The Energy Markets Under a Microscope: Government Investigations into Market Manipulation

            The paths of the energy industry and probing government investigations are crossing more and more often, as regulators and legislators have made it a priority to ensure the integrity of energy markets.  The Federal Energy Regulatory Commission (“FERC”), Office of Enforcement has made fraud and market manipulation one of its top four priorities, prompting the creation in 2012 of the Division of Analytics and Surveillance (“DAS”), which facilitates the identification of investigative targets through continuous surveillance and analysis of “the natural gas and electricity markets and related financial products … to detect potential manipulation, anticompetitive behavior, and other anomalous activity.”  In the last year and a half alone, FERC pursued investigations into manipulation of the energy markets, seeking to impose in excess of $500 million in civil penalties on the companies under investigation, plus the disgorgement of more than $150 million in profits.  In the course of these investigations, FERC also initiated proceedings against individuals, seeking millions of dollars in fines for their involvement in the alleged market manipulation.  The spotlight on the investigation of JPMorgan Chase & Co. (“JPMorgan”), and its subsidiary, J.P. Morgan Ventures Energy Corp. (“JPMVEC”), for allegedly using manipulative trading strategies in the electricity markets in California and Michigan brings to the forefront the tenacity of FERC’s enforcement efforts.

            JPMorgan’s May, 2013 10Q Filing with the Securities & Exchange Commission acknowledged the current posture of FERC’s investigation into the company and individual employees: “In March 2013, the Firm received a Wells-type notice that the FERC staff intends to recommend that the Commission bring a possible enforcement action against [JPMVEC], [JPMorgan] and certain Firm personnel relating to alleged violations of FERC rules and the rules of certain independent system operators.”  This March 2013 notice followed FERC’s November 2012 suspension of JPMVEC’s electric market-based rate authority for allegedly submitting false information to the Commission in connection with the ongoing investigation. The suspension prohibits JPMVEC from selling power at market-based rates for six months effective April 1, 2013.  During the course of the JPMorgan investigation, FERC also sought court intervention to resolve disputes regarding JPMorgan’s invocation of the attorney-client privilege with respect to certain emails.  A recent New York Times article discusses FERC’s findings in the March 2013 “Wells-type notice” that JPMorgan received.  The article explains that FERC’s investigators claim that traders harmed the markets by using several schemes to offer electricity at prices that were “calculated to falsely appear attractive to state energy authorities,” who then made approximately $83 million in “excessive” payments to JPMorgan.  JPMorgan denies any wrongdoing.

            In other recent efforts to curtail market manipulation, FERC reached a settlement with Constellations Energy Commodities Group, LLC in which the company neither admitted nor denied the allegations, but agreed to pay a record amount of $135 million in civil penalties and $110 million in disgorgement.  FERC also settled a proceeding with Deutsche Bank Energy Trading LLC regarding manipulation of the California power markets, in which the company agreed to pay a $1.5 million civil penalty and disgorge $172,645 of profits without admitting or denying the allegations.  And in an aggressive proceeding against Barclays Bank PLC and several individual traders for allegedly manipulating electricity markets in and around California, FERC issued a show cause order seeking a $435 million penalty and $34.9 million in disgorged profits from the company, as well as $18 million in penalties from the individual traders.  These are just a few of the many efforts undertaken by the FERC Office of Enforcement in which the energy industry has come face-to-face with the burdens brought on by government probes, including the need to balance tough considerations like whether to cooperate with the government, when to invoke or waive attorney-client privilege, and issues raised by the government’s targeting of individual employees.

            In the current environment, we likely will continue to see aggressive regulatory enforcement efforts focused on the energy markets.  The worlds of energy industry regulation and energy trading will continue to collide with the intricacies of government investigations.