Justice Department Investigating JP Morgan Chase on Energy Manipulation

The Justice Department is investigating whether J.P. Morgan Chase & Co. manipulated U.S. energy markets.  J.P. Morgan last month agreed to pay $410 million to settle allegations raised by the Federal Energy Regulatory Commission that the bank manipulated markets in California and the Midwest. J.P. Morgan, the nation's largest bank by assets, didn't admit to wrongdoing as part of the settlement.

 

The Justice Department decided to examine J.P. Morgan's energy practices in recent weeks as that settlement was being wrapped up.  U.S. Attorney Preet Bharara accused two former J.P. Morgan employees who worked alongside a former trader known as the "London whale" of hiding losses on runaway bets in 2012 that cost the bank more than $6 billion.  In the energy investigation, Mr. Bharara will examine some of the same issues at the center of the FERC case, these people said. It isn't known whether the investigation is civil or criminal. The U.S. attorney's office for the Southern District of New York declined to comment.

The new inquiry from the Justice Department shows how J.P. Morgan's legal woes are mounting as regulators and government investigators work through a backlog of cases focused on banks' activities during the housing downturn and financial crisis.

The new look into J.P. Morgan's energy practices is the latest federal scrutiny of banks'

participation in the world of physical commodities assets. The Federal Reserve and some members of Congress are questioning whether banks should be profiting from their ownership of power plants and other assets.

 

J.P. Morgan plans to sell of its physical commodities assets, everything from metals warehouses to trading desks that buy and sell oil, gas, power and coal. The bank is planning to kick off the sale in early September and it hopes to sell the assets as one package but might have to sell them piecemeal.

FERC said in its settlement with J.P. Morgan that the bank engaged in a series of "manipulative bidding strategies" from September 2010 to November 2012. The regulator said J.P. Morgan devised ways to turn money-losing power plants into profitable assets, focusing in part on maximizing payments designed to compensate power providers when prices fall.

One alleged scheme took advantage of the fact that system operators try to avoid making power plants ramp up and down quickly. J.P. Morgan would submit a low bid to ensure the system operator would schedule its plant to produce power on a given day, the regulator alleged. Then it would bid $999 a megawatt-hour for the first two hours of the next day, even though market prices at the time were at about $12.
The California system operator's rules required it to pay J.P. Morgan the high prices because the plant was in "ramp-down" mode from the previous day, the regulator said. (WSJ, 8/19/2013)