Barclays seems to be facing the wrath of several regulatory agencies in the United States.
Four months after reaching a $453 million settlement with American and British regulators over manipulating the London interbank offered rate, or Libor, the Federal Energy Regulatory Commission is seeking a $435 million civil penalty over accusations that the bank manipulated energy prices in and around California.
The bank has also disclosed that the Justice Department and the Securities and Exchange Commission are examining whether payments related to raising capital from investors in the Middle East during the height of the financial crisis violated the Foreign Corrupt Practices Act.
The Federal Energy Regulatory Commission order involves complex transactions from 2006 to 2009 in which Barclays traders are accused of taking losses in the market for delivering electricity in order to manipulate the price of an index that effectively bolstered the value of financia l swaps held by the bank.
That summary hardly does justice to the detailed description of the accusations against the bank. Reading it should cure any case of insomnia almost instantly.
The $435 million proposed penalty is the largest ever sought by the Federal Energy Regulatory Commission, exceeding the previous record $135 million fine imposed against Constellation Energy in April and dwarfing assessments in all other cases.
The commission is also seeking to have Barclays disgorge approximately $35 million in profit. In a statement, the bank asserted its “trading was legitimate and above board,†adding that it intended “to vigorously defend this matter.â€
How can the government seek a civil penalty more than 10 times greater than the claimed profit from the actions? It relates to the starting point for the penalty calculation.
Under guidelines issued by the energy commission, the process for determining the appropriate civil penalty can be based on the loss caused by the violations along with certain factors that can increase the fine.
The important point here is the conclusion that “Barclays engaged in this activity for 655 product days for 35 monthly products and caused losses to market participants estimated at $139.3 million.†The Energy Policy Act of 2005 gave the Federal Energy Regulatory Commission the authority to seek a civil penalty of up to $1 million for each day in which there was a violation of the rules intended to prevent manipulation of the energy market. In the case of Barclays, therefore, the maximum could be $655 million.
There are several factors in the case that work against Barclays. For one, the commission noted that one of the traders involved was a senior manager. The order also concludes that the bank's internal compliance program was “inadequate†because it “did not have systems in place to detect†manipulative trading. In fact, the commission asserts, responsibility for compliance in the power trading operation was put in the hands of one the senior manager accused of the violations.
Another factor is previous misconduct by the bank. Here the Libor settlement has come back to haunt Barclays. The energy commission noted that the bank was involved in manipulation during the same period, even though it was in another part of the company and involved a far different financial issue. That shows the problem every multinational company faces when distinct violations can be aggregated to paint a picture of an organization that appears to be unable to prevent misconduct by its employees.
Taken together, these factors led to the decision to seek about a triple penalty against the bank, based on the claimed losses it inflicted on others trading in the financials swaps contracts. The commission's calculation is sure to be challenged by Barclays if it decides not to pursue a settlement and seeks a hearing.
The fore ign bribery investigation by the Justice Department and the S.E.C. may be an even bigger headache because the amounts involved are significant. During the height of the 2008 financial crisis, Barclays raised over £11 billion from Qatar Holding, the sovereign wealth fund of the Qatari government, and made payments totaling £400 million to facilitate the investments. Those payments are at the center of the bribery inquiry, which is also being scrutinized by the Serious Fraud Office and the Financial Services Authority in Britain.
Coming on top of the Libor settlement and the Federal Energy Regulatory Commission charges, at a minimum the American government may try to extract a significant financial penalty from Barclays to settle any violations of the Foreign Corrupt Practices Act. The bank would be, in effect, a three-time loser, making it hard to reach a favorable resolution.
Barclays was praised by the Justice Department for its “extraordinary co operation†in the Libor inquiry, and continued cooperation would be a point in its favor. But the investigations of energy price manipulation and overseas bribery cover the same period of time as the Libor manipulation involving the bank's senior management.
At some point, the Justice Department and the S.E.C. may be unwilling to go easy when the bank's culture seemingly reflected the attitude of a teenager: “If we don't get caught, then why bring it to anyone's attention?â€
I think it is unlikely that prosecutors will take any action that threatens the bank's authority to conduct business in the United States, but that is the threat hanging over its head. That may prompt Barclays to settle the bribery investigation as quickly as possible. Any settlement is likely to include continued monitoring of the bank's compliance program, a potentially onerous cost given its size.
Barclays is certainly hoping that there are no more investigations lurking out there that could cause more pain. The last few months have been bad enough for its reputation and bottom line.
