The regulator of U.S. power markets appears likely to pursue manipulation charges against JPMorgan Chase & Co (JPM.N), analysts said, after a New York Times report on the agency's document that seemed to lay out its case.
The Times said on Friday it reviewed a confidential, 70-page government document that the U.S. Federal Energy Regulatory Commission (FERC) sent to JPMorgan in March, which alleged the bank manipulated the power market in California and Michigan in 2010 and 2011.
FERC investigators found JPMorgan devised "manipulative schemes" that transformed "money-losing power plants into powerful profit centers," the Times reported, citing the document. It said the bank has until mid-May to respond.
It has been clear since last summer that FERC was pursuing a deep enquiry on JPMorgan's trading activities, the latest in a string of FERC investigations that have rattled the U.S. power market and - in the case of rival bank Barclays Plc (BARC.L) - concluded with $470 million in proposed penalties.
FERC has not moved to publicly charge JPMorgan, but experts said that now seemed likely.
"FERC staff would not have gone to the trouble of putting together a 70-page document without a case. If they have gotten this far they will likely pursue it," said Susan Court, a former senior lawyer at FERC who is principal of SJC Energy Consultants LLC in Arlington, Virginia.
The document also criticized Blythe Masters, JPMorgan's head of global commodities and former chief financial officer, saying she "falsely" denied under oath that she was aware of schemes carried out by a group of energy traders in Houston, according to the Times.
"We strongly dispute that Blythe Masters or any employee lied or acted inappropriately in this matter," JPMorgan spokeswoman Jennifer Zuccarelli said. "We intend to vigorously defend the firm and the employees in this matter."
The document cited by the Times came after a months-long inquiry into the bank's trading in power markets, one of several high-profile investigations since FERC's enforcement powers were expanded in 2005 following the Enron scandal a decade ago.
"We cannot, and do not, speculate as to any investigations, as they are all non-public. We do not speculate as to whether investigations are taking place, nor do we speculate as to whether or when the Commission will take any action," FERC spokeswoman Mary O'Driscoll said.
FERC last summer subpoenaed JPMorgan to produce 25 internal emails - some between Blythe Masters and the bank's head of principal commodity investments Francis Dunleavy - as part an ongoing investigation focused on bidding practices that may have raised electricity prices by about $73 million in California and the Midwest power markets.
FERC normally does not disclose investigations but chose to subpoena JPMorgan after the bank claimed the emails were protected by attorney client privilege. A federal magistrate in November sided with JPMorgan and ruled that FERC could not see the emails. FERC appealed that decision in January.
TRADING BAN 'NO BIG DEAL'
In November, FERC imposed a temporary ban on JPMorgan's ability to trade physical power at market-based rates for six months, starting in April, for failing to disclose information to the FERC and the California ISO in a market manipulation investigation.
In December, JPMorgan Chief Executive Jamie Dimon said the trading ban is "not that big a deal" for the bank.
FERC Commissioner Cheryl LaFleur dissented in that November vote, saying the agency should include penalties for any failure to disclose information as part of the market manipulation case if the agency decided to pursue it.
In order to pursue a penalty or disgorgement of profits, FERC staff typically issues a public show-cause order, which has not yet occurred in the JPMorgan case.
"A lot of the letters that FERC sends out are trying to get at facts. And the tone of this (letter) sounds a little different ... a little bit more sharp," said Marc Spitzer, a partner at the law firm of Steptoe & Johnson in Washington, and a former FERC Commissioner.
One open question at this point is to what extent FERC's cases may be weakened by a ruling in March on a case related to Brian Hunter, a natural gas trader for the now closed Amaranth Advisors hedge fund, who was fined $30 million by FERC for alleged manipulation of gas prices in 2006.
A federal appeals court ruled that FERC acted outside of its mandate in imposing the fine because the U.S. Commodities Futures Trading Commission (CFTC) has jurisdiction over financial derivatives trading.
FERC has jurisdiction over physical power and natural gas trading, but several of its recent cases - including the one against Barclays - hinge on demonstrating that traders may have manipulated physical prices in order to profit on derivatives.
Barclays has disputed the FERC allegations and said it will defend itself in court if FERC issues a final order seeking to impose the fine. To date, FERC has not issued a final order.
"We need more information about the JPMorgan and Barclays cases to know whether there are Hunter questions. I am confident law firms with manipulation cases at FERC are pursuing that question," Court, of SJC Energy Consultants, said.