FERC Proposes $435 Million Penalty for Barclays Alleged Manipulation

FERC yesterday issued a show cause order and notice of proposed penalty against Barclays Bank PLC and individual traders Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith, as FERC alleged that they manipulated the electricity markets in and around California from November 2006 to December 2008.

Specifically, FERC directed Barclays to show cause why it should not be assessed a civil penalty in the amount of $435 million and ordered to disgorge $34.9 million plus interest.

A report from Staff at FERC's Office of Enforcement alleges that Barclays and the individual traders, "engaged in a coordinated scheme to manipulate trading at four electricity trading points in the Western United States in certain months from November 2006 to December 2008."

"Specifically, OE staff alleges that Barclays and the four individual traders violated section 1c.2 [of the Commission's regulations] in certain months by engaging in loss-generating trading of next-day fixed-price physical electricity on the IntercontinentalExchange at the locations of Mid-Columbia, Palo Verde, South Path 15 and North Path 15 to benefit Barclays' financial swap positions in those markets," FERC said.

"Staff concludes that during the alleged manipulation months Barclays' West power desk engaged in a coordinated scheme to trade next-day fixed-price physical power to move the ICE daily index settlements to benefit Barclays' fixed-for-floating financial swap positions that settled against those indices. Barclays engaged in this activity for 655 product days for 35 monthly products and caused losses to market participants estimated at $139.3 million," Staff alleged.

"In the alleged manipulation months, Barclays generally began by assembling substantial physical index positions in the opposite direction of its fixed-for-floating financial swap positions. Barclays flattened those physical index positions in the next-day fixed-price physical markets in a manner designed to move the daily index settlement up if it was buying and down if it was selling. Barclays' execution of its next-day fixed-price physical trading was highly coordinated and discussed amongst the traders. Barclays' trading of next-day fixed-price physical against index produced substantial, repeated, and avoidable losses in the next-day fixed-price physical markets. Barclays was willing to accept losses in its next-day fixed-price physical trading to move the settlement of daily indices in the direction that benefited its financial swaps," Staff alleged.

"Staff's investigation uncovered a substantial number of contemporaneous instant messages and e-mails that reveal Barclays' intent to trade next-day fixed-price physical electricity against index to move the respective daily index settlements and enhance the value of its fixed-for-floating financial swaps," Staff alleged.

Notably, in a report, Staff alleged that, "Smith described how he 'fuckked [sic] with the Palo m[a]rk[e]t,' 'propped up the palo index,' and was 'gonna try to crap on the NP light and it should drive the SP light lower.'"

FERC directed the individual traders to show cause why they should not be assessed civil penalties of the following amounts: Brin – $1 million, Connelly – $15 million, Levine – $1 million, and Smith – $1 million