NEW YORK JPMorgan Chase & Co agreed on Tuesday to pay $410 million to settle allegations of power market manipulation in California and the Midwest, the latest in a series of high-profile inquiries by U.S. federal energy regulators.
The settlement, announced by the Federal Energy Regulatory Commission (FERC), will allow Chief Executive Jamie Dimon to close the books on one of several costly run-ins with regulators over the past year. It came days after the bank said it was quitting the physical commodities business.
JPMorgan Ventures Energy Corp, the commodity trading unit that became one of the biggest U.S. electricity traders with the 2008 acquisition of Bear Stearns, agreed to pay a civil penalty of $285 million and disgorge $125 million for "manipulative bidding strategies" from September 2010 through November 2012.
It is the second largest penalty in FERC history, and comes as the once-quiet government regulator steps up its pursuit of market malfeasance after gaining expanded powers from Congress in 2005, part of efforts to crack down on market manipulation after Enron Corp's spectacular collapse.
JPMorgan spokesman Brian Marchiony said the settlement would "not have a material impact on our earnings" because the bank had previously set aside reserves.
FERC said JPMorgan admitted the facts in the agreement, but "did not admit or deny the violations."
Dimon has moved this year to resolve multiple government investigations and correct problems regulators have found at the bank in an effort to take a more conciliatory stance as new rules are imposed more than five years after the start of the financial crisis.
The deal also came amid unprecedented political scrutiny of Wall Street's involvement in the raw materials supply chain. Lawmakers have questioned whether banks should own metals warehouses and power plants, while the U.S. Federal Reserve reviews a landmark 2003 decision that first let them trade commodities.
The FERC deal did not cite specific traders or JPMorgan's commodities chief Blythe Masters for any wrongdoing. Masters spent billions of dollars over the past five years to build JPMorgan's oil, power, gas and metals business into the biggest on Wall Street.
JPMorgan had vowed in May to fight the FERC charges and disputed allegations that employees lied or acted inappropriately during the investigation. After a court battle over the disclosure over documents, the bank entered settlement discussions.
On Tuesday, FERC laid out Masters knowledge of the traders abusive bidding strategies, including spreadsheets given to her detailing a seven-year plan to churn up to $2 billion in profits from potentially loss-making power plants.
FERC Commissioner Tony Clark heralded the settlement as "historic," but said he was frustrated over the bank's evasiveness during the investigation. FERC had accused JPMorgan on several occasions of being late in responding to data requests and alleged it sometimes submitted "misleading information."
"In this investigation and others, it has become too common for subjects of an investigation to take steps to obfuscate the true intent of their business strategies as a litigation posture for dealing with their regulators," he said in a statement.
In May, JPMorgan sold the so-called "tolling agreements" it owned for several power plants in California owned by AES Corp, for which it had been paying $170 million a year in rent. The agreements effectively gave the bank the right to operate the plants, supplying natural gas as fuel and then selling electricity into the market.
FERC said its investigators found the bank's Houston-based traders engaged in 12 "manipulative bidding strategies designed to make profits from power plants." The plants built in the 1950s and 1960s were less efficient than modern units and without the bidding strategies would not have operated very often, potentially costing the bank millions.
FERC said the company created "artificial conditions" by manipulating power grid operators into paying the bank to run the plants at low levels and getting "premium rates."
Lawyers for three JPMorgan employees from the trading desk - Francis Dunleavy, Andrew Kittell and John Bartholomew - who were identified in the investigation, said the decision not to press charges against them indicated they had done nothing that broke the law. The three oversaw the bidding strategies, according to FERC.
"Francis, Andrew and John were very clear in their communications with the commission," said their attorney, William Scherman of Gibson, Dunn & Crutcher LLP, "that if the commission were to make any finding that they had engaged in any misconduct, they were fully prepared to defend and prove the legality of their conduct in court."
Dunleavy reported to Masters and was head of JPMorgan Ventures' Principal Investments unit. Dunleavy joined the bank after the takeover of Bear Stearns and supervised Kittell and Bartholomew, according to the FERC order.
FERC levied a $470 million penalty against British bank Barclays Plc and four of its traders earlier this month. The tougher enforcement has rattled many traders in the power market, who say FERC is delving into a gray area that separates legitimate entrepreneurial trading from intentional manipulation.
Barclays said it will fight the fine in court.