Over objections from consumer groups and New York officials, a federal judge on Tuesday approved a $4.8 million settlement between the Justice Department and Morgan Stanley over allegations of price fixing in the electricity market.
Yet even as he signed off on the settlement, Judge William H. Pauley III of Federal District Court in Manhattan expressed “misgivings†about the deal, saying the dollar amount was too low.
“Given the government's stark allegations of manipulative conduct against Morgan Stanley, disgorgement of $4.8 million is a relatively mild sanction,†Judge Pauley wrote. “There is a risk that a large financial services firm like Morgan Stanley could view such a modest penalty as merely the cost of doing business.â€
The judge said he agreed to the settlement out of deference to government's arms-length negotiations with Morgan Stanley. In his ruling, Judge Pauley cited a recent decision by a federal appeals court that criticized a nother federal judge, Jed S. Rakoff. The appeals court suggested that Judge Rakoff might have overstepped his authority when he rejected a contentious settlement between the government and Citigroup.
The Morgan Stanley case was the first attempt by the Justice Department to penalize a bank over using derivatives to help clients allegedly violate federal antitrust laws. Morgan Stanley, the government said, aided the efforts of KeySpan Corporation, a major utility company in New York, to manipulate electricity prices.
In 2006, the bank entered into a complex swap agreement with KeySpan that gave the company a stake in the profits of its competitor Astoria Generating Company Acquisitions. Morgan Stanley also represented Astoria in the transaction.
The government said that the deal allowed KeySpan to push up the price of electricity in New York, costing consumers about $300 million. Morgan Stanley made $21.6 million in revenue in serving as an intermediary in t he deal.
Morgan Stanley settled the allegations with a $4.8 million payment to the federal government without admitting any wrongdoing. In 2010, KeySpan, which is owned by the British energy company National Grid, paid $12 million to resolve its role in the case, also without admitting any wrongdoing.
Late last year, after the government solicited public comments on the settlement, the AARP, an association of middle-aged persons and older Americans, filed a complaint that the deal was too lenient and Morgan Stanley should be forced to disgorge all of its revenue from the transaction.
The AARP also objected, saying that Morgan Stanley did not have to admit that it violated the law. In addition, the payment will go to the United States Treasury and not to utility customers.
“Future wrongdoers can try the gambit again and need be concerned only about trivial civil sanctions,†said the AARP.
A Morgan Stanley spokeswoman declined to comment. A Ju stice Department spokeswoman did not immediately respond to a request for comment.
Michael Gianaris, a New York state senator, had sent a letter to the court opposing the settlement. On Tuesday, Mr. Gianaris said he was extremely disappointed with the judge's ruling.
“This does nothing to achieve justice for aggrieved consumers,†Mr. Gianaris said. “And by allowing Morgan Stanley to reap more than $16 million in profit despite their misdeeds, it does even less to deter other banks from engaging in the exact same scheme in the future.â€
US v Morgan Stanley
