The Fifth Circuit Court of Appeals in New Orleans issued this decision on Friday in the case of former Dynegy trader Michelle Valencia that upholds a controversial law that the Justice Department has used to charge a group of Houston natural gas traders with reporting false information in an alleged scheme to manipulate prices. Here is an earlier post on this particular prosecution.
The Fifth Circuit decision overturns a previous ruling of U.S. District Judge Nancy Atlas of Houston that the law was vague and that someone could be charged in the trader cases with delivering “false and misleading” information even if the person did not know that the data was incorrect.
In January 2003, Ms. Valencia was charged with three counts of false reporting under the Commodity Exchange Act and four counts of wire fraud. The indictment alleges that Valencia fabricated natural gas trades for submission to the publication Inside FERC’s Gas Market Report from November 2000 to February 2001. She pleaded not guilty to the charges.
This past August, a group of former natural gas traders received letters from the U.S. Attorney’s Office in Houston advising them that are targets of a criminal investigation. Then, a couple of months later, four former El Paso traders pleaded guilty to false reporting charges in connection with the probe. Finally, in late November, three more former El Paso workers and a former Reliant trader were charged with false reporting, and Ms. Valencia was also charged with conspiracy and wire fraud charges.
All of these indictments follow a lengthy investigation into alleged efforts to manipulate the trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications such as the Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas. Accordingly, movement in index prices often affects the level of profits traders can generate. In these particular cases, it remains unclear whether the publication actually used the false information provided. Nevertheless, the government contends that it needs only to prove that fake trades were reported and not that they were actually published or affected the markets.
These cases — along with the recent Enron-related Nigerian Barge criminal case — are at the forefront of the controversial but increasingly common tactic of federal prosecutors and state prosecutors such as Eliot Spitzer criminalizing merely questionable business practices to regulate politically unpopular business interests. As noted in this earlier post, this tactic is resulting in absurdly unjust results, such as Martin Frankel’s 25% shorter sentence than that of Jamie Olis.
Moreover, the inflexibility of the federal sentencing guidelines combined with the public animus toward business that the government’s press releases often provoke, defendants in these cases are often faced with the untenable choice of copping a plea for a short prison term or defending themselves under politically-charged circumstances against a possible prison term that would amount to a life sentence.
With the Yukos bankruptcy filing in Houston this past week, much has been made in news reports regarding the Russian government’s politically-motivated and unjust criminal prosecution of former Yukos CEO Mikhail B. Khodorkovsky. What is not as widely reported is that the current United States Justice Department policy of pursuing questionable criminal prosecutions of politically unpopular businesspersons is not much different.