Analysis: Barclays set to fight FERC over bragging, not rigging

Mon Nov 5, 2012 12:06am EST
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By Cezary Podkul and Jonathan Leff

NEW YORK (Reuters) - British bank Barclays is set to fight a potentially record $470 million penalty from U.S. energy regulators by arguing its traders were guilty of braggadocio, not of rigging California electricity prices.

The four traders in question, who boasted in emails and instant messages about how "fun" it was to "crap on" certain physical power prices, did not actually carry out the complex scheme they are accused of by the Federal Energy Regulatory Commission, a source familiar with the bank's thinking said.

Last week, the country's top cop overseeing electricity markets ordered Barclays to demonstrate why it should not pay a $435 million civil penalty, plus $34.9 million in the repayment of ill-gotten gains, for manipulation of California power markets between 2006 and 2008.

The British banking giant, still reeling from an nearly equivalent fine over its role in rigging the Libor interest rate benchmark, has already said it will "vigorously" fight the FERC charges, likely setting up a landmark court battle.

It believes electricity trades on the days of the traders' messages show their West Coast trading team was not intentionally manipulating prices for profit, despite the "unfortunate" emails released in FERC's 73-page regulatory filing, the source said.

Any losses incurred on the bank's mammoth trades -- which on some days accounted for more than half of all the deals in specific markets -- was an effort to "build credibility" with potential clients in a new market.

In fact, on more than half of the days in question, the bank actually made money or lost very little, the source said, an outcome seemingly at odds with FERC's accusation that it was engaged in so-called "uneconomic trading", where losses in one market would yield larger profits in another.

To prevail in its case, which stems from an investigation that began in July 2007 after an anonymous tip-off from other market participants, FERC will have to demonstrate the traders' messages demonstrate "intent" to manipulate markets - a tough, though not impossible hurdle to meet, legal experts said.   Continued...

Barclays bank headquarters in Canary Wharf, east London August 30, 2012. REUTERS/Olivia Harris