Fed. Energy Regulatory Comm'n v. Powhatan Energy Fund, LLC

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FEDERAL ENERGY REGULATORY COMMISSION, Plaintiff, v. POWHATAN ENERGY FUND, LLC, et al., Defendants.

Civil Action No. 3:15cv452

United States District Court, E.D. Virginia, Richmond Division

March 22, 2023

MEMORANDUM OPINION

M Hannah Lauck United Stalls District Judge

This matter comes before the Court on Plaintiff Federal Energy Regulatory Commission's (“FERC” or the “Commission”) Motion for Default Judgment against Defendant Powhatan Energy Fund, LLC (“Powhatan”). (ECF No. 321.) For the reasons that follow, the Court GRANTS the Motion for Default Judgment. (ECF No. 321.)

I. Background^[1]

Powhatan a private investment fund, conducted financial trades through the wholesale electricity market administered by PJM Interconnection, LLC (“PJM”), an organization that operates various electricity markets throughout the Mid-Atlantic. Certain energy trades on the wholesale market qualified market participants to receive a payment, known as a “Marginal Loss Surplus Allocation,” or MLSA, which PJM distributed to customers making certain trades. (ECF No. 93-1 ¶ 2.)

FERC alleges here that, for approximately two months, between June 1,2010 and August 3,2010, Powhatan engaged in a “trading scheme to receive excessive amounts of MLS A payments,” by manipulating “day-ahead” and “real-time” energy trades to engage in what are commonly called “wash trades”: “trades that are pre-arranged to cancel each other out and involve no economic risk.” (ECF No. 93-1 ¶¶ 3, 6.) These types of transactions are commonly called “wash trades.” Powhatan engaged in these transactions because it learned that in certain situations PJM paid out credits that at times exceeded the transaction fees charged by PJM. (ECF No. 93 ¶ 52.) Between June 1, 2010, and August 3, 2010, Powhatan made $3,465,108 from transactions that Powhatan's trader described as “risk-free.” (ECF No. 93 ¶¶ 11, 57.)

FERC became aware of Powhatan's purportedly manipulative activities after PJM received two complaints from market participants about someone “trying to game the system.” (ECF No. 93-1 ¶ 26.) In August 2010, in response to these complaints, PJM submitted a “referral” to the Commission's Office of Enforcement, alerting the Commission to Powhatan's allegedly fraudulent behavior and setting off the investigations that ultimately resulted in this action. (ECF No. 93-1 ¶ 26.) That same month, FERC's Office of Enforcement began investigating Powhatan for engaging in allegedly manipulative and fraudulent energy trading. (ECF No. 93 ¶ 67; ECF No. 93-1 ¶ 28.)

On May 29, 2015, after a contested and adversarial proceeding before FERC, the Office of Enforcement issued an eighty-nine-page Order Assessing Civil Penalties (the “Penalty Order”). (ECF No. 93-1.) In the Penalty Order, the Commission found that Powhatan had violated 6 U.S.C. § 824v(a)^[2] and 18 C.F.R. § lc.2(a)^[3] “which prohibit energy market manipulation, through a scheme to engage in fraudulent Up-To Congestion ([“]UTC[”]) transactions in [P]M's] energy markets to gamer excessive amounts of certain credit payments to transmission customers.” (ECF No. 93-1 ¶ 1.) The Commission also determined that Powhatan “engaged in round-trip UTC transactions[,] not for hedging or arbitraging price spreads[,] but instead to receive large shares of MLS A payments that otherwise would have been allocated to other market participants.” (ECF No. 93-1 ¶ 69.) The Commission ruled that Powhatan's “round-trip UTC trades [were] wash trades, and therefore per se fraudulent and manipulative.” (ECF No. 93-1 ¶ 103.) Citing the Commission's Market Behavior Rules, the Penalty Order stated that wash trades possess “two key elements[.]... [T]he transactions: (1) are pre-arranged to cancel each other out; and (2) involve no economic risk.” (ECF No. 93-1 ¶ 103.)

Because of its findings, and pursuant to 16 U.S.C. § 823b(c),^[4] FERC assessed against Powhatan a civil penalty of $ 16,800,000 and profit disgorgement payments of $3,465,108. (ECF No. 93-1 ¶¶ 174,190.)

After Powhatan failed to pay the penalties within 60 days, pursuant to § 823b(d)(3)(B),^[5]FERC filed the present action on July 31, 2013. (ECF No. 1.) Pursuant to the Court's order, (ECF No. 92), FERC filed an Amended Complaint, (ECF No. 93). The Amended Complaint seeks the Court's affirmance and enforcement of civil penalties assessed in FERC's Penalty Order. (ECF No. 93.)

