By Scott DiSavino and David Sheppard
Jan 22 German bank Deutsche Bank AG will pay nearly $1.7 million to settle allegations it manipulated electricity markets in California in 2010, federal regulators said on Tuesday.
The settlement is the latest victory for the U.S. Federal Energy Regulatory Commission (FERC) in its crackdown on alleged trading schemes reminiscent of the Enron scandal that led to the California energy crisis more than a decade ago.
FERC has also proposed imposing a record $470 million on Barclays Plc for allegedly manipulating power markets in California and banning JPMorgan Chase & Co's energy trading arm from some U.S. power markets for six months.
"Deutsche Bank violated the Commission's anti-manipulation rule by engaging in a scheme in which Deutsche Bank entered into physical transactions to benefit its financial position," FERC said in a statement.
FERC said in the order that Deutsche Bank also agreed to disgorge "unjust profits" of $172,645 for manipulating the California power market between January and March in 2010.
While Deutsche neither admits nor denies the violations, according to the order, the bank did not succeed in getting the fine reduced in settlement talks with FERC. The regulator originally proposed the fine in September.
Susan Court, a former director of FERC's Office of Enforcement and founder of SJC Energy Consultants LLC in Arlington, Virginia, said that the market manipulation cases brought against financial institutions generally all involved using physical positions to benefit derivative positions in financial markets.
"Lawyers will be sitting down and comparing the Deutsche Bank and Barclays cases," Court said. "Barclays has a lot more at stake."
The proposed fine for Barclays is even larger than the record $450 million the bank paid for allowing traders to manipulate key interest rates during the 2007/08 credit crunch.
FERC has until Jan. 28 to reply to Barclay's response to the proposed fine, which argued the British bank did nothing wrong.
JPMorgan's six-month ban on market based trading of physical power is due to start in April. FERC has requested more time to decide whether pre-existing contracts will be included in the ban.
FERC also has a $30 million market manipulation case pending against Brian Hunter, the former trader at hedge fund Amaranth that collapsed in 2006 after placing multibillion dollar wrong-way bets in natural gas markets.
Deutsche Bank originally said in September it would fight the proposed fine, despite the fact it would likely cost the bank more in legal fees than they were being asked to pay by the regulator.
Since then, however, the bank has pulled back from commodity trading, including closing its California power trading desk.
"We are pleased to have reached a settlement and put this matter behind us," Deutsche Bank said in a statement.
In U.S. power markets, Deutsche Bank's physical electricity sales fell from a peak of about $1.6 billion in 2010 to $1 billion in 2011, according to sales data submitted to the FERC.
During the first half of 2012, the bank sold just about $200 million of electricity, according to the FERC data.
As of 2010, Deutsche Bank Energy Trading LLC was listed as having about 155 employees, according to a FERC filing.