JPMorgan Chase has agreed to pay $410 million to the nation’s energy regulator, a move that will allow the bank to settle allegations that traders in its Houston offices manipulated electricity markets in California and Michigan.
The pact announced on Tuesday is a record settlement for the regulator, the Federal Energy Regulatory Commission, which has ramped up its policing of Wall Street trading in recent months.
While the regulator fined the bank, it stopped short of penalizing individual JPMorgan executives. That decision is a reversal from earlier this year, when the regulator warned JPMorgan that it might seek to sanction Blythe Masters, the influential leader of the bank’s commodities business. Initially, investigators also planned to recommend that the agency hold three of her employees “individually liable.â€
The accusations of market manipulation initially surfaced this spring in a confidential commission document, reviewed by The New York Times. The document, a warning that investigators would recommend that the agency pursue civil charges, had originally concluded that Ms. Masters gave “false and misleading statements†under oath.
From the outset, JPMorgan argued that Ms. Masters never made false statements.
The accusations against JPMorgan originated from its rights to sell electricity from power plants that it acquired after the bank took over Bear Stearns in an emergency rescue in 2008.
The plants that the bank inherited were outdated and inefficient. Still, the regulator found, traders in Houston found a work around. To transform the power plants into profit generators, the agency said, JPMorgan’s traders adopted eight different “schemes†from September 2010 to June 2011.
The trading strategies offered electricity at prices that appeared falsely attractive to state energy authorities. The effort prompted authorities in California and Michigan to make excessive payments that helped drive up energy prices, the regulator said.
As part of the settlement on Tuesday, JPMorgan will pay a civil penalty of $285 million to the Treasury Department. JPMorgan will also pay $125 million in “unjust profits,†the energy regulator said on Tuesday. That money will go to ratepayers in both California and the Midwest, where JPMorgan’s trading practices, the agency said, drove up prices for electricity.
Under the deal, the banks must also make annual reports to the commission for three years detailing its power business in the United States. While JPMorgan admits to the facts of the trading strategies, outlined in the settlement, the bank did not admit or deny wrongdoing.
The case is the regulator’s latest crackdown on big banks. In January, the commission stuck a $1.6 million settlement with Deutsche Bank involving accusation of improper trading in California.
The commission also recently ordered Barclays to pay a $470 million penalty for suspected manipulation of energy markets in California and other Western states. Unlike JPMorgan and Deutsche Bank, however, Barclays is fighting the charges.
