Posted: 08 May 2013 11:22 PM PDT
As US power plants lose money, a bit of market manipulation goes a long way … ask JPMorgan Chase.
The banking giant is accused of manipulating energy prices in Michigan and California to make money-losing power plants appear more profitable to investors—and now it faces penalties from the Federal Energy Regulatory Commission (FERC), which regulates the sale of electricity.
Detailed in a New York Times report, JPMorgan Chase is accused of selling electricity to authorities in California and Michigan between 2010 and 2011 at prices calculated to appear falsely attractive.
How much did these two US states pay for this manipulate on: $83 million—that’s in excess of what they would have paid normally.
The scandal heated up in November, when FERC imposed a temporary, 6-month ban on JPMorgan’s ability to trade physical power at market-based rates, beginning in April this year. The reason: The bank failed to disclose information to FERC and the California authorities during the market manipulation investigation. JPMorgan blew off the ban with a shrug.
Word on the street is that FERC is getting a bit more serious these days, and no longer willing to turn a blind eye to this brand of market manipulation. This time, it may not be just a slap on the wrist for this banking big boy. At least, the general consensus among analysts is that JPMorgan Chase could be hit with a pretty stiff fine.
After all, it’s not the first time this has happened to California: The state’s 2000-2001 energy crisis and ensuing blackouts were the result of market manipulation for which it is still attempting to get its money back. That crisis was on Enron Corp., which manipulated the energy market and hid the evidence in some convenient accounting loopholes. It filed for bankruptcy in December 2001, its CEO, Jeff Skilling , was convicted of fraud in 2006 and sentenced to 24 years in prison. It was this scandal that empowered FERC to take more serious action against market manipulators.
FERC’s target list has grown, and if the recent past is anything to go by, JPMorgan Chase won’t get out of this one unscathed. In December 2012, FERC slapped $488 in fines (pending) on Barclays Plc for rigging energy markets, and in January 2013 it went after Deutsche Bank for $1.6 million for California market manipulation.
In 2006, trader Brian Hunter of Amaranth Advisors lost a whopping $6.4 billion after some rather bad gambles on natural gas prices, leading to the collapse the hedge fund group in September that year. In 2007, the Commodity Futures Trading Commission (CFTC) charged Amaranth with attempting to manipulate natural gas futures between February and April 2006. Hunter was fined $30 million by FERC, and it’s not over yet. In 2011, Amaranth settled in a class action suit with investors for $77 million, along with a $7.5 million fine by the CFTC. Where it gets interesting is a little power struggle between FERC and the CFTC over how has the mandate here to deal with Hunter. Earlier this year, a US appeals court gave that mandate to the CFTC, which means that Hunter’s $30 million fine is now void.
Back to JPMorgan … even some heavy fines will just be business as usual for JPMorgan—which his used to handing out millions (if not billions) in lawsuits. According to some accounts, the bank has spent $16 billion in litigation money since 2009. This is part of its general operating expenses.
It’s also still under investigation in relation to our favorite Ponzi schemer, Bernie Madoff, whose criminal dealings the bank might have known about and failed to alert the federal authorities.
JPMorgan has until mid-May to respond to the latest FERC accusations.