Thereafter, the Parties engaged in years of discovery and motions practice, and an interlocutory appeal, during which Powhatan actively defended this action. Following the close of expert discovery, Powhatan filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the District of Delaware, Case No. 22-10142-MFW. (ECF No. 302.) Accordingly, on February 22, 2022, the Court stayed the case. (ECF No. 303.)

After the closure of the claims period in the Bankruptcy Proceeding, FERC and Powhatan's Trustee reached an agreement whereby the Trustee would not oppose the stay being lifted and would not oppose or otherwise challenge the entry of a default judgment based on Powhatan's failure to defend the litigation, while FERC would not make any attempt to enforce or otherwise collect any judgment the Court may issue outside of its claim in the Bankruptcy Court. (ECF No. 316-3.) FERC and the Trustee entered a Stipulation to this effect, (ECF No. 316-3), which was accepted by the Bankruptcy Court on February 14, 2023. (ECF No. 316-4.)

Consistent with the terms of the Stipulation, FERC moved the Court to lift the stay. (ECF No. 316.) On March 6, 2023, the Court lifted the stay. (ECF No. 318.) FERC subsequently requested an entry of default from the Clerk of the Court, (ECF No. 319), and on March 7, 2023, the Clerk entered a default, (ECF No. 320). This request for default judgment ensued.

II. Standard of Review

Federal Rule of Civil Procedure 55 governs default judgment. Rule 55(a) provides that “when a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.” Fed.R.Civ.P. 55(a). The party seeking entry of default judgment must then “apply to the court for a default judgment.” Fed.R.Civ.P. 55(b)(2).

A defendant in default “admits the plaintiffs well-pleaded allegations of fact, is concluded on those facts by the judgment, and is barred from contesting on appeal the facts thus established. A default judgment is unassailable on the merits but only so far as it is supported by well-pleaded allegations, assumed to be true.” Nishimatsu Constr. Co., Ltd. v. Houston Nadi Bank, 515 F.2d 1200,1206 (5th Cir. 1975) (internal citations omitted). The clerk's entry of default does not itself warrant the Court's entry of default judgment. See id. “There must be a sufficient basis in the pleadings for the judgment entered.” Id. Therefore, before entry of default judgment, the Court must determine whether the allegations of the complaint support the relief sought. See Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780 (4th Cir. 2001). This is so because “[d]efault is a harsh measure because it ignores the merits,” Bogopa Serv. Corp. v. Shulga, No. 3:08cv365, 2009 WL 1628881, at *3 (W.D. N.C. June 10, 2009), and “the Fourth Circuit has a ‘strong policy that cases be decided on the merits.'” State Employees' Credit Union v. Nat'l Auto Leasing, Inc., No. 2:06cv663,2007 WL 1459301, at *1 (E.D.Va. May 14, 2007). In determining whether allegations are plausible, the reviewing court may draw on context, judicial experience, and common sense. See Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

If the facts alleged in the complaint establish liability, then the court must determine the appropriate amount of damages. Ryan, 253 F.3d at 780-81. The court may make a determination as to the amount of damages without a hearing if the record contains sufficient evidence to support the award. Anderson v. Found, for Advancement, Educ. & Emp't of Am. Indians, 155 F.3d 500, 507 (4th Cir. 1998) (noting that “in some circumstances a district court entering a default judgment may award damages ascertainable from the pleadings without holding a hearing”).

III. Analysis

FERC alleges Powhatan violated the statute and regulation forbidding the use of manipulative behaviors in connection with the purchase or sale of electric energy: 16 U.S.C. § 824v(a)and 18 C.F.R. § lc.2, respectively. The well-pleaded allegations in FERC's Amended Complaint and Penalty Order, deemed admitted as a result of Powhatan's default, meet the requirements for market manipulation

A. Legal Standard: Market Manipulation Claim (16 U.S.C. § 824v(a) and 18 C.F.R. $ lc.2)

Section § 824v(a) of Title 16 of the United States Code provides that:

It shall be unlawful for any entity ... directly or indirectly, to use or employ, in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission [i.e., FERC], any manipulative or deceptive device or contrivance (as those terms are used in [Section 10(b) of the Securities Exchange Act of 1934]), in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of electric ratepayers.

16 U.S.C. § 824v(a). On the basis of this statutory authority, FERC promulgated the Anti-Manipulation Rule. Prohibition of Energy Market Manipulation, Order No. 670,114 FERC ¶ 61,047, 71 Fed.Reg. 4244-03 (2006) (codified at 18 C.F.R. § lc.2). The relevant portion of the Anti-Manipulation Rule states:

It shall be unlawful for any entity, directly or indirectly, in connection with the...