The Federal Energy Regulatory Commission announced July 30 that a JPMorgan Chase (NYSE:JPM) subsidiary had agreed to pay $410 million to put charges that the bank manipulated energy markets in California and the Midwest to rest.
JP Morgan Ventures Energy Corp. “admits the facts set forth in the agreement, but neither admits nor denies the violations,” the press release issued the same day said. “FERC investigators determined that JPMVEC engaged in 12 manipulative bidding strategies designed to make profits from power plants that were usually out of the money in the marketplace.”
The statement continued: “In each of them, the company made bids designed to create artificial conditions that forced the ISOs [independent system operators] to pay JPMVEC outside the market at premium rates.” The regulatory body also determined that the bank’s subsidiary knew the California and Midwest operators did not benefit from making the inflated payments, “thereby defrauding the ISOs” between September 2010 and November 2012.
But the government’s probe didn’t end with that settlement. Through multiple sources familiar with the matter, Reuters learned that U.S. authorities are in the midst of a criminal investigation aimed at discovering whether several employees of JPMorgan tried to impede FERC’s probe.
In particular, the Federal Bureau of Investigation and prosecutors from Manhattan U.S. Attorney Preet Bharara’s office want to determine if those employees — including three individuals who operated out of a Houston office — gave regulators all the information they needed to investigate the bank’s power market deals, the sources told Reuters.
None of the employees involved in the investigation have been accused of any wrongdoing, but if they are found to have deliberately withheld information from regulators or lied during interviews conducted as part of the probe — actions regarded as an obstruction of justice — they could be charged criminally.
The Reuters sources said the motivation to launch the investigation was a letter written July 31 by Massachusetts’s two Democratic senators, Elizabeth Warren and Edward Markey, who asked why the Federal Energy Regulatory Commission had allowed JPMorgan to settle the case without admitting wrongdoing and why the regulatory agency did not take action against the individuals involved in the market manipulation and those who “impeded the Commission’s investigations.”
The letter also noted that while the $410 million fine was “large in absolute terms,” the penalty was “equal to roughly 1.3 percent” of the bank’s 2012 profits. Warren and Markey were also concerned that the settlement did not include “adequate refunds to defrauded ratepayers.”
The bank was suspended for six months from participating in the electric power market in November 2012. A press release made at the time said the suspension was put in place “because the company made factual misrepresentations and omitted material information over the course of several months of communications with the California Independent System Operator (California ISO) and in filings to the Commission in connection with requests for information involving bidding activities in the California market.”
Additionally, the Senate Permanent Subcommittee on Investigations is making its own inquiries into the FERC accusations, including whether the bank or its employees lied to regulators or impeded their inquiries.
JPMorgan has been slammed with numerous legal and regulatory headaches in recent months. Not only is the bank dealing with the legal repercussions of 2012’s $6 billion London Whale trading loss, it is involved in more than a handful of separate investigations led by U.S. Department of Justice and other government agencies looking into various aspects of several of JPMorgan’s past operations.
The legal problems and resulting pressure on JPMorgan’s stock is unusual for the bank, which up until the London Whale fiasco was often held up as an example a well-run financial institution — it even emerged from the financial crisis stronger than most of its peers. But now, JPMorgan has calculated that its losses from lawsuits and federal investigations could exceed its legal reserves by as much as $6.8 billion, according to a filing made August 7 with the Securities and Exchange Commission.
The Wall Street Journal first reported on the criminal probe into JPMorgan’s alleged energy market manipulations last month. However, the article said the investigation was related to whether the bank manipulated the power markets, not whether its employees were guilty of obstruction of justice.
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