U.S. Proposes Record Penalty for Barclays’ Energy Trades

FERC Proposes Record $435 Million Fine in Barclays Energy Trades
In the Barclays case, “FERC appears to be certain of the nature of the violation and is moving ahead with profit disgorgement and fines and penalties,” said Isemonger, a former market monitor for California’s power-grid operator. Photographer: Chris Ratcliffe/Bloomberg

The U.S. Federal Energy Regulatory Commission proposed that Barclays Plc pay a record $435 million civil penalty and give up $34.9 million in profit for allegedly manipulating energy markets from late 2006 to 2008.

The agency issued the order today, giving the London-based company 30 days to respond. 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.”

The federal agency is stepping up its drive 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. and Deutsche Bank AG, in February created a division in its enforcement office to police the markets.

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 in the western U.S. at various times from November 2006 through December 2008. The agency notified Barclays on Oct. 25 that it was proposing penalties, according to the company statement.

$139 Million

The actions resulted in losses estimated at $139.3 million for participants in the market trading electricity for California and neighboring states, according to FERC.

“Barclays intends to vigorously defend this matter,” the bank, the second-largest U.K. lender, said earlier today in a statement.

The agency’s April notice suggests the investigation is focusing on traders who allegedly made financial bets in energy markets to benefit the bank’s financial position on the IntercontinentalExchange Inc., Susan Court, a former director of FERC’s enforcement office, said in a phone interview before the order was released.

“The allegations here are similar to what FERC lodged” against Brian Hunter, a former Amaranth Advisors LLC energy trader, said Court, a principal at SJC Energy Consultants LLC in Arlington, Virginia, who isn’t involved in the FERC probe.

Civil Penalty

The FERC in April 2011 issued a $30 million civil penalty against Hunter, who the agency said manipulated the price of contracts on the New York Mercantile Exchange in 2006 while boosting the value of financial derivatives. He has challenged the FERC case in court.

While FERC has authority to levy fines as high as $1 million per day per violation, Court said.

“It really is going to depend on how many months are involved,” she said.

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.

Deutsche Bank

The FERC 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.

Regulators “have been cracking down on market manipulation whereby companies essentially leverage one market to influence the outcome of another,” Alan Isemonger, founder of Energy Market Expertise LLC, a Sacramento, California-based consulting firm, said in an e-mail.

In the Barclays case, “FERC appears to be certain of the nature of the violation and is moving ahead with profit disgorgement and fines and penalties,” said Isemonger, a former market monitor for California’s power-grid operator.

In addition to the FERC investigation, Barclays said it is is 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.

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