Blumenthal Calls for Investigation into Potential Criminal Activity in Oil Markets

(Washington, DC) – Senator Richard Blumenthal today wrote to Attorney General Eric Holder at the Department of Justice, as well as the heads of the Federal Trade Commission, the Commodity Futures Trading Commission, and the Federal Energy Regulatory Commission to request that their respective agencies investigate various aspects of oil speculation to determine whether potentially illegal practices might be artificially inflating oil and gas prices, driving up gas prices for families and businesses in Connecticut and across the country.

“With gas prices surging to nearly $4 per gallon across the country, and to $4.26 in Connecticut, it is vital that the government use every tool at its disposal to protect the American people from pain at the pump,” Blumenthal writes in the letter. “There are many reasons for high gas prices, and no one effort to protect consumers is guaranteed to solve the problem. But the vigorous exercise of these investigative and regulatory authorities will send a signal to speculators that excessive manipulation, collusion or fraud will not be tolerated, and will hopefully serve as a deterrent to further activity to artificially inflate gas prices. Even announcing such investigations and beginning to issue subpoenas could curb some of the worst speculative activity that may well be underway at this very moment.”

Blumenthal has previously called for strong investigatory action involving subpoenas and compulsory process to uncover potentially illegal practices. He reiterated his call for an investigation and wrote to the four agency heads to ensure that that various aspects of oil speculation falling under their purview would be addressed, and to obtain a comprehensive picture of any potential wrongdoing.

The text of the letter follows:

May 4, 2011

The Honorable Eric Holder
Attorney General
U.S. Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530 

The Honorable Jonathan Leibowitz
Chairman
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580

The Honorable Gary Gensler
Chairman
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st St NW
Washington D.C. 20581

The Honorable Jon Wellinghoff
Chairman
Federal Energy Regulatory Commission
888 First St NE
Washington, DC 20426

Dear Attorney General Holder, Chairman Leibowitz, Chairman Gensler, and Chairman Wellinghoff:

            With gas prices surging to nearly $4 per gallon across the country, and to $4.26 in Connecticut, it is vital that the government use every tool at its disposal to protect the American people from pain at the pump. In light of data cited by Commodity Futures Trading Commission Commissioner Bart Chilton indicating that speculators have increased their positions in energy markets by 64% since June 2008 to their highest levels on record, I write to call on your respective agencies to exercise a variety of enforcement authorities to thoroughly investigate potential illegal activity in the oil futures markets and to responsibly regulate speculative activity.

            The Department of Justice (“DOJ”) has wide-ranging criminal and civil authority to investigate and prosecute fraud and price manipulation. I applaud the decision to create an Oil and Gas Price Fraud Working Group to look for evidence of oil and gas price manipulation, fraud, or collusion. These recent steps by DOJ to prioritize its efforts in this area as it relates to surging gas prices are important, but I believe we must go further. With speculation in the energy markets at its highest levels on record, it is vital that prosecutors in DOJ’s Fraud Section and at the U.S. Attorneys’ offices nationwide begin immediately investigating potential ongoing commodities fraud.

            The Federal Trade Commission (“FTC”) has the authority to police anticompetitive behavior and to protect consumers from unfair market manipulation across a number of different industries. Recognizing the periodic, ongoing threat to consumers and the economy from artificially high gas prices, Congress expanded the agency’s authority in 2007 to fight fraudulent and manipulative conduct in oil markets. The FTC’s Petroleum Market Manipulation Rule, issued in 2009 pursuant to this new authority, allows the agency to investigate and seek penalties where manipulative or deceptive conduct occurs “in connection with” the purchase or sale of oil in the wholesale markets. This includes conduct in energy futures markets, to the extent that there is a “sufficient nexus between the prohibited conduct and the markets for these products.” The FTC should aggressively exercise the agency’s authority under the Petroleum Market Manipulation Rule to open immediate investigations into fraud and manipulation in these markets.

            While the authority of the Federal Energy Regulatory Commission (“FERC”) does not extend to oversight of gas prices, in the wake of the Enron market manipulation debacle, Congress gave FERC authority to investigate and litigate energy market manipulation activities affecting wholesale energy markets within the agency’s jurisdiction. The electricity and natural gas markets that FERC oversees may also be affected by manipulation of underlying wholesale petroleum prices. Given the current crisis, FERC should think creatively about how to use its investigative and enforcement authority to police illegal activity in oil futures markets to the extent that such speculative activities are also affecting electricity prices.

            Finally, the Commodity Futures Trading Commission (“CFTC”) is authorized to police commodity speculation in a variety of markets. The agency received new authority under last year’s Dodd-Frank financial reform legislation to limit excessive speculation and fix market failures in petroleum markets. This authority includes the ability to establish speculative position limits and the authority to impose margin requirements to protect the financial integrity of the energy futures trading markets. The agency’s efforts at implementing this authority are not proceeding fast enough – the CTFC should act swiftly to rein in dangerous activity in this market – but regardless of this rule, the CFTC should use its existing enforcement authority in coordination with DOJ, FTC and FERC to aggressively pursue illegal speculative activity in the oil futures markets.

There are many reasons for high gas prices, and no one effort to protect consumers is guaranteed to solve the problem. But the vigorous exercise of these investigative and regulatory authorities will send a signal to speculators that excessive manipulation, collusion or fraud will not be tolerated, and will hopefully serve as a deterrent to further activity to artificially inflate gas prices. Even announcing such investigations and beginning to issue subpoenas could curb some of the worst speculative activity that may well be underway at this very moment. As key officials with the authority to undertake these actions, your efforts in this area will be critical to reducing Americans’ pain at the pump this summer.

Thank you for your consideration.

/s/

_____________________________

Richard Blumenthal

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