JPMorgan’s Trades Ensnared by Post-Enron Regulator Zeal
Millions of dollars in penalties slapped on some of the world’s biggest banks, including JPMorgan Chase & Co. (JPM), by U.S. regulators are the result of policing powers established after the 2001 collapse of Enron Corp.
Within the past month, the Federal Energy Regulatory Commission, acting on recommendations from a 200-person enforcement unit assembled in the past three years, proposed fines on Barclays Plc (BARC) and Deutsche Bank AG (DBK) for manipulating energy trades. The agency this week revoked J.P. Morgan Ventures Energy Corp.’s right to trade power for six months next year -- the first such sanction for an active market participant.
“I wouldn’t say that we’re picking on the banks,” FERC Chairman Jon Wellinghoff said in an interview. “We’re going after anybody who’s involved in manipulative or fraudulent activity in these markets.”
FERC didn’t always wield such muscle. Its authority expanded after the California power crisis of 2000-2001, when Enron traders’ actions triggered rolling blackouts. In 2005 Congress enacted a sweeping energy law that gave the FERC the ability to go after fraud and manipulation. It also gave the agency the authority to impose fines as high as $1 million a day for those who tamper with electric-grid reliability.
The FERC enforcement unit is led by Norman Bay, a former U.S. attorney in New Mexico, and includes a former general counsel for the Federal Bureau of Investigation as well as about 40 analysts who focus on market-manipulation violations.
“A lot of people think you put a law in place and you’re ready to go the next day,” Wellinghoff said in a Nov. 7 interview. “Unfortunately it’s not quite like that. It takes a substantial period of time to build up a team and to build up the expertise and the resources necessary to utilize the tools that Congress gave us.”
Researching cases also takes time, and much of the office’s efforts in recent years are now coming to fruition. Since January 2011, the FERC announced 11 cases of alleged market manipulation in the electricity and natural gas markets, and this year settled with Constellation Energy Group Inc. for $245 million.
The cases have been developed over years. Barclays’ alleged violations, which drew a proposed record fine on Oct. 31, took place from 2006 to 2008. Barclays, which said its trading complied with the law, has vowed to fight the $469.9 million penalty.
Deutsche Bank Energy Trading LLC on Nov. 5 said it was protesting FERC’s proposed penalties of $1.6 million for alleged misconduct during early 2010, saying the agency’s legal position is “radical.” The agency is punishing JPMorgan for producing incorrect documents in a manipulation investigation.
A spokeswoman for JPMorgan, which has apologized for what it has said was an inadvertent mistakes, said it is reviewing the decision and its next steps.
“This is a novel use of FERC’s authority over market-based rates and is unsupported by FERC’s own regulations,” Jennifer Zuccarelli said in an e-mail.
While the violations during the Enron era involved traders using illegal practices to drive up prices which led to blackouts, the commission has seen a different type of manipulation violation in recent years, in which traders try to “play one market off the other,” Wellinghoff said.
Traders might take a loss in the physical energy markets, where electricity is bought and sold, in order to make money on financial exchanges “without any legitimate hedging purpose,” he said. FERC alleges that this is what happened in the Barclays case. Wellinghoff said energy companies also are reporting misconduct by calling an agency telephone hotline.
“We’re getting substantial information from other market participants” who may be losing money at a competitor’s expense, he said.
Even though Wellinghoff denied FERC is targeting financial companies, the investigations are evidence that Wall Street firms have the savvy to game the system, according to Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer group.
“It appears as though Wall Street is playing a significant role in exploiting overly complex market rules,” Slocum said in an interview. Regulators should revoke energy-trading privileges for all companies accused of alleged market manipulation, he said. “That’s the most significant club that FERC can wield.”
Separately, the California Independent System Operator complained to the FERC yesterday that the JPMorgan unit, which controls electric generators in Huntington Beach, is using its stake to block changes to plants that will be needed by the state next year.
The grid operator is seeking the FERC’s permission to move ahead with the project, by removing JPMorgan’s right to object to the changes. Asked about the filing to FERC, Zuccarelli in an e-mail today said: “J.P. Morgan’s goal is to work cooperatively to help to find an economic and efficient way to make generation available in California.”
Wellinghoff said he expects market-manipulation violations to decline as traders realize that the agency’s enforcement division is operating at “full speed.”
“The message is going to transfer through the industry that if you engage in this kind of activity you’re going to get caught,” he said. “If you get caught you’re going to pay.”
Wellinghoff said the FERC plans to “go after” individual traders as well as specific companies. And he’s not concerned about whether this may spook the financial sector.
“Have you ever met any traders?” he said to reporters after the commission’s monthly meeting yesterday. “Very few of them are scared or intimidated by anything.”
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