FERC Enforcement Drove Trader to Suicide, Lawyers Say in Filing

(Bloomberg) -- A power trader who was under investigation over his role in a massive default on the largest U.S. electric grid took his own life in January, lawyers for his estate said in a legal filing that claims aggressive federal regulators drove him to his death.

Andrew Kittell, co-founder of GreenHat Energy LLC, jumped off the San Diego-Coronado Bridge on Jan. 6, one day after investigators for the Federal Energy Regulatory Commission informed him that they were forging ahead with fraud allegations that might lead to criminal charges, according to a filing made public Tuesday.

Kittell, 50, was already under financial pressure from GreenHat’s 2018 default and millions in legal bills, the lawyers for his estate said. FERC’s investigative tactics -- which included costly demands for documents and a proposed penalty that was millions of dollars beyond Kittell’s net worth -- were more than he could bear, the lawyers said.

“This case drove an innocent man to his death,” wrote lawyers at Skadden, Arps, Slate, Meagher & Flom LLC in a response to allegations FERC had made against GreenHat in an order the commission published in May.

FERC’s enforcement staff has proposed that GreenHat and its partners, including Kittell’s estate, pay back roughly $13 million in “unjust profits” and $229 million in penalties. In the papers made public Tuesday, lawyers for Kittell’s estate argued that there was no fraud and that Kittell’s widow and two children should not be held liable.

A spokeswoman for FERC declined to comment on the filing.

‘Bust-Out’ Allegation

GreenHat defaulted on June 12, 2018, leaving behind roughly $180 million in losses in a so-called financial transmission rights market operated by PJM Interconnection LLC. Such markets for power derivatives, which are regulated by FERC, are designed to let power providers hedge against spikes in the cost of delivering electricity that are caused by congestion in power lines. Under rules established by PJM, which operates the electric grid for more than 65 million people in 13 Eastern states, those losses were paid by other traders and ratepayers.

In May, FERC officials had alleged that Kittell and his two partners in GreenHat, John Bartholomew and Kevin Ziegenhorn, had sought to take advantage of PJM’s policies, which required minimal collateral of traders. The federal regulators said that GreenHat defrauded PJM by carrying out a so-called “bust-out” scheme: They planned to run up a huge bill that the firm had no intention of paying, then default and walk away. George Murphy, an attorney representing Bartholomew and Ziegenhorn, declined to comment Wednesday.

The Kittell estate’s lawyers, John Estes and William Barksdale, wrote that there was no fraud scheme; GreenHat had expected to turn a profit and made its trading decisions in good faith, based on PJM’s own forecasting model, they said.

“GreenHat’s strategy proved mistaken. But that does not make it fraudulent,” they wrote.

A spokeswoman for PJM declined to comment Wednesday.

Public Warnings

GreenHat’s default, which came after other traders had publicly warned PJM for more than a year about the firm’s portfolio, led to widespread criticism of the grid operator’s oversight and a shakeup of its top management.

Before co-founding GreenHat, Kittell and Bartholomew worked at a power trading unit of JPMorgan Chase and Co., where they were named in a 2013 FERC settlement that alleged manipulative activity in California’s electricity markets. JPMorgan Ventures Energy Corp. paid $410 million to settle the case -- a $285 million fine and $125 million in disgorged “unjust profits,” with no admission of wrongdoing. Lawyers for Kittell and Bartholomew said at the time that the traders had done nothing that broke the law.

When GreenHat later applied to trade in PJM’s market in 2014, the grid operator -- unlike other commodities markets -- didn’t vet financial traders’ backgrounds before allowing them to participate. GreenHat’s application was approved without so much as a Google search, according to an independent consultant’s report on the case.

Since the default, PJM has begun mandatory background checks, tightened its credit and collateral policies and hired a chief risk officer. PJM’s top two executives at the time both left the company shortly after GreenHat’s default.

FERC investigators have alleged that GreenHat exploited PJM’s lenient credit policies at the time to amass an enormous portfolio of contracts in its congestion market, even though the firm had posted less than $1 million in collateral. 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 the partners’ personal bank accounts, FERC’s enforcement staff has alleged.

Default in 2018

The bulk of GreenHat’s contracts lost money, however. When those positions began settling, the company was unable to cover its mounting losses; in June 2018, it defaulted. While FERC’s staff has alleged that GreenHat’s strategy included a plan to abandon its obligations, lawyers for Kittell’s estate say the default was unintentional.

Before GreenHat began trading, it tested its strategy using historical PJM data on congestion and found that it would be profitable, the lawyers said. In 2018, PJM began using more sophisticated market-simulation software to forecast congestion, and GreenHat incorporated that data into its strategy as well, according to the estate lawyers’ filing.

But both methods of forecasting proved unreliable, the lawyers said, and led to trades of financial transmission rights, or FTRs, that increased the size of GreenHat’s losses.

“How can it be fraud for GreenHat to buy and sell FTRs based on its expectations about future profit and loss when GreenHat’s expectations tracked PJM’s own expectations about future profit and loss of the same FTRs?” they wrote.

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