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Powhatan gives up fight with FERC over 2010 trades, files for bankruptcy


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Powhatan gives up fight with FERC over 2010 trades, files for bankruptcy

Powhatan Energy Fund LLC decided to end its fight with the Federal Energy Regulatory Commission over alleged market manipulation and is declaring bankruptcy.

"Powhatan will file for Chapter 7 bankruptcy today because it does not have enough money to continue to litigate with the FERC over simple spread trades that took place almost 12 years ago. We've already paid our attorneys many millions of dollars and simply do not have another million dollars to continue to defend ourselves from FERC's meritless assault," Powhatan co-founder Kevin Gates announced in a Feb. 17 email.

FERC said it declines to comment on pending litigation.

In May 2015, FERC directed Powhatan, energy trader Houlian Chen and two funds created by Chen to pay penalties for allegedly manipulating the PJM Interconnection LLC's markets during two months in 2010. The commission ordered Powhatan to pay a $16.8 million fine and disgorge $3.5 million in unlawful profits, plus interest.

After Powhatan refused to pay the FERC penalties assessed, the agency asked a federal district court to affirm its decision and enforce the penalties. The case has been in litigation ever since.

Kevin and Rich Gates, the two brothers who owned Powhatan, have vigorously defended themselves for years. They launched a website dedicated to their defense and reached out to reporters long before FERC staff's nonpublic investigation officially became public in August 2014.

On the website, the Gates brothers disclosed legal documents tied to the case. They also posted videos, affidavits and position statements from 12 experts — including a former director of FERC's office of enforcement and a Harvard economics professor — to support their position that the allegations are legally unfounded.

FERC found that Chen, trading on behalf of Powhatan, CU Fund and HEEP Fund, developed a scheme to take advantage of a rebate PJM offers market participants that use its transmission lines when it collects excess line-loss payments. The commission determined that Chen engaged in a high volume of offsetting up-to congestion, or UTC, transactions for the sole purpose of receiving transmission loss credits, or TLCs, instead of pursuing legitimate arbitrage opportunities.

The round-trip UTC transactions were wash trades, FERC reasoned. Ever since the 2000-2001 energy crisis, the agency has made clear that trades that are prearranged to cancel each other out and involve no economic risk are wash trades and inherently fraudulent.