when seeking and obtaining the necessary approvals.
The court rejected these arguments and found that the trader’s allegedly manipulative and deceptive actions and objectives could be blamed on the company because the employee was not acting against 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 contains no explicit guidance on when an employee’s actions and intentions are to be imputed as those of the company, the Ninth Circuit held that employers can be held liable for the actions of an employee. their employees under the principles of agency law and the “general credit rule”. In that case, the court ruled that allowing the company to shirk its liability “would flout the Ninth Circuit ruling that principals cannot” avoid secondary liability simply by showing that they are ignoring, intentionally or by negligence ”, which their agents did”. In addition, the court found that the trader in this case was acting within the scope of his employment during the execution of the alleged project and obtained the authorization of the company to exercise the physical trades. The rogue agent exception, or the adverse interest exception, which prevents the employee’s actions or knowledge from being attributed to the principle, did not apply because the trader was not acting solely on his own. own purposes or for the benefit of a third party. Rather, the intention of the trader was to reduce the company’s financial exposure.
Prohibition on increasing a sentence when requesting enforcement by a district court
Finally, the court ruled that the FERC had exceeded its statutory powers by imposing a civil fine of $ 1 million on the trader, which exceeds the fine proposed in the show cause order. Before FERC can impose a civil penalty, it must provide notice of the charges and proposed penalties. In this case, in its show cause order, the FERC notified a proposed fine of $ 800,000 against the merchant. The court ruled that if the FERC seeks to impose a higher penalty, it must provide additional notice and cannot unilaterally increase the penalties after evaluating them.
While this decision is subject to appeal, the order serves as an important reminder of the importance of establishing, implementing and enforcing strong and effective compliance practices. While having a solid paper-based compliance program is a good foundation, effective implementation and enforcement of the compliance program across the organization is essential. Compliance staff should be familiar with the company’s current business activities and strategies in order to effectively monitor and identify potential misconduct. Supervisors need to know who to contact if they have compliance questions or potential issues. All compliance rules and restrictions should be strictly enforced, and a business and its staff should be diligent in tracking and resolving any identified potential issues, misconduct or non-compliance.