Barclays’ Energy Trading in Record $470 Million U.S. Fine

U.S. regulators proposed a record $469.9 million in penalties against Barclays Plc (BARC), and an additional $18 million on four of its former traders, as part of stepped up enforcement against energy-market manipulation.

The Federal Energy Regulatory Commission issued an order yesterday directing the London-based bank to show why it shouldn’t have to pay a $435 million civil penalty and give up $34.9 million in profit for allegedly gaming markets in the western U.S. from late 2006 to 2008. The FERC also proposed an individual penalty of $15 million for trader Scott Connelly and $1 million each for three colleagues.

“We are disappointed by the action that FERC took today and strongly disagree with the allegations made by FERC against Barclays and its former traders,” Mark Lane, a Barclays spokesman, said in an e-mailed statement. “We believe that our trading was legitimate and in compliance with applicable law.”

Barclays said yesterday that it is also the subject of separate probes by the U.S. Justice Department and Securities and Exchange Commission. The agencies are trying to determine whether third parties who help the bank win business comply with the Foreign Corrupt Practices Act. In June, U.K. and U.S. regulators fined Barclays for manipulating the London interbank offered rate.

‘Reckless’ Conduct

The FERC order is part of a drive by the agency to combat manipulation in energy markets, where utilities and generators buy and sell electricity. The agency, which also is probing trading by JPMorgan Chase & Co. (JPM) and Deutsche Bank AG (DBK), in February created a division in its enforcement office to police the markets.

“Staff concludes that Barclays’ conduct constitutes, at a minimum, recklessness,” according to the agency’s filing. The traders knew their actions were “likely unlawful,” and ignored warnings from Joseph Gold, a Barclays’ managing director, according to FERC.

The traders were willing to accept losses in next-day electricity markets in order benefit Barclays’ positions in the InterContinental Exchange Inc., the agency said.

“Barclays’ cash trading produced significant, repeated and avoidable losses,” according to the filing.

The actions cost other buyers and sellers in energy and financial markets an estimated $139.3 million, according to the agency.

‘Manipulative Scheme’

FERC staff in a notice issued April 5 said four Barclays energy traders -- Connelly and Daniel Brin, Karen Levine and Ryan Smith -- allegedly coordinated to manipulate electricity markets. Connelly warranted higher penalty “as the leader of the manipulative scheme,” FERC said, citing agency staff.

Barclays hired Connelly in May 2006 to build a power trading desk, and he recruited the other traders, according to FERC. Connelly said in his testimony to FERC staff that he was trying to build Barclays’ profile and reviewed his colleagues’ performance “holistically” instead of examining their daily losses in electricity markets, the FERC said.

The company and former traders have 30 days to respond to the agency. Barclays can challenge the proposed penalties at the FERC or the case could be referred to a U.S. district court.

The order is a “one-sided document” and Barclays will “vigorously defend this matter,” Lane said in the company’s statement.

Executives Ousted

Barclays settled a case over its role in rigging global interest rates, agreeing in June to pay a record fine of 290 million pounds to regulators who found traders and senior managers tried to manipulate the Libor and Euribor, its euro equivalent. The fine triggered the exit of Chairman Marcus Agius, Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier, the lender’s three most senior executives, as well as Alison Carnwath, head of the British bank’s remuneration committee.

“Going after individual traders with civil penalties is not common and represents a more serious and determined attempt by FERC to discipline market traders and bring them into compliance with FERC’s views of conduct in wholesale electric markets,” Alan Isemonger, founder of Energy Market Expertise LLC, a Sacramento, California-based consulting firm, said in an e-mail.

Regulators “have been cracking down on market manipulation whereby companies essentially leverage one market to influence the outcome of another,” said Isemonger, a former market monitor for California’s power-grid operator.

10 Probes

Since January 2011, the FERC has announced more than 10 probes of alleged manipulation in electricity and natural-gas markets, and agency Chairman Jon Wellinghoff has vowed that “senior management will be held accountable” for violations. The agency this year reached a record $245 million settlement with Constellation Energy Group Inc. over allegations of market manipulation in the U.S. northeast.

The FERC this year said it was investigating J.P. Morgan Ventures Energy Corp. for allegedly gaming energy markets in California and the Midwest, resulting in at least $73 million in improper payments to generators. The company on Oct. 18 apologized to regulators for making what it said were inadvertent mistakes in responding to investigators as it seeks to retain its energy-trading license.

The agency in December issued a preliminary determination that Deutsche Bank’s energy trading unit manipulated the California power market in 2010, which may result in a $1.5 million fine and the loss of $123,198 in profits. The company has until Nov. 5 to respond to the agency’s allegations.

Barclays yesterday posted a 29 percent gain in third- quarter pretax profit. Excluding provisions and accounting losses from revaluing the bank’s own debt, the profit rose to 1.73 billion pounds ($2.8 billion). Its shares rose 5.2 percent to 239.25 pence in London trading today after tumbling 4.7 percent yesterday.

To contact the reporter on this story: Brian Wingfield in Washington at bwingfield3@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.