JPMorgan Probed Over Potential Power-Market Manipulation
Katarzyna Klimasinska and Dawn Kopecki
JPMorgan Chase & Co. (JPM)’s refusal to turn over e-mails in a federal probe of potential energy-market manipulation is the latest challenge for Chief Executive Officer Jamie Dimon as the bank faces multiple investigations.
The U.S. Federal Energy Regulatory Commission sued JPMorgan July 2 to release 25 e-mails in an investigation of possible manipulation of power markets in California and the Midwest by J.P. Morgan Ventures Energy Corp., according to court filings by the Washington-based agency. FERC opened the probe in August after complaints from California and Midwest grid operators that JPMorgan’s bidding practices were abusive, the documents show.
“He’s got a PR nightmare in front of him,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s another headline risk, which means more regulators, which means over-regulation, which will eventually hit their bottom line.”
The largest U.S. bank is struggling to maintain its image as risk-averse and well-managed after reporting a $2 billion loss in a London unit that Dimon said “violated common sense.” Dimon, 56, has said that the loss may grow to $3 billion or more. Analysts including Charles Peabody at Portales Partners LLC in New York estimate it at about $5 billion.
The Securities and Exchange Commission and U.S. Justice Department are among agencies investigating the cause of the loss as well as the company’s public disclosures.
Libor Probe
JPMorgan, Citigroup Inc. and Bank of America Corp. may get stung also by an international investigation into an attempt by banks in the U.K. and U.S. to rig the London interbank offered rate, called Libor. London-based Barclays (BARC) Plc was fined 290 million pounds ($455 million) and its top three executives, including CEO Robert Diamond, said they would step down.
“There is a heightened possibility of scrutiny after recent events at Barclays,” Mike Mayo, an analyst at CLSA Ltd. in New York, wrote in a July 2 research note. The banks face risks of fines, lawsuits, negative news and new regulations, according to Mayo’s note.
JPMorgan keeps “having these little blowups,” said Paul Miller. “It just sounds like a culture that’s supposed to be very tight and risk-managed is not being well run.”
FERC, which has pledged to combat manipulation of prices, said JPMorgan’s bidding techniques in California and the Midwest resulted in at least $73 million in improper payments. It accused the bank of improperly using attorney-client privilege to withhold or redact 53 e-mails subpoenaed in April.
E-Mails Released
The company has since released 28 of the e-mails, including a March 14, 2011, exchange between commodities head Blythe Masters and her chief of principal investments, Francis Dunleavy, regarding an update on the California Independent System Operator Inc., one of the complainants in the case.
“So in your opinion we are better off with me trying to decide this without your help?” Masters asked.
After Dunleavy asked to speak directly to Masters, who wasn’t available, he said, “I will handle it but it may not be pretty.”
FERC said in its complaint “there is no conceivable argument that any of this is privileged.”
FERC Chairman Jon Wellinghoff said in March that the agency will be vigorous in seeking to stop companies from manipulating electricity markets, after the agency reached a record $245 million settlement with Constellation Energy Group Inc. for trading practices in New York and New England.
Alleged Violations
FERC has issued 15 notices of alleged violations since January 2011 for companies including Barclays, BP Plc (BP/), Deutsche Bank AG and Constellation, according to information posted on the agency’s website. Seven of the cases have been settled, FERC said.
“We have been responding to a FERC investigation into certain activities in our federally approved power business,” Jennifer Zuccarelli, a JPMorgan spokeswoman, said in an e-mail. “We believe we have complied in all respects with the law, as well as FERC rules and applicable tariffs.” She declined to discuss the bank’s image.
The regulator is examining efforts by Houston-based J.P. Morgan Ventures to extract excessive payments or above-market prices from California ISO and Midwest Independent Transmission System Operator Inc., Thomas Olson, a lawyer in the FERC investigating division, said in a court document. The probe focuses on winning inflated “make-whole” payments, he said.
Improper Payments
“Any such improper payments to generators are ultimately borne by the households, businesses and government entities that are the end-consumers of electricity,” Olson said.
The California and Midwest grid operators solicit bids from electricity suppliers each day to meet expected demand. Typically, 90 percent or more power consumed is secured in what is known as the day-ahead market. Any supply shortfalls because of weather or unexpected plant shutdowns are met through bids placed in real-time.
“Anytime you have allegations like this, it’s noteworthy,” said Paul Patterson, a New York-based analyst at Glenrock Associates LLC. “Given the vital nature of electricity, its inability to be stored and limitations for transmission, the ability for players to influence prices is a substantial concern to regulators.”
JPMorgan fell 1.1 percent to $35.88 yesterday in New York, the fifth-worst performing stock among 30 companies in the Dow Jones Industrial Average.
The Financial Times reported the FERC investigation earlier on its website.
The case is Federal Energy Regulatory Commission v. J.P. Morgan Ventures Energy Corp., 12mc352, U.S. District Court for the District of Columbia (Washington).
To contact the reporters on this story: Katarzyna Klimasinska in Washington at kklimasinska@bloomberg.net; Dawn Kopecki in New York at =1-212-617-9115 or dkopecki@bloomberg.net.
To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net