FTC issues final rule prohibiting oil marketplace manipulation

The Federal Trade Commission issued a final rule prohibiting oil marketplace manipulation, effective Nov. 4, that will bar fraud or deceit in wholesale petroleum markets, and omissions of material information that are likely to distort those markets.

The Federal Trade Commission issued a final rule prohibiting oil marketplace manipulation, effective Nov. 4. It will bar fraud or deceit in wholesale petroleum markets, and omissions of material information that are likely to distort those markets, the FTC said.

It said that it issued the rule under authority it received in the 2007 Energy Independence and Security Act. “This new rule will allow us to crack down on fraud and manipulation that can drive up prices at the pump,” FTC Chairman Jon Leibowitz said on Aug. 6 as the final rule was issued. “We will police the oil markets, and if we find companies that are manipulating the markets, we will go after them.”

US Sen. Maria A. Cantwell (D-Wash.), who wrote the EISA provision authorizing the FTC’s action, called it “an historic first. The US government now has some of the same abilities to police oil markets as it has in electricity, natural gas, and securities markets. We now have the tools to prosecute bad actors who manipulate wholesale oil and gas markets.”

US Rep. John B. Larson (D-Conn.), who also has pushed for tougher federal regulation of alleged oil price gouging, was not able to comment because he was recovering from heart valve replacement surgery earlier in the week.

The American Petroleum Institute, in a statement, warned that “the new rule could lead to a less competitive market that would ultimately not be in the best interest of American consumers of gasoline, diesel and other petroleum products. It could discourage companies from providing information to the marketplace.”

In its announcement, the FTC said that the final rule retained the anti-fraud approach of the April 2009 revised proposed rule. It prohibits fraudulent or deceptive conduct such as false public announcements of planned pricing or output decisions, false statistical or data reporting, and wash sales intended to disguise the actual liquidity of a market or the price of a particular product. The final rule also prohibits material omissions from a statement that, although true, is misleading under the circumstances.

Strong penalty

Violators face civil penalties of up to $1 million per day per violation. In its statement, API noted that this is nearly 100 times greater than the $11,000 penalty per violation under the FTC Act. “This clearly is an overreaction by the FTC when strong deterrents already are in place,” it said.

Cantwell said that she was particularly pleased that when the FTC faced a choice between tougher or more permissive language in its rule, it opted for the former. For example, she said that the commission adopted a federal court’s application of “extreme recklessness” under US Securities and Exchange Commission law, allowing the FTC to act against reckless market behavior without having to prove market manipulation intent. The new rule also lets the FTC act whether or not a manipulative practice actually affects oil prices, she said.

“Oil supplies are near 20-year highs and demand for oil is at a 10- year low, so why have gasoline prices gone up $1/gal since the beginning of the year?” she said. “With this new rulemaking, the FTC has established a clear, bright line to distinguish healthy market practices from illegal manipulation which will help restore consumer confidence in the fairness of prices at the pump.”

The three-member FTC approved the final rule by two votes to one. “The current rule, as modified, strikes the right balance; it gives the commission the authority to stop fraudulent conduct in energy markets but does not undermine appropriate business activity,” said Leibowitz, who supported it.

Commissioner William E. Kovacic, who voted against it, said in a dissenting statement that the rule was flawed because it does not require that an alleged market manipulation violation be intentional and either actually or likely distort markets. Its omissions component also potentially could force oil firms doing business with competitors to either disclose more proprietary information or limit investments in requiring potentially relevant marketplace information “and to reduce the number of encounters that could be examined through the lens of the commission’s final rule. Neither alternative is good for consumers,” he continued.

‘An immense stake’

“When implemented, the final rule will cover a vast number of routine transactions, literally thousands daily, in petroleum products. These transactions are the indispensable means by which gasoline, diesel fuel, and jet fuel move from refineries to end users. Society has an immense stake in avoiding unnecessary disruption to these undertakings,” Kovacic said.

Commissioner J. Thomas Rosch, who voted for the final rule, said in a statement that he shares Kovacic’s misgivings concerning proof of an alleged violator’s intent and whether the conduct in question adversely affects the market. “The net result is that the rule may chill oil companies from, among other things, voluntarily providing their data to independent data-reporting firms, as they do now, for fear that they may be held liable for an inadvertent omission. That would be unfortunate because at least in some circumstances, having abundant data of that sort can be pro-competitive. It would be especially unfortunate if the rule were interpreted or applied so as to permit follow-on private actions,” he said.

“All of this said, however, Congress apparently intended that the commission fashion a rule that goes beyond the Sherman Act and that resembles SEC Rule 10b-5. In exercising prosecutorial discretion, however, I, for one, intend to keep these misgivings in mind,” Rosch said.

Liebowitz acknowledged that oil industry trade associations have expressed concerns about the new rule. “They argue that it will chill business conduct in the service of stopping something that they don’t believe is happening in the first place. These industry advocates have proposed several specific changes that would weaken the rule, requiring a higher scienter standard under the general liability provision, requiring an explicit market distortion element for the entire rule, and entirely eliminating liability for omissions,” he said.

Opposes suggestions

The FTC chairman said that he opposed such proposals because they would effectively neuter the rule and undermine congressional intent.

“For example, the proposed changes would make it harder, if not impossible, to prosecute those who manipulate the market by intentionally omitting critical information from their communications, even when those omissions distort market conditions and raise gasoline prices for all Americans,” Leibowitz said. “Such omissions can be every bit as deceptive as any other type of fraudulent conduct, so it is crucial that we have the ability to prevent and prosecute them. A rule that does not allow us to go after such conduct would limit our ability to protect consumers.”

He said that the rule, as proposed, already takes legitimate oil industry concerns into account. “In fact, we responded directly to those concerns by modifying the more expansive proposal in the draft rule we released last summer, originally based on SEC Rule 10b-5, to accommodate industry worries,” he said.

“It is only the fact that [gasoline] prices were over $4/gal a year ago that keeps us from thinking that prices are too high today. If we water down this rule as suggested by the industry, it would hinder our ability to stop manipulation of wholesale petroleum markets. That would undermine the intent of Congress, and undermine the efforts of the commission to protect consumers and do our job,” Leibowitz maintained.

In its statement, API noted that earlier, extensive FTC investigations of the petroleum industry did not uncover evidence that market manipulation distorted markets or harmed consumers. “In fact, these investigations found that prices are primarily determined by supply and demand fundamentals. Last summer’s $4 a gallon gasoline price was essentially the result of higher costs to produce gasoline. Higher crude prices as a result of a tight global supply and demand situation led to higher prices at the pump,” it said.

Contact Nick Snow atnicks@pennwell.com

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