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West Chester investors go public vs. U.S. regulators

The Gates twins take on FERC

Twin brother Kevin and Richard Gates attended Conestoga High School in Berwyn together, went off to get chemical engineering degrees at the University of Virginia together, and, with a group of fellow financial brains, founded TFS Capital of West Chester together, where they manage more than $1 billion in other people's money through mutual funds (one won a Morningstar Inc. performance award last year) and other investments.

In 2008 veteran energy trader Houlian (Alan) Chen came to the Gateses with a proposition: If they and some of their friends raised millions to back his trades, Chen would use it to buy and sell electricity contracts on the market run by the Audubon, Pa.-based PJM Interconnection, which runs the grid that sells electricity in Pennsylvania and 15 other states.

The Gates and their partners set up Powhatan Energy Fund LP. Chen used it to make them millions, much of it in "loss credit" payments that PJM awarded traders when prices move below a certain level in order to help keep the power markets moving. PJM stopped making such payments in 2010.

Also that year the Federal Energy Regulatory Commission warned it was investigating Chen's trades. After three years of back and forth, in August FERC sent a letter warning Powhatan it was preparing "preliminary charges" of "market manipulation" in Chen's trades. FERC told Powhatan that  in some trades "Chen had little or no expectation of profit from market fundamentals but instead sought to derive profit solely from loss credits." FERC also said Powhatan and related funds "netted more than $4.7 million in profit by manipulating PJM's energy market." FERC officials offered to meet. Maybe Powhatan would pay a penalty and settle the case?

The Gates hired lawyers. They denied any wrongdoing. They had checked out the strategies and were sure they conformed to FERC and PJM rules.

They also began setting up a Web site,, to tell their side through FERC correspondence, their own rebuttals to FERC, and videos of experts -- a former FERC enforcement director, two former SEC chief economists, Harvard Prof. William Hogan -- who can be viewed on the site solemnly insisting that Chen followed FERC's and PJM's rules, and there is no basis for a government case against the fund.

The Gateses took the site live last week because they believe a FERC complaint is imminent. They say both their side and the government has spent "millions" in what they call an unfair and unfounded investigation; they called on FERC to stop; they added that they want the public to know the facts, now.

"No comment," FERC spokeswoman Celeste Miller told me. PJM officials wouldn't talk either.

Joseph Bowering, of Monitoring Analytics Inc., an independent firm appointed as "market monitor" to review PJM's energy trading, won't comment on the case or Powhatan's profits. But, he told me, "As a general statement, following the rules does not mean you are not manipulating the market. It's not a defense."