Trash Talk Haunts Barclays Traders in Manipulation Probe
Boastful chatter among young traders, preserved in digital archives, has come back to haunt Barclays Plc as it defends itself against allegations that it manipulated U.S. energy markets.
“I just started lifting the piss out of the Palo,” Ryan Smith, then a trader for Barclays in New York, wrote in a 2006 instant message, allegedly bragging to a colleague that he had raised the price on an energy hub near Palo Verde, Arizona. In another, he used a profane term for a sexual encounter to describe what he had done to the market.
“Was fun. Need to do that more often,” he wrote.
These messages and others have surfaced in filings by the U.S. Federal Energy Regulatory Commission against London-based Barclays and four former traders. The agency, which has expanded its oversight of energy markets since the 2001 failure of Enron Corp., and its enforcement unit are seeking a record $488 million in penalties from the bank and its traders, which they are fighting.
Messages among employees are “like catnip to enforcement authorities,” Craig Pirrong, director of the Global Energy Management Institute at the University of Houston, said in a phone interview. “Traders are typically their own worst enemy. Sometimes they’re just shooting off their mouths.”
The case is the latest example of how instantaneous electronic communications can cause legal headaches years later. In July, Barclays Chief Executive Officer Robert Diamond stepped down, and the bank was fined a record 290 million pounds ($455 million), after regulators released e-mails from traders accused of rigging the London interbank offered rate, or Libor. Last week, U.S. and British regulators fined Royal Bank of Scotland Group Plc $612 million after electronic messages from bank traders allegedly showed they manipulated rates.
Under authority expanded in the wake of the Enron case, the FERC can impose fines of up to $1 million per violation per day for manipulating energy markets. Barclays has vowed to appeal the case to federal court if the commission doesn’t relent.
Instant messages and e-mails sent by Barclays’ traders, along with data, show the company conducted a “manipulative scheme” from 2006 to 2008, costing other market participants at least $139.3 million, according to the FERC’s enforcement office. The regulator says the traders deliberately took losses in physical markets, where electricity is bought and sold, to benefit swap positions in financial markets.
The bank’s lawyers rebut that interpretation and say in a Dec. 14 filing with the regulator that the FERC has cherry- picked from more than 160,000 messages to build a baseless case. Neither Barclays nor its traders did anything wrong, and the electronic messages don’t line up with market data, according to the filing.
“Junior traders brag,” Michael Spafford, an attorney for Ryan Smith with Bingham McCutchen LLP, wrote in a filing. Smith’s comments aren’t that different from what others on Wall Street say to each other, and FERC should ignore the playful manner of his remarks, according to the documents.
Scott Connelly, a veteran trader by the time he joined Barclays in 2006 to head its North American power-trading desk, recruited several former colleagues -- Smith, Daniel Brin and Karen Levine -- and allegedly conspired with them to game markets, according to the FERC. Because they had previously worked with Connelly at another company, they were loyal to him, according to an Oct. 31 report the FERC staff prepared for the commissioners.
In an instant message in February 2007, Connelly wrote that a market participant said he would call the FERC after a period of market volatility, according to the agency’s staff. “lol,” Connelly wrote, shorthand for “laugh out loud.”
The FERC has made public 13 investigations of market manipulation since January 2011, including probes of trading units at JPMorgan Chase & Co. and Deutsche Bank AG, which settled with the regulator for $1.6 million last month. The Barclays case has drawn attention because the agency has named individual traders as well as the bank.
Brin, Levine and Smith never gamed markets and Connelly never directed them to do so, according their lawyers’ filings. All, through their attorneys, either declined to comment or were unavailable for comment, and Mark Lane, a Barclays spokesman, declined to comment beyond previous statements denying wrongdoing. The trading data during the months of the investigation doesn’t show any intent or ability to manipulate prices, and e-mails and instant messages have been taken out of context, lawyers for the company and the individuals say in their filings.
Connelly’s response to the possibility that another market participant might call the FERC about suspicious activity was his dismissal of an unsubstantiated comment, his lawyers said in a Dec. 14 filing. The Barclays trader turned off his instant messaging function “because it was ‘mostly trash talking and garbage,’” the attorneys said, citing testimony the former trader provided to the FERC.
“I own the palo markt, BTW,” Smith said, using shorthand language in an instant message in November 2006. “Yeah and I own your mom,” another trader responded, prompting Smith to write “hahahahahhahahahah.”
“This is joking between friends and former colleagues,” Smith’s lawyers said in their filing. “It is not evidence of fraudulent intent.”
The FERC staff rejects such explanations. On Jan. 28, after reviewing responses from the traders and the bank, it upheld $470 million in proposed penalties for Barclays, the U.K.’s second-biggest bank by assets, and an additional $18 million for the individuals, including $15 million for Connelly. Messages between them prove that the traders took losses in one market to benefit their positions elsewhere, the staff said in a report.
“Why you buy index if its gonna tank?” a former colleague not accused in the FERC’s probe said in a Dec. 21 instant message to Smith.
“My lil secret,” Smith responded. “Tell you about it later.”
The regulator says that messages sent by Brin and Levine also point to market-manipulation, which the traders have denied in filings. FERC staff is focusing on one message that Brin sent, according to his attorneys. A conversation between Brin and Smith complaining about Levine not talking to them is evidence that she wasn’t conspiring with them, her lawyers said in a filing.
Brin, Connelly, Levine and Smith now await the commission’s final decision on the matter. The agency hasn’t given a timeline for its deliberations. Barclays fired Smith in March 2007 for reasons that it says weren’t related to the FERC investigation. Connelly, a Canadian, has returned to his home country.
Guidelines for appropriate communications “should be part of an ongoing training for the traders,” Miki Kolobara, managing attorney at the Kolobara Law Firm LLC in Phoenix, which specializes in energy-trading law, said in a phone interview.
“I tell them not to say anything that they wouldn’t mind seeing on the front page of a newspaper,” he said.
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