JPMorgan Chase & Co. will pay $410 million to settle Federal Energy Regulatory Commission allegations that the bank manipulated power markets, enriching itself at the expense of consumers in California and the Midwest from 2010 to 2012.
The bank agreed to pay a U.S. civil penalty of $285 million and return $125 million in ill-gotten profits to electricity ratepayers, according to a regulatory commission order Tuesday. JPMorgan also agreed to give up claims to $262 million worth of disputed payments from California’s grid operator, the state authority said in a separate statement.
“We’re pleased to have this matter behind us,” said Brian Marchiony, a spokesman for New York-based JPMorgan, the largest U.S. bank by market value.
The case marks another setback for JPMorgan, which sailed through the 2008 financial crisis without a single quarterly loss. Last year, JPMorgan lost more than $6.2 billion from wrong-way derivatives bets placed by traders in London. The incident prompted a U.S. Senate investigation, the departure of two senior executives and a debate over whether Chief Executive Officer Jamie Dimon, 57, should keep his chairman role. In May, shareholders re-elected him as chairman.
“JPMorgan picked the pockets of California households and businesses, and their manipulation increased the electric bills that people pay,” Tyson Slocum, director of the energy program at Public Citizen, a Washington based consumer advocacy group, said Monday.
JPMorgan shares fell 36 cents to close Tuesday at$55.33. The shares rose 27 percent this year through Monday.
The settlement is a record for the Federal Energy Regulatory Commission since Congress gave it additional powers to police energy markets in 2005, after the collapse of energy trader Enron Corp. JPMorgan’s $285 million civil penalty is the largest paid to the regulator by any company. The commission on July 16 assessed a $435 million penalty to Barclays Plc for purported market manipulation, which will be a record if it is paid. The company has vowed to challenge in court.
“JPMorgan’s brazen, Enron style market manipulation cost California ratepayers over $120 million,” Rep. Henry Waxman, D-Calif., said in an email. “Congress provided FERC with the authority to stop precisely these kinds of fraudulent schemes.”
The Federal Energy Regulatory Commission said a JPMorgan energy-trading unit engaged in 12 bidding strategies in wholesale energy markets from September 2010 to November 2012, resulting in tens of millions of dollars in over payments from the grid operators. The agency announced the violations Monday after investigating the bank’s energy-trading practices for more than a year.
Of the $410 million, $124 million will go to the California electric-grid operator and $1 million will go to an operator in the Midwest, according to the agency. The bank accepted the facts in the settlement agreement without admitting or denying wrongdoing, the Federal Energy Regulatory Commission said in a statement.
The settlement won’t have a material effect on the bank’s earnings since it has previously set aside reserves to cover the costs, Marchiony, the JPMorgan spokesman, said.
The agreement to settle is another scandal that hurts the bank’s credibility with customers, said Charles Peabody, an analyst with Portales Partners in New York. “It’s very damning because they were duping others,” Peabody said in an interview.
Questions have been raised about the bank’s practices, including those involving credit card debt collections, investment products and mortgage practices, he said.
“There are a lot of these issues that have surfaced within the JPMorgan franchise that say maybe they aren’t looking out for the best interest of their clients,” Peabody said.
The settlement with the Federal Energy Regulatory Commission ends the agency’s investigation of J.P. Morgan Ventures Energy Corp., a trading unit overseen by commodities chief Blythe Masters. The wholly owned subsidiary trades and holds physical commodities, including agricultural products, metals and energy, as well as derivatives.
The bidding strategies at issue were developed by a Houston-based unit run by Francis Dunleavy, who was one of eight people who reported directly to Masters.
Dunleavy oversaw Andrew Kittell and John Bartholomew in the company’s principal investments unit beginning in 2010.
All three men are still employed by JPMorgan although they no longer have a role in bidding for energy in California’s power market, according to the Federal Energy Regulatory Commission. Marchiony declined to comment on their current roles or whether the company would cut their bonuses or Masters’ compensation.
Business, Pages 25 on 07/31/2013