FERC Accuses Barclays of Manipulating Western Energy Markets, Proposes Record Fine
On October 31, 2012, FERC issued an order (“Show Cause Order”) proposing to fine Barclays Bank PLC (“Barclays”) $435 million for manipulating Western energy markets from November 2006 to December 2008. FERC also proposed a disgorgement of $34.9 million, plus interest, in profits earned as part of Barclays’ alleged market manipulation scheme. Additionally, FERC proposed individual civil penalties for four different Barclays’ traders: Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith. FERC recommended Connelly receive the highest individual civil penalty of $15 million, while the others were each assessed a proposed penalty of $1 million. Both Barclays and the named traders will have 30 days to demonstrate that they did not violate FERC’s market manipulation rules, or that the proposed fines and disgorgements are either unwarranted or should be modified. Coupled with recent actions against Constellation, JPMorgan, and Deutsche Bank, this case suggests an ongoing enforcement focus on the relationships between physical and financial energy markets, and the manipulation of physical settlement prices to benefit financial positions.
According to the Show Cause Order, FERC’s Office of Enforcement (“OE”) began to investigate Barclays after several calls were made to the Enforcement Hotline by other market participants. As part of its investigation, OE reviewed data and communication from Barclays’ traders, and interviewed current and former Barclays’ employees. According to the OE report that accompanied the order, multiple instant messages and emails from the named traders demonstrate a highly coordinated effort to manipulate the settlement of 35 monthly physical products that would influence the settlement price of certain financial swaps settling against Western market indices. In April 2012, OE announced its preliminary determination that Barclays and the four named traders manipulated markets in and around California from November 2006 to December 2008. After Barclays and OE failed to settle the matter, OE released a notice on May 3, 2012 that it intended to recommend that FERC initiate a public proceeding against Barclays and the four named traders.
In its report to FERC, OE alleges that Barclays intentionally made certain day-ahead physical transactions at a loss at Mid-Columbia, Palo Verde, South Path 15 and North Path 15. OE argues that these losses were incurred in order to benefit Barclays’ IntercontinentalExchange (“ICE”) fixed-for-floating financial swap positions at the same locations. Thus, OE maintains that Barclays assumed a loss in the physical market in order to move the various indices for the financial swaps up or down to provide an overall gain for Barclays. OE estimates that Barclays gained $34.9 million in unjust profit and that the alleged market manipulation caused other market participants to lose an estimated $139.3 million.
While OE determined the penalty amounts for Barclays based on the FERC’s Penalty Guidelines, those guidelines do not apply to individuals. Instead, the proposed penalties for the named traders are based on the severity of the violations. OE concluded Connelly warranted the highest individual civil penalty as the alleged leader of the “manipulative scheme.”
On November 1, 2012, Barclays released a statement defending its trading practices. Barclays claims its “trading was legitimate and above-board” and that the bank intends to “vigorously defend this matter.” Barclays and the individual traders must file answers to FERC within 30 days. Once answers are filed at FERC, OE will have 30 days to respond.
A copy of the Show Cause Order is available here.