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FERC proposes to fine Barclays record $470 million for alleged manipulation of Western markets

From the November 5, 2012 issue of Public Power Daily

Originally published November 5, 2012

By Robert Varela
Editorial Director

The Federal Energy Regulatory Commission proposed Barclays Plc pay a record $469.9 million for allegedly manipulating energy markets in and around California between 2006 and 2008. In an Oct. 31 show cause order, the commission also proposed a $15 million penalty for former Barclays trader Scott Connelly and $1 million each for former traders Daniel Brin, Karen Levine and Ryan Smith. The company and the four traders have 30 days to respond. The bank denied wrongdoing and said it will vigorously defend itself, Bloomberg reported.

FERC’s Office of Enforcement alleged that Barclays and the four traders manipulated markets by engaging in loss-generating trading of next-day fixed-price physical electricity on the IntercontinentalExchange (ICE) at the locations of Mid-Columbia, Palo Verde, South Path 15 and North Path 15 to benefit Barclays’ financial swap positions in those markets. The alleged manipulation caused losses to market participants estimated at $139.3 million, according to a report by commission staff. FERC staff said they uncovered a substantial number of instant messages and emails "demonstrating manipulative intent."

Barclays’ traders were trained not to take intentional losses. "The golden rule was always, under no circumstances, lose money on a transaction for the intention of making money on another transaction," Joseph Gold, Barclays managing director and head of commodities, Americas, testified in a deposition to FERC staff.

Barclays was a major participant in the Western U.S. power markets, the FERC staff report said. "During the relevant trade sessions during the alleged manipulation months, Barclays’ total market concentration of next-day fixed-price physical trading ICE volumes was a maximum of 58%, and a minimum of 10%, of a month’s trading. Barclays’ trades constituted 24% of the total next-day fixed-price trading across the alleged manipulation months," the report said. 

The commission specifically proposed that Barclays pay a $435 million civil penalty and disgorge $34.9 million (plus interest) in profits.

The staff report cited a number of factors that went into calculation of the penalty. "The scope of Barclays’ manipulation, which involved six different products traded at four different locations throughout the Western U.S. for over two years, adds significantly to the seriousness of the violations." FERC staff also found that high-level personnel (Connelly) were not only involved in but designed and supervised the manipulation. The report cited "prior adjudication of similar misconduct." Barclays recently settled claims by the Commodity Futures Trading Commission and Department of Justice that it manipulated the London Interbank Offer Rate during the same period.

Barclays’ compliance program was inadequate, the report said. Although the bank’s commodities compliance department "recognized that uneconomic trading raised serious legal and compliance issues, Barclays did not have systems in place to detect those issues."


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