Barclays, 4 traders fined $488M in probe; state to receive share
Washington is one of four states that will receive a share of fines and penalties leveled against Barclays Plc and four former traders who, the U.S. Federal Energy Regulatory Commission says, manipulated energy markets.
Barclays Plc and four former traders must pay a combined $487.9 million in fines and penalties, the U.S. Federal Energy Regulatory Commission (FERC) said in an order tied to an investigation of alleged manipulation of energy markets.
The agency directed the company and traders to pay $453 million in civil penalties to the U.S. Treasury within 30 days, according to the order issued Monday. The London-based bank also must surrender $34.9 million in profits, to be distributed to programs that help low-income homeowners pay energy bills in Washington, Oregon, California and Arizona, the FERC said.
“Consumers have the right to heat and power their homes without fear that traders are stacking the deck against them to rack up unjust profits,” said U.S. Sen. Ron Wyden, an Oregon Democrat and chairman of the Energy Committee. He said the fine “sent a strong message to traders and banks today that manipulating energy markets comes at a steep cost.”
The penalties, which the agency first proposed Oct. 31, stem from an investigation in the FERC’s crackdown on market manipulation. Since the beginning of 2011, the agency has made public at least 13 probes of energy-market gaming, including investigations of trading units at Deutsche Bank AG and JPMorgan Chase & Co.
“We believe that our trading was legitimate and in compliance with applicable law,” Marc Hazelton, a Barclays spokesman, said yesterday in a statement. “We intend to vigorously defend this matter.”
He said the bank believes the penalty is without basis and that the FERC order is a “one-sided document, and does not reflect a balanced and full description of the facts or the applicable legal standard.”
The FERC determined that the Barclays traders manipulated markets in the Western U.S. from November 2006 to December 2008. The employees made transactions in fixed-price products — often at a loss — with the intent of moving an index to benefit the bank’s other bets on swaps, according to the FERC.
The evidence “demonstrates that the intentional amassing of the positions and trading to influence price were not based on normal supply and demand fundamentals, but rather on the intent to effect a scheme to manipulate the physical markets in order to benefit the financial swaps,” the agency wrote in its order. Swaps are derivative instruments used to hedge risks or for speculation.
The watchdog’s staff estimated that the misconduct caused $139 million “in harm to the market.” The actions “demonstrate an affirmative, coordinated and intentional effort to carry out a manipulative scheme,” violating U.S. law and FERC rules, the agency said in the statement.
The FERC directed Barclays to pay $435 million in penalties and Scott Connelly, former head of its North American power-trading desk, to pay $15 million, for allegedly directing the manipulation of electric-energy prices.
“We recognize that Connelly contends that his personal financial circumstances may make payment of these penalties difficult, but Connelly’s participation in a serious scheme to manipulate the nation’s wholesale power markets warrants the imposition of significant penalties,” the FERC said in its order. The penalty, “while severe, is well short of what the statute allows,” it said.
Todd Mullins, an attorney for Connelly with McGuire Woods LLP in Washington, declined to comment on the order. In a Dec. 14 filing with the agency, Connelly’s attorneys said there was no proof that he had violated the law and that the conclusions of FERC staff were inconsistent with the facts.
The FERC also levied fines of $1 million each on former Barclays traders Daniel Brin, Karen Levine and Ryan Smith. Brin declined to comment yesterday. The agency used instant messages and emails sent by the former traders to bolster its case against them.
“This is an aggressive action by FERC,” said Thomas Sporkin, a former Securities and Exchange Commission enforcement lawyer and now a partner at BuckleySandler LLP. Regulators typically name specific victims when levying fines of that magnitude, he said. “It may be hard for the public to grasp why there’s such a huge penalty here and why they’re naming individuals given that there’s no identified victim.”
Congress in 2005 granted the agency additional enforcement powers, including the ability to fine violators up to $1 million per day, after market manipulation by traders for Enron triggered rolling blackouts in California. In some cases, including its probe of Frankfurt-based Deutsche Bank, FERC has reached a settlement with the companies it is investigating.
“I wouldn’t say that we’re picking on the banks,” FERC Chairman Jon Wellinghoff said in an interview in November. “We’re going after anybody who’s involved in manipulative or fraudulent activity in these markets.”