JPMorgan Chase May Have Manipulated Power Markets In California, Regulators Say

07/03/2012 09:27 am ET | Updated Sep 02, 2012

* FERC files to force JPMorgan to produce emails
* Regulator stepping up enforcement in energy market

By Scott DiSavino and David Sheppard
NEW YORK, July 3 (Reuters) - U.S. energy regulators have
subpoenaed JPMorgan Chase & Co to produce 25 internal emails as
part of an investigation into whether the bank manipulated
electricity markets in California and the Midwest.
The Federal Energy Regulatory Commission (FERC), which has
recently stepped up its efforts to end manipulation of U.S.
power markets, filed a petition in federal court on Monday to
require the bank to produce emails from 2010 and 2011 as part of
a formal investigation into the bank's power trading.
News of the subpoena follows a series of more advanced
probes of other big Wall Street banks and a record $245 million
penalty against Constellation Energy that have sent shudders
through electric markets this year, rekindling memories of the
California power crisis and Enron melt-down a decade ago.
The inquiry also comes at a delicate moment for JPMorgan
, already facing losses from its disastrous "London
Whale" derivative trades that could amount to as much as $6
billion.
FERC does not normally disclose investigations, but it chose
to subpoena JPMorgan after the bank claimed emails - some
between commodities chief Blythe Masters and head of principal
commodity investments Francis Dunleavy - were protected by
attorney-client privilege, which the regulator disputes.
"The investigation focuses on JPMorgan bidding practices
that may have been designed to manipulate the California and
Midwest electricity markets," FERC lawyers said in the subpoena.
"Any such improper payments to generators are ultimately
borne by the households, businesses, and government entities
that are the end consumers of electricity."
FERC said it is also looking at whether the bank has tried
to stall the investigation by not engaging in truthful
communications with the commission.
The inquiry follows complaints from grid operators in
California and the Midwest in 2011 that JPMorgan's traders may
have bid up electricity prices by more than $73 million. FERC
has not yet found if there was any wrongdoing.
"We have been responding to a FERC investigation into
certain activities in our federally approved power business,"
JPMorgan spokeswoman Jennifer Zuccarelli said in an email.
"We stress that this investigation is ongoing and that no
conclusions have been reached or findings adjudicated. We
welcome the court's assistance in resolving this dispute over
documents," Zuccarelli said.



EMAIL CHAIN
At the center of the subpoena is a dispute over
client-attorney privilege. Court papers and exhibits show that
JPMorgan repeatedly told FERC's Office of Enforcement that 53
emails the regulator sought from the bank were protected.
JPMorgan produced 20 emails in May after FERC told the bank
it intended to seek judicial review of the emails. The bank
produced another eight emails in June, the court papers said.
"A party that has knowingly and repeatedly assured a federal
agency that documents are privileged, when there was no good
faith basis for a privilege claim, is entitled to no credibility
when it makes similar privilege claims about other documents,"
FERC said in the court filing.
In one of the emails revealed by FERC in the court filing,
Dunleavy, head of principal investments within the bank's
commodities group, told commodity chief Masters that he will
"handle" the matter but said "it may not be pretty."
The bank maintains the remaining 25 emails are protected
under client-attorney privilege.

STEPPED-UP ENFORCEMENT
FERC's Office of Enforcement, run by Norman Bay, has stepped
up its game lately, taking the lead among regulators in cracking
down on trades that cross both physical and financial markets.
In March, FERC hit Constellation Energy with a record $135
million civil penalty and forced the company to return $110
million to settle charges of power market manipulation in the
U.S. Northeast in 2007 and 2008. Constellation settled prior to
its merger with Exelon Corp of Chicago.
Over the past several months, FERC has announced "notices of
alleged violations" by units of Barclays Bank, in
April, and Deutsche Bank, last December. The JPMorgan
enquiry has not yet reached this stage, which signals that an
enforcement action is likely.
Unlike the often brazen trading ploys that were exposed on
phone tapes and emails after the 2001 power trading crisis, more
nuanced strategies, some of which have been considered
commonplace in related markets, have been FERC's latest focus.
With Constellation, for example, it alleged the company used
the physical market trades to benefit its financial positions.
Tom Olson, a Harvard Law School-educated enforcement
attorney at FERC, who describes himself on his LinkedIn profile
as a "tireless defender of the nation's energy systems," is the
lead investigator for the alleged manipulation of power markets
in the Midwest, according to the court papers.

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