JPMorgan Executive May Escape Penalty

Even as the nation's top energy regulator is poised to extract a record settlement from JPMorgan Chase over accusations that it manipulated power markets, the agency is expected to spare a top bank lieutenant who federal investigators initially contended made “false and misleading statements under oath,” according to people briefed on the matter.

Blythe Masters, a seminal Wall Street figure who is known for developing exotic financial instruments, emerged this spring at the center of an investigation by the Federal Energy Regulatory Commission into accusations of illegal trading in the California and Michigan electricity markets.

The regulator found that JPMorgan designed trading “schemes” that converted “money-losing power plants into powerful profit centers,” a commission document said.

While the commission and JPMorgan are negotiating a settlement for about $500 million, the people briefed on the matter said, Ms. Masters is not expected to face a separate action. The move signals a pivot for the agency, which has been increasingly flexing its enforcement muscle, according to the people briefed on the matter, who spoke on the condition they not be named.

Months earlier, investigators planned to recommend that the regulator find Ms. Masters, who holds a powerful position within JPMorgan as the head of its commodities business, “individually liable.” But as the investigation progressed, these people said, top energy regulatory officials have been leaning toward not pursuing any civil charges against Ms. Masters.

The decision - which could change, according to the people briefed on the matter - would mean that Ms. Masters would escape the agency's sweeping crackdown against big banks. After gaining enforcement authority because of a change in 2005 that allowed it to impose fines of $1 million a day for each violation, the energy regulator has taken a tougher stance with Wall Street.

Still, the regulator's claims against JPMorgan, which came to light this spring in a confidential commission document reviewed by The New York Times, have turned a harsh spotlight on Ms. Masters. In the 70-page document, sent to JPMorgan in March, the regulator's enforcement staff said it intended to recommend that the commission pursue a civil case against JPMorgan in connection with the trading in California and Michigan. Since the regulator's findings surfaced, JPMorgan has defended Ms. Masters and the traders, disputing that “Blythe Masters or any employee lied or acted inappropriately in this matter.”

As JPMorgan began to negotiate a settlement with the regulator in recent weeks, Ms. Masters, too, vociferously defended the trading activity, asserting that the bank did nothing wrong, according to three people briefed on the matter. That position, the people said, has been echoed throughout JPMorgan.

Within Wall Street, Ms. Masters is widely considered a pioneer for her use of credit derivatives, the complex financial products that played a central role in the 2008 financial crisis. Rising through the ranks of JPMorgan - she was the youngest managing director at 28 - Ms. Masters became one of the most powerful executives on Wall Street, propelled by a vision that the products could radically remake the banking industry.

Ms. Masters formed close ties with Jamie Dimon, the bank's chief executive, who has moved to shore up support for her, according to people close to the bank. The two were bound by their belief that the commodities business was critical to JPMorgan's growth.

In her role as commodities chief, according to the March document, Ms. Masters oversaw traders in Houston who were in a vexing position: selling electricity from power plants in California and Michigan was a losing endeavor. The rights to sell the energy, which JPMorgan inherited after its 2008 takeover of Bear Stearns, relied on “inefficient,” antiquated technology. Simply put, the document said, it was an “unprofitable asset.” Particularly troubling, the document said, was a string of Southern California power plants that were built in the 1950s and 1960s, ultimately making them “less efficient than most of their competitors” because they siphoned more fuel for the energy they produced.

Known for her “highly detail-oriented” style, Ms. Masters “kept close tabs on the California and Michigan power plants,” asking that she be directly briefed by her employees about “many of the bidding schemes under investigation,” agency investigators found in the March document. From September 2010 to June 2011, those traders devised eight separate “schemes” to sell energy at prices “calculated to falsely appear attractive” to state energy authorities.

As the bidding was under way, the investigators found, Ms. Masters received regular PowerPoint presentations and e-mails that referred to the strategies. In one January 2011 PowerPoint reviewed by Ms. Masters, the strategy, which promised to transform the plants losing money into profitable operations, appeared 51 times, according to the March regulatory document.

JPMorgan has argued that its trading was legal. In an earlier statement, a bank spokeswoman said the “bidding strategies were in full compliance with applicable rules.”

But the energy investigators disagreed, the document shows. Duped by the manipulation, the investigators said, authorities in California and Michigan gave roughly $83 million in “excessive” payments to JPMorgan.

When JPMorgan traders worked to systemically “cover up” the strategy, investigators initially found, Ms. Masters aided the obfuscation. Ms. Masters “personally participated in JPMorgan's efforts to block” the state authorities “from understanding the reasons behind JPMorgan's bidding schemes,” the document said.

After California authorities began to raise objections to the bank's trading strategy, the investigators found, JPMorgan worked to cloak the trading from authorities by excluding critical profit and loss statements.

In April 2011, Ms. Masters initiated a conference call with top JPMorgan executives to brief them on “a reputational risk we are running in California,” according to the document.

The investigators also cited an April 2011 e-mail in which Ms. Masters, overriding the bank's compliance department, ordered a “rewrite” of an internal document that questioned whether JPMorgan ran afoul of the law. The revised wording, referring to the commission, said that “JPMorgan does not believe that it violated FERC's policies.”

One of the central disputes between the regulator and Ms. Masters was the extent to which she knew about the bidding strategies. Initially, the regulators took aim at Ms. Masters, whom they described as highly intelligent. While Ms. Masters “saw many presentations” about the strategies, she “falsely testified that she did not understand how the scheme made money, beyond a generic understanding that it was designed to maximize all sources of revenue,” investigators found.

JPMorgan's response to the March document, which exceeded 100 pages, could ultimately modulate the regulator's decision.

A version of this article appeared in print on 07/19/2013, on page B1 of the NewYork edition with the headline: JPMorgan Executive May Escape Penalty.