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Judge in $487.9M Barclays case agrees 'de novo' review is not what FERC thinks

Another federal district judge has landed the latest in a long string of blows to FERC's attempt to limit the scope of court reviews of the agency's market manipulation findings.

The case at issue this time is a big one: FERC's attempt to penalize Barclays Bank PLC and several of its traders a collective $487.9 million for manipulating physical and financial energy markets in the West between November 2006 and December 2008.

After Barclays and the employees refused to pay the penalties, FERC in October 2013 asked the U.S. District Court for the Eastern District of California to affirm the agency's findings and enforce the penalties.

In doing so, the commission asked the court to agree with its interpretation of a Federal Power Act provision specifying that a court should review a FERC enforcement action "de novo" when the target of that action refuses to pay the penalty imposed by the agency. FERC has insisted that the court's role is simply to review the evidence and arguments the agency developed as part of the “administrative record" and not to conduct a fully contested hearing.

However, several federal district court judges already have shot down FERC's argument in other cases in which the targets of commission investigations have refused to pay their penalties, starting with a Massachusetts judge overseeing a proceeding involving a FERC enforcement case targeting Maxim Power Corp. Those judges ruled that their de novo reviews of FERC's cases will be conducted according to the same procedures applicable to any ordinary civil action. As such, the defendants will be allowed to assert their due process rights, including by seeking discovery from witnesses interviewed by FERC or presenting their own witnesses during the civil trial.

Citing those previous rulings and the "structure of the statute," District Court Judge Troy Nunley reached the same conclusion March 28 with respect to the Barclays case.

In doing so, the judge rejected FERC's claims that the defendants are asking for a "do over" of the administrative case the agency built against them, and instead found that they are only asking to contest the case before a neutral arbiter.

The defendants "have never had the opportunity to conduct discovery, could not compel witnesses to give testimony, had no opportunity to cross-examine witnesses, and had no opportunity to make their case before a neutral decision-maker," Nunley recounted. "Defendants are asking for the opportunity to do those things for the first time here, in this court."

The language of the FPA is vague regarding the scope of a court's de novo review. Under the statute, a target of a FERC investigation can either seek a hearing before a FERC administrative law judge or a court proceeding before a federal district court judge. If it chooses the district court option, the court has the authority "to review de novo the law and the facts involved" in the case as well as the penalties FERC seeks to impose.

Nunley noted that defendants who elect the administrative law judge route may conduct full discovery and "are not saddled" by the administrative record compiled by FERC. "FERC offers no coherent explanation for why the statute would authorize full discovery before an ALJ but silently deny it if defendants chose to go to district court," the judge wrote. "Nothing in the wording or structure of the statute warrants this incongruous result."

Moreover, the judge stressed that whether a defendant chooses the hearing or the court review option, that election takes place after the full administrative record has been compiled. Yet the election to go the hearing route provides for full proceedings, while FERC argues that the same should not be true in a court review. Such an interpretation is not sensible, the judge maintained. He also noted that FERC apparently never warned defendants that choosing court review would waive the discovery they are entitled to if they elect for a hearing.

And while FERC argued that defendants had the opportunity to submit additional factual affidavits to the commission from any witnesses they wished FERC to consider, the judge said that opportunity was inadequate. Defendants have never had the power to compel any witness to give an affidavit or a deposition or to submit to cross-examination, the court noted.

"Therefore, even if defendants knew of witnesses whose testimony would convincingly refute any market manipulation claims, defendants could not compel those witnesses to submit to a deposition or to produce the evidence that would convince FERC that the charges had no merit," the judge stated.

Finally, among other things, Nunley found that nothing in the wording of the statute "gives any hint that such divergent results would obtain depending on whether the assessed party chose the ALJ route or the district court route."

"When Congress intends to limit de novo 'review' to the administrative record, it knows how to do so. Congress did not do so here," the judge said.

Bill Scherman, a former FERC general counsel who has been highly critical of FERC's enforcement procedures, applauded Nunley's ruling.

"Every court has now rejected FERC's cramped and unreasonable reading of the de novo review language in the FPA. Yet parties have been forced to spend millions of dollars vindicating their basic due process rights. That money would have been far better spent on building new infrastructure and improving energy markets. It's time for FERC to formally abandon its ill-advised position," Scherman said in an email. FERC v. Barclays Bank et al. (No. 2:13-cv-2093)