by T. GormanPosted on Posted in SECActions

In the 1980s the SEC and the CFTC had turf battles that ultimately ended with an accord between the two agencies. More recently the CFTC and the Federal Energy Regulatory Commission have spared over which agency has jurisdiction when futures contracts are used as part of a manipulative scheme which alters the price of physicals in the energy markets. The dispute has left market participants caught in the middle between two federal regulatory agencies in a manner which is reminiscent of the SEC – CFTC battles of the 1980s. This time the D. C. Circuit has stepped in to resolve the matter. Hunter v. Federal Energy Regulatory Commission, No. 11-14777 (D.C. Cir. Decided March 15, 2013).

In Hunter the CFTC and FERC claimed to have jurisdiction over the activities of Brian Hunter, an employee of hedge fund Amaranth. Mr. Hunter traded natural gas futures contracts on the New York Mercantile Exchange or NYMEX. In April 2006 he essentially shorted the price of natural gas. His portfolio had been constructed to benefit from a decline in the price. Thus in February, March and April he sold significant number of futures contracts. The volume of his trading reduced the settlement price for natural gas, a benefit for Mr. Hunter.

In July 2007 the CFTC filed an enforcement action against Mr. Hunter, alleging manipulation in violation of Section 13(a)(2) of the Commodity Exchange Act. FERC followed, filing an administrative proceeding against Mr. Hunter alleging manipulation in violation of Section 4A of the Natural Gas Act. Eventually FERC found against Mr. Hunter, imposing a $30 million fine. This appeal followed. The CFTC intervened in support of Mr. Hunter on his claim that FERC lacks jurisdiction.

The Court began its analysis by concluding that deference is not due either agency here. While Chevron deference is typically due an agency interpreting its statute, where two governmental agencies have competing jurisdictional claims, the D.C. Circuit has never deferred.

Turning to Section 2(a)(1)(A) of the CEA which governs the jurisdiction of the CFTC, the Court found the statutory language compelling. In part the Section provides that “The Commission shall have exclusive jurisdiction . . . with respect to accounts, agreements . . . and transactions involving contracts of sale of a commodity for future delivery . . .” (emphasis added).

In contrast, the Natural Gas Act makes it unlawful to manipulate the price of natural gas and vests jurisdiction over such claims with FERC. In Section 23 of the Act, however, Congress directed that FERC and the CFTC enter into a memorandum of understanding about information sharing. That Section further provides that it has no effect on the CFTC’s exclusive jurisdiction.” In this case Mr. Hunter’s alleged scheme focused on trading natural gas futures contracts with an intent to manipulate. Thus the CEA “by its plain terms” vests the CFTC with exclusive jurisdiction over the manipulation of natural gas futures contracts.

The Court rejected the contrary arguments of FERC. Its claim that because the manipulation of one market impacted another both agencies have an enforcement role ignores the plain language of the statute. Indeed, acceptance of such a proposition would effectively eviscerate the exclusive jurisdictional grant to the CFTC.

Equally unpersuasive is FERC’s claim that the Energy Policy Act constitutes an implicit repeal of the CEA’s exclusive jurisdiction provision. Not only are such claims disfavored the Court noted, but more importantly, the contention cannot be sustained absent an express contradiction of the original Act in the subsequent legislation. That is not the case here. Accordingly, the Court granted the petition, ruling in favor of Mr. Hunter and the CFTC.

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by T. GormanPosted on Posted in SECActions

Craig Berkman, a former Oregon political figure and repeat securities law violation was charged by the U.S. Attorney’s Office in Manhattan and the SEC with operating an investment fund fraud. Investors were solicited with fraudulent claims about purchasing pre-IPO interests in popular stocks such as Facebook, Inc. In reality their money was never invested in shares of that company. It was misappropriated by Mr. Berkman.

Beginning in late 2010 told investors that Ventures Trust II, LLC, an entity Mr. Berkman controlled, owned shares of Facebook. At the time Facebook had yet to conduct its IPO. In fact the firm never owned an interest in Facebook securities with the sole exception of a small interest in a fund which did own securities of the company. That interest was revoked, however, when Mr. Berkman was caught using a forged letter purporting to be from the law firm that represented the fund which actually did own the shares to help sell interest in Ventures Trust II.

Following Facebook’s IPO investors attempted to redeem their shares in the Trust. A lawyer acting on behalf of Ventures Trust wrote to the investors, insisting that it owned the shares. The representation was false. Mr. Berkman, and others assisting him, raised over $5.5 million from over 50 investors through this scheme.

A second scheme centered on selling interests in Face Off Acquisitions LLC. Potential investors were told that Face Off was about to acquire an entity which owned more than 1 million Facebook shares. The acquisition would cost between $40 and $50 million investors were told. They were also informed that a billionaire had already committed to invest in Face Off. All of these representations were false. Mr. Berkman raised about $2.5 million from 14 investors through this scheme. He misappropriated much of the money raised in each scheme.

Mr. Berkman served from 1989 to 1993 as the chairman of the Oregon Republican Party. In 1994 he unsuccessfully ran for governor. In 2001the Oregon Division of Finance and Securities issued a cease and desist order against him for offering and selling convertible promissory notes without a brokerage license to Oregon residents from 1983 through 1997. In June 2008 an Oregon jury found him liable for breach of fiduciary duty, conversion of investor funds and making misrepresentations to investors. A $28 million judgment was entered against him. Subsequently, in a Florida bankruptcy proceeding, he had three judgments entered against him which were non-dischargeable totaling about $15 million. Those were eventually paid with the final installments coming from the investor funds in this case.

A criminal complaint in New York charges Mr. Berkman with two counts of securities fraud and two counts of wire fraud. He was arrested in Florida. The SEC brought an administrative proceeding against Mr. Berkman, John Kern, an attorney who facilitated the schemes, and twelve entities he utilized. The Order for Proceedings alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). In the Matter of Craig Berkman, Adm. Proc. File No. 3-15249 (March 19, 2013).

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