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Barclays, FERC near deal in $453M manipulation case

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Barclays, FERC near deal in $453M manipulation case

A massive $453 million enforcement case against Barclays Bank PLC and four of its former traders accused of manipulating electricity prices in California may be headed for a settlement agreement.

A probe by the Federal Energy Regulatory Commission concluded in 2013 that traders at Barclays manipulated a daily Intercontinental Exchange index price to benefit the bank's financial swap positions. The scheme allegedly executed by former employees Scott Connelly, Karen Levine, Daniel Brin and Ryan Smith between November 2006 and December 2008 involved building and then flattening substantial monthly physical index positions at four of the then most-liquid trading points in the West.

After finding that defendants failed to put forth “a credible explanation” for the trading behavior, FERC in July 2013 ordered Barclays to pay penalties totaling $435 million and disgorge $34.9 million in unjust profits, plus interest. It also ordered Connelly, who according to FERC directed the scheme, to pay $15 million in penalties and Brin, Levine, and Smith to each pay $1 million in penalties.

When the accused refused to pay the penalties, FERC in October 2013 asked the U.S. District Court for the Eastern District of California to affirm the penalties. Following a protracted procedural battle over the meaning of a de novo review by the court, Judge Troy Nunley in March concluded that the defendants were entitled to conduct discovery. He also set a schedule for the case that would have concluded with a trial in May 2019.

In a Sept. 29 order, however, Nunley agreed with Smith that FERC's actions against him were time-barred by the five-year statute of limitations and therefore dismissed him from the case.

Following a settlement conference held Oct. 11-12 before Magistrate Judge Kendall Newman, the court has now vacated all pending dates in the proceeding.

The minutes from the settlement conference issued by the court Oct. 12 revealed that "parties made substantial progress towards a settlement," and would "file status report/dismissal documents within 45 days." The minutes from the court did not disclose any details of the settlement being brokered between Barclays, the remaining traders and FERC.

The closely watched legal fight over FERC’s record-setting fine against Barclays was seen as a critical test of the commission’s authority to pursue market manipulation cases under the Federal Power Act.

"It would have been nice if the industry had gotten some clarity on the reach of [FERC's] anti-manipulation rule, but with the settlement it's totally unclear as to what will be disclosed publicly," Bracewell senior counsel Bob Pease said in an interview Oct. 13.

Pease, who spent 22 years as director of investigations in FERC’s enforcement office, predicted the settlement will lean in Barclays favor, especially given the court's decision last month on the statute of limitations.

With that ruling, "you've eliminated a significant number of the days at issue" in the Barclays enforcement case, Pease said. "If our math is correct, over a third of the days were eliminated and perhaps some of the best evidence, which was connected to the trader that was dismissed from the case. Some of the most damaging emails were some of his that we've seen made public."

Michael Brooks, a partner at Bracewell, added that the ruling on the statute of limitations removed "any profit or harm to the market for those days from the penalty calculation," impacting the maximum penalty and penalty guidelines on which FERC relied.

Of potentially greater significance, the statute of limitations ruling could have implications for how FERC enforcement staff approaches pending and future investigations, Brooks said.

"There's more pressure to move more quickly in cases, and part of that could be reforming their process to make it a more efficient process," Brooks said. "Basically, the clock is running against FERC while it conducts its investigation and goes through the different procedures that it has. What you might see happen is … the investigations may speed up, but also they may look for ways to streamline or reduce the delay that’s caused by the current process." (FERC v. Barclays Bank, et al. 2:13-cv-02093).

Jasmin Melvin is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is owned by S&P Global Inc.