JPMorgan Chase & Co. will pay $410 million to settle U.S. Federal Energy Regulatory Commission allegations that the bank manipulated power markets in California and the Midwest from 2010 to 2012.
The bank agreed to pay a U.S. civil penalty of $285 million and return $125 million in ill-gotten profits to electricity ratepayers, according to a FERC statement today. New York-based JPMorgan, the largest U.S. bank by market value, said the settlement will “put this matter behind it.”
JPMorgan “employed a fraudulent device, scheme or artifice, made false statements or material omissions, or engaged in a course of business that operated or would operate as a fraud on electricity market participants,” the FERC said today in an order posted on its website.
The case marks another setback for JPMorgan, which sailed through the 2008 financial crisis without a single quarterly loss. Last year JPMorgan lost more than $6.2 billion from wrong-way derivatives bets placed by traders in London. The incident prompted a U.S. Senate investigation, the departure of two senior executives and a debate over whether Chief Executive Officer Jamie Dimon, 57, should keep his chairman role. In May shareholders re-elected him as chairman.
JPMorgan fell 18 cents to $55.51 at 10:32 a.m. in New York trading. The shares rose 27% this year through yesterday.
The FERC said a JPMorgan energy-trading unit had engaged in 12 bidding strategies in wholesale energy markets from September 2010 to November 2012, resulting in tens of millions of dollars in overpayments from the grid operators. The agency announced the violations yesterday after investigating the bank’s energy- trading practices for more than a year.
Of the $410 million, $124 million will go to the California electric-grid operator and $1 million will go to an operator in the Midwest, according to the agency. The bank accepted the facts in the settlement agreement without admitting or denying wrongdoing, the FERC said in a statement.
“We’re pleased to have this matter behind us,” Brian Marchiony, a spokesman for JPMorgan, said today in a statement. The settlement will not have a material impact on the bank’s earnings since it has previously set aside reserves to cover the costs, he said.
The settlement ends the U.S. investigation of J.P. Morgan Ventures Energy Corp., a trading unit overseen by commodities chief Blythe Masters. The wholly owned subsidiary trades and holds physical commodities, including agricultural products, metals and energy, as well as derivatives.
The settlement released JPMorgan, all subsidiaries and employees, including Masters, from any future enforcement actions by FERC in this case.
Francis Dunleavy, Andrew Kittell and John Bartholomew, who the FERC said devised the bidding strategy, are still employed by the company, according to the FERC settlement. Marchiony declined to comment on their current roles or whether the company would cut their bonuses or Masters’ compensation.
The three no longer have a role in bidding for energy in California’s power market, according to the FERC. JPMorgan, which controlled power plants owned by AES Corp., has effectively sold its interest in those generators, according to the FERC.
The three traders didn’t agree to a settlement with the FERC, Gibson, Dunn & Crutcher LLP, the law firm representing Dunleavy, Kittell and Bartholomew, said in a statement. The agency decided not to pursue sanctions against them after they explained to the FERC that their conduct was lawful, it said.
“The commission’s decision to voluntarily settle with JPMorgan and not proceed against the individuals can only be read as the commission correctly concluding that no case or findings against the individuals could be sustained in a court of law,” William Scherman, their lawyer, said in the statement.
JPMorgan said July 26 it was considering the sale or spin off of its physical commodities business, including energy trading, three days after a congressional hearing examined whether banks are using their ownership of raw materials to manipulate markets.
The FERC in November revoked the unit’s right to trade power for six months after accusing the firm of providing misleading information to regulators. The suspension, which took effect in April, marked the first such sanction for an active market participant.
“JPMorgan picked the pockets of California households and businesses, and their manipulation increased the electric bills that people pay,” Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer advocacy group, said in an interview yesterday.
FERC investigators focused in part on “make whole” payments that grid operators pay to generators if the sale of electricity doesn’t yield enough revenue for the company to recover its startup costs.
The agency’s investigation of JPMorgan covered two periods, September 2010 to June 2011 and March to November 2012. The company’s energy energy-trading unit was engaged in 12 strategies to manipulate markets in California and the Midwest, 10 of which began while the investigation was underway, according to the agency.
In one scheme, JPMorgan traders made low end-of-day bids to attract large orders from buyers to provide power the next day, the FERC said. In the first two hours the next day, the bank demanded higher rates for making the power available, a maneuver that led the grid operator to pay it millions of dollars for a period in which demand is typically low.
In another strategy, traders offered low rates for providing electricity the next day to lure orders from grid operators, then gamed the bidding system to reap higher payments above market prices, according to the agency.
JPMorgan also agreed to forego an unspecified amount of future payments from California’s grid operator, according to the FERC.
The settlement agreement “is a vindication for California ratepayers and for market participants who play by the rules and work to support an effective market,” Nancy Saracino, general counsel for the California Independent System Operator, the state’s grid operator, said today in a statement.
The California authority had requested in public filings with the FERC during the last two years that the company give up $68 million in profits. The settlement will allow the state’s electricity consumers to receive an additional $56 million associated with trading tactics identified by the operator’s market monitor, according to the statement.
FERC Chairman Jon Wellinghoff has stepped up scrutiny of corporations as the agency wields policing powers that were expanded in the wake of Enron Corp.’s 2001 collapse. Since 2011, the FERC has revealed at least 13 probes of energy-market gaming.
The regulator on July 16 ordered Barclays Plc and four of the company’s former traders to pay a combined $487.9 million in fines and penalties for engaging in what the agency said was a scheme to manipulate energy markets in the Western U.S. from 2006 and 2008. The bank has vowed to fight the penalties.
Deutsche Bank AG agreed on Jan. 22 to pay $1.6 million to resolve FERC claims that an energy-trading unit manipulated markets in 2010. The Frankfurt-based bank didn’t admit or deny wrongdoing.
The agency fined ex-Amaranth Advisors LLC trader Brian Hunter $30 million in 2011, ruling he manipulated the price of contracts on the New York Mercantile Exchange in 2006 while boosting the value of financial derivatives. A U.S. Court of Appeals ruled in March that FERC lacked the jurisdiction for the fine.
The FERC in March 2012 reached a then-record $245 million settlement with Constellation Energy Group Inc. over alleged energy trading violations in New York. Constellation didn’t admit any wrongdoing.
The JPMorgan case differs from those involving Barclays and Deutsche Bank in that it deals only with bidding strategies in electricity markets, according to Susan Court, a former director of FERC’s enforcement office. The latter two investigations dealt with traders who allegedly gamed electricity markets to benefit their positions in financial markets.
“FERC enforcement staff is getting more sophisticated in their understanding of these markets,” Court, now the principal at SJC Energy Consultants LLC in Arlington, Virginia, said in a phone interview yesterday. The markets are also becoming more complicated, she said.