(Bloomberg) – An electricity trader who was under investigation over his role in a massive default on America’s largest electricity grid committed suicide in January, lawyers for his estate said in a report. legal brief claiming aggressive federal regulators led him to his death.
Andrew Kittell, co-founder of GreenHat Energy LLC, jumped off the San Diego-Coronado Bridge on January 6, a day after Federal Energy Regulatory Commission investigators informed him they were moving forward with allegations of fraud that could lead to criminal charges. , according to a file made public Tuesday.
Kittell, 50, was already under financial pressure from GreenHat’s 2018 default and millions of legal bills, lawyers for his estate said. FERC’s investigative tactics – which included costly requests for documents and a proposed penalty that exceeded Kittell’s net worth by millions of dollars – were more than he could afford, lawyers said.
“This case resulted in an innocent man being killed,” lawyers for Skadden, Arps, Slate, Meagher & Flom LLC wrote in response to FERC’s allegations against GreenHat in an order issued by the commission in May.
FERC enforcement staff have proposed that GreenHat and its partners, including Kittell’s estate, reimburse approximately $ 13 million in “unfair profits” and $ 229 million in penalties. In documents released Tuesday, lawyers for Kittell’s estate argued that there had been no fraud and that Kittell’s widow and her two children should not be held responsible.
A spokeswoman for FERC declined to comment on the matter.
Allegation of “foreclosure”
GreenHat defaulted on June 12, 2018, leaving behind approximately $ 180 million in losses in a so-called financial transportation rights marketplace operated by PJM Interconnection LLC. These power derivatives markets, which are regulated by the FERC, are designed to allow electricity providers to guard against spikes in electricity delivery costs caused by power line congestion. Under rules set by PJM, which operates the power grid of more than 65 million people in 13 eastern states, these losses were paid for by other traders and taxpayers.
In May, FERC officials alleged that Kittell and his two GreenHat partners, John Bartholomew and Kevin Ziegenhorn, had sought to take advantage of PJM’s policies, which demanded a minimum guarantee from traders. Federal regulators said GreenHat defrauded PJM by implementing a so-called “bust-out” plan: they planned to charge a huge bill that the company had no intention of paying, then default and to go away. George Murphy, a lawyer representing Bartholomew and Ziegenhorn, declined to comment on Wednesday.
Kittell estate attorneys John Estes and William Barksdale wrote that there was no fraudulent scheme; GreenHat expected to make a profit and made its trading decisions in good faith, based on PJM’s own forecasting model, they said.
“GreenHat’s strategy has proven to be wrong. But that doesn’t make it fraudulent, ”they wrote.
A spokeswoman for PJM declined to comment on Wednesday.
The GreenHat default, which came after other traders publicly warned PJM for more than a year about the company’s portfolio, has led to widespread criticism of the network operator’s oversight and a reshuffle of its management.
Prior to co-founding GreenHat, Kittell and Bartholomew worked in an electricity trading unit of JPMorgan Chase and Co., where they were named in a 2013 FERC settlement that alleged manipulative activity in the markets of California electricity. JPMorgan Ventures Energy Corp. paid $ 410 million to settle the case – a fine of $ 285 million and $ 125 million in “unfair profits” returned, without an admission of wrongdoing. Lawyers for Kittell and Bartholomew said at the time that the traders had done nothing that broke the law.
When GreenHat subsequently applied to trade in the PJM market in 2014, the network operator – unlike other commodities markets – did not check the backgrounds of financial traders before allowing them to participate. GreenHat’s request was approved without even a Google search, according to an independent consultant’s report on the case.
Since the default, PJM has started mandatory background checks, tightened its credit and guarantee policies, and hired a risk manager. The two main executives of PJM at the time both left the company shortly after the failure of GreenHat.
FERC investigators alleged that GreenHat exploited PJM’s lenient credit policies at the time to amass a huge portfolio of contracts in its congestion market, even though the company had deposited less than $ 1 million. warranty. GreenHat sold a small number of its profitable contracts to other traders for cash up front and transferred more than $ 13 million in proceeds to partners’ personal bank accounts, staff alleged. application of FERC.
Default in 2018
Most of GreenHat’s contracts lost money, however. When these positions started to settle, the company was unable to cover its growing losses; in June 2018, it failed. While FERC staff alleged that GreenHat’s strategy included a plan to abandon its obligations, attorneys for Kittell’s estate said the default was unintentional.
Before GreenHat started trading, it tested its strategy using historical PJM congestion data and found it would be profitable, the lawyers said. In 2018, PJM began using more sophisticated market simulation software to forecast congestion, and GreenHat has also incorporated this data into its strategy, according to the estate attorneys file.
But both forecasting methods proved unreliable, the lawyers said, and led to financial transmission rights, or FTR, swaps that increased the size of GreenHat’s losses.
“How can it be fraudulent for GreenHat to buy and sell FTRs based on its expectations for future profit and loss when GreenHat’s expectations followed PJM’s own expectations for future profit and loss of the same FTRs ? ” they wrote.
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