Canaries in the Coal Mine: Facts from Securities Fraud Private Civil Actions Can Identify Intent to Manipulate Energy Markets

Article excerpt


Congress modeled its Energy Policy Act of 2005 market manipulation provisions on longstanding federal securities law. The EPAct 2005 specifically declared unlawful, for energy markets, any manipulative or deceptive device or contrivance, as those terms are used in federal securities law for securities markets. The FERC and energy industry participants thus can use analogous securities industry precedents as a guide in energy industry litigations. But, in the words of an anonymous FERC practitioner: "What is [manipulation]? How do we know it?" Approaching that pre-eminent question from one angle, market manipulation cannot be proved without evidence of intent, or scienter. Besides the Securities and Exchange Commission's own cases on intent, many additional private party, civil class action federal court cases also analyze securities fraud intent. The U.S. Supreme Court views those private civil actions as an indispensable tool to deter fraud. Analogous facts from those federal court decisions work as do canaries in coal mines,1 helping to identify scienter or its absence in energy industry market manipulation prosecutions, for which the FERC has substantial new penalty powers.


The Energy Policy Act of 2005 (EPAct 2005)2 requires the Federal Energy Regulatory Commission (FERC) to prevent energy industry market manipulation and fraud through such enforcement rules and regulations as that agency prescribes. The FERC has concluded that its energy industry enforcement actions must show a person's or an entity's intent, or scienter, to manipulate or defraud.3 The FERC, its Office of Enforcement (OE), and other energy industry participants therefore should be able to identify scienter.*

Congress expressly patterned EP Act 2005 prohibitions of manipulation and fraud in U.S. energy markets on securities law prohibitions of manipulation and fraud in U.S. securities markets. The FERC declares that its civil prosecutions of energy market manipulation will be guided by U.S. securities and Exchange Commission (SEC) civil enforcement decisions, including the law of alleged manipulator intent or scienter. Scienter is to apply to FERC enforcement just as scienter applies to sec enforcement.5

Besides the SEC's own cases, to help identify scienter or its absence FERC practitioners should employ the many federal court securities law cases with facts showing or failing to show scienter. Federal courts recognize and adjudicate civil class actions by private parties complaining of violations of federal, antifraud securities law, and treat such suits as essential, necessary supplements to SEC civil enforcement and U.S. Department of Justice (DOJ) criminal prosecution.6 Private securities litigation functions as an indispensable tool to deter fraud.7 In fact, the U.S. Supreme Court first applied the scienter requirement to securities law enforcement in a private civil action, not an enforcement by the SEC itself.8

Using a heightened pleading standard to promote meritorious private party actions enforcing securities law, the Private securities Litigation Reform Act of 1995 (PSLRA) amended the Exchange Act to require complainants to show with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.9 The PSLRA, however, does not change the ultimate standard of proof to be met or the kind of evidence to be adduced for scienter under Exchange Act § 10(b) and SEC Rule 10b-5.10 PSLRA federal court decisions thus apply the same scienter standard of proof, and require the same kind of scienter evidence to be adduced under Exchange Act § 10(b) and SEC Rule 10b-5, as SEC decisions do.11

Like canaries in coal mines, facts from securities law cases, including the very large body of PSLRA cases, can indicate the presence or absence of intent for energy industry prosecutions. PSLRA decisions set out in section IV below teach, among other things, that scienter is not alleged adequately without facts either of motive and opportunity to manipulate markets, or of reckless behavior. …