* Barclays traders’ “unfortunate” emails don’t match
trades-source
* Alleged “loss-leader” physical trades made money half the
time
* Manipulation “intent” is high bar for Bay, FERC’s tough
top cop
By Cezary Podkul and Jonathan Leff
NEW YORK, Nov 5 (Reuters) – British bank Barclays
is set to fight a potentially record $470 million penalty from
U.S. energy regulators by arguing its traders were guilty of
braggadocio, not of rigging California electricity prices.
The four traders in question, who boasted in emails and
instant messages about how “fun” it was to “crap on” certain
physical power prices, did not actually carry out the complex
scheme they are accused of by the Federal Energy Regulatory
Commission, a source familiar with the bank’s thinking said.
Last week, the country’s top cop overseeing electricity
markets ordered Barclays to demonstrate why it should not pay a
$435 million civil penalty, plus $34.9 million in the repayment
of ill-gotten gains, for manipulation of California power
markets between 2006 and 2008.
The British banking giant, still reeling from an nearly
equivalent fine over its role in rigging the Libor interest rate
benchmark, has already said it will “vigorously” fight the FERC
charges, likely setting up a landmark court battle.
It believes electricity trades on the days of the traders’
messages show their West Coast trading team was not
intentionally manipulating prices for profit, despite the
“unfortunate” emails released in FERC’s 73-page regulatory
filing, the source said.
Any losses incurred on the bank’s mammoth trades — which on
some days accounted for more than half of all the deals in
specific markets — was an effort to “build credibility” with
potential clients in a new market.
In fact, on more than half of the days in question, the bank
actually made money or lost very little, the source said, an
outcome seemingly at odds with FERC’s accusation that it was
engaged in so-called “uneconomic trading”, where losses in one
market would yield larger profits in another.
To prevail in its case, which stems from an investigation
that began in July 2007 after an anonymous tip-off from other
market participants, FERC will have to demonstrate the traders’
messages demonstrate “intent” to manipulate markets – a tough,
though not impossible hurdle to meet, legal experts said.
FERC spokesperson Mary O’Driscoll declined comment, citing
the agency’s policy of not commenting on open cases.
INTENT AND DISREGARD
Typically, in a manipulation case FERC must show the accused
individuals or companies knew or acted with “reckless disregard”
toward good business practices in their industry, said Susan J.
Court, former chief of enforcement at FERC.
“To prove that that’s the answer is difficult,” she said,
“because it goes to the intent” of the traders’ actions. “So
sometimes it comes down to interpreting those electronic
messages and what they mean in context.”
Barclays will argue that even taking into account the emails
the traders did not act on the messages.
Examining emails alone, “you could argue that it’s a
manifestation of intent. But if you look at the real trading, it
just doesn’t line up,” the source said.
Across 35 alleged months of alleged manipulation, the
traders were either making money or “losing hardly anything”
during more than half the days, according to the source.
All four of the traders accused in the case – Daniel Brin,
Scott Connelly, Karen Levine, and Ryan Smith, who also have 30
days to “show cause” on penalties amounting to $18 million –
have left Barclays since the alleged manipulation.
Their legal status is unclear; Brin declined comment when
reached on his mobile phone by Reuters last week. Efforts to
reach the other traders were unsuccessful.
Since Congress enhanced FERC’s enforcement powers in 2005,
the commission has only concluded a finding of manipulative
intent in one case: Brian Hunter, the former natural gas futures
trader whose massive bets sank hedge fund Amaranth in 2006. Key
to the finding were Hunter’s instant message communications, in
which he asked fellow traders to take actions that would benefit
his bets that natural gas futures would tumble.
The commission fined Hunter $30 million in April 2011, an
amount “appropriate and sufficient” to discourage others from
engaging in market manipulation, FERC said at the time.
The case is now on appeal.
HIGH STAKES
The stakes in the Barclays case are significantly higher
than the sums involved, for both sides of the docket.
Though Barclays quit the energy trading business in the
Western United States almost a year ago, it is still reeling
from $450 million in penalties over the Libor interest rate
rigging that cost former CEO Robert Diamond his job. FERC’s
enforcement action could potentially double those fines and the
negative publicity the bank has experienced in recent months.
For FERC, the case could underscore the agency’s
determination to go after manipulation – a cause championed by
enforcement chief Norman C. Bay.
Of 12 investigations opened by FERC’s enforcement staff
during the year ended Sept. 30, 2011, eight involved market
manipulation or false statements to the agency, according to the
most recent data, including against banking giant Deutsche
Bank’s energy trading arm and BP.
Bay may be emboldened by the record $135 million fine, plus
$110 million in return of ill-gotten profits he won in a
settlement with Constellation Energy Group Inc earlier this
year. However, some in the industry argue that the FERC had
leverage in that case — power provider Exelon Corporation’s
pending takeover of Constellation — that doesn’t exist
with Barclays.
Marc L. Spitzer, a former FERC commissioner who worked with
Bay on enforcement actions, declined to comment on the Barclays
case. However, he praised Bay for his ability to judge when to
pursue enforcement actions.
“Norman Bay has a good sense for which cases he should move
and which cases he should settle on,” Spitzer said.
Settling, however, may not be an attractive option to
Barclays because the bank may not want to be seen giving any
ground on a charge of manipulation, said Paul Korman, an energy
attorney at Van Ness Feldman in Washington D.C.
“It is a very serious charge, so we see more and more people
who are willing to fight it out,” said Korman, who is not
involved in the Barclays proceedings. “Historically, most of
these cases settled.”
Barclays’ strategy suggests it is taking a different
approach than London-based oil trader Arcadia, which was sued
last year by the Commodity Futures Trading Commission (CFTC) for
allegedly rigging physical crude markets in order to reap gains
on the futures exchange. Arcadia and two traders have argued
that the CFTC did not have authority to pursue physical trades.
The issue of “interconnected markets”, as it is known, is a
thorny one for many regulators, whose remits often cover one or
the other side of the marketplace, but rarely both.
It is a more complex issue than those facing FERC and other
regulators a decade ago, when the Enron scandal exposed traders
who had simply inflated California’s power prices or reported
false trade to energy index providers.
The now-defunct energy giant’s infamous market manipulation
during the 2000 to 2001 California energy crisis is still fresh
in many consumers’ minds, raising ire from advocates who want to
see FERC take even tougher sanctions against the bank.
NEXT STEPS
If Barclays does fight to the finish, the final outcome of
FERC’s action, as well as any fines paid, could be a few years
away, experts said. Barclays must respond by the end of this
month, unless an extension is granted; FERC then has 60 days to
determine whether to impose the fine, which is likely.
At that point, assuming Barclays does not settle, the case
would shift to one of several legal avenues.
If it goes before an administrative law judge, a hearing
could take about a year, said Court, the former FERC head of
enforcement. Additional time to consider the judge’s finding and
hold a re-hearing could take an additional three to four months
each, she said, making it about two years before the case is
even ready for an appeal in federal court.
Another option is for Barclays to request to try the case
from scratch in federal court, an option it is “leaning toward,”
according to the source familiar with the matter.
Still, based on the fact that the case has even gone this
far, Court places FERC’s chance of prevailing at “over 50
percent.”
“The staff is not going to waste the commission’s time if
they don’t think they have a good case,” she said.
(Reporting by Jonathan Leff; Editing by Marguerita Choy)
