FTC Market Manipulation Rule (With Oil Pipelines) - ABA YLD 101 Practice Series

By Armita Cohen, Daniel Poynor, and William Vigdor

On August 6, 2009, the Federal Trade Commission ("FTC") issued a final rule prohibiting any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline or petroleum distillates at wholesale, from (a) knowingly engaging in any act, practice or course of business - including the making of any untrue statement of material fact - that operates or would operate as a fraud or deceit upon any person; or (b) intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product (the "Final Rule"). 1 The Final Rule will become effective on November 4, 2009.

The first part of the Final Rule, Section 317.3(a), prohibits any person from knowingly engaging in fraudulent conduct or making fraudulent statements in the context of a wholesale purchase or sale of petroleum products. Section 317.2(c) of the Final Rule defines "knowingly" to mean "that the person knew or must have known that his or her conduct was fraudulent or deceptive." The FTC has advised that at a minimum, a violation of Section 317.3(a) requires a showing of "extreme ecklessness." 2 According to the FTC, extreme recklessness "requires a showing that an actor knew or must have known that his conduct created a danger of misleading buyers or sellers." 3 Significantly, the Final Rule Statement of Base and Purpose (the "SBP") makes clear that the knowledge of one individual within an organization will not be imputed to other persons in the organization. 4 Notably, the omission of a material fact is not sufficient to find a violation of Section 317(a). 5 In addition, Section 317.3(a) contains no requirement to show a market effect.

The second part of the Final Rule, Section 317.3(b), prohibits the intentional omission of a material fact if the omission would render a previously made statement misleading under the circumstances and distorts or is likely to distort market conditions for a covered product. The
SBP states that the level of scienter required for a Section 317.3(b) violation is higher than that required to prove a violation for Section 317.3(a). Specifically, a violation of this provision requires that the actor intentionally omitted material information from a statement with the intent of rendering the statement misleading. The SBP emphasizes that a violation requires a showing that the intentional omission "distorts or is likely to distort market conditions ... ." Nevertheless, the FTC has stated that it does not intend to require a showing that the market was actually distorted. Lastly, the FTC concluded that there is no requirement to disclose information; however once information is provided, a participant cannot intentionally fail to provide information that makes the disclosure misleading. 6

In comments filed with the FTC, the Association of Oil Pipe Lines argued that oil pipelines regulated by the Federal Energy Regulatory Commission are exempt from FTC jurisdiction under the Federal Trade Commission Act and that the FTC consequently lacks authority to apply the new rule to such pipelines. The FTC acknowledged that the scope of the regulation "is coextensive with the reach of the FTC Act." 7 The FTC also agreed that "[c]ertain pipeline companies or their activities may fall outside the coverage of the FTC Act to the extent they are acting as common carriers." 8 The FTC nevertheless declined to carve out an explicit safe harbor for oil pipelines, claiming that "pipeline companies and their owners or affiliates often are involved in multiple aspects of the petroleum industry - including the purchase or sale of petroleum products, and the provision of transportation services - and they may engage in conduct in connection with wholesale petroleum markets [covered by the rule]." 9 The FTC therefore stated it reserved the right to "assess on a case-by-case basis whether any particular person - or any conduct at issue - falls outside the scope of the final Rule." 10

1 Final Rule Statement of Base and Purpose (the "SBP"), available at http://ftc.gov/os/2009/08/P082900mmr_finalrule.pdf
2 The Commission explicitly adopted the "extreme recklessness" standard established by the Seventh Circuit. SBP, at 25-26, 44-45 (relying on Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) (defining reckless conduct as a "highly unreasonable [act or] omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.") and SEC v. Lyttle, 538 F.3d 601 (7th Cir. 2008) (reaffirming the extreme recklessness standard set forth in Sundstrand) and SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992) (establishing "extreme recklessness" as the standard applicable to SEC Rule 10b-5)).
3 SBP at 26.
4 SBP at 44 n.128.
5 SBP at 42.
6 SBP at 51.
7 SBP at 21.
8 Id.
9 Id.
10 Id


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About the Author

Daniel J. Poynor is a partner at Steptoe & Johnson LLP in their Washington, DC office. You can reach him at dpoynor@steptoe.com . William Vigdor is a partner at Vinson & Elkins LLP in their Washington, DC office. Armita Cohen is an associate at Vinson & Elkins in the New York City office. You can reach William at wvigdor@velaw.com and Armita at acohen@velaw.com . This article is taken from a portion of a report they composed for the Section of Public Utility, Communications, and Transportation Law’s Oil Pipelines Committee. You can read the full report when you join the Section.

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