FERC Takes Aim at Wall Street

Wall Street finds itself in a bare-knuckle brawl with a government agency.

Yet the fight is not with the Federal Reserve or another banking regulator, but a less-known agency more accustomed to patrolling the nation’s energy pipeline than a trading floor.

The Federal Energy Regulatory Commission, the government watchdog overseeing the oil, natural gas and electricity business, has lately taken aim at three major banks suspected of manipulating energy prices. After taking action against JPMorgan Chase and Deutsche Bank, the agency on Wednesday threatened to impose its largest fine ever against Barclays.

The agency — building on a 2005 law, additional resources and a string of personnel moves — is increasingly exercising its new enforcement muscle to pursue not only energy companies but some of the nation’s biggest banks. Indeed, the case against Barclays, which could cost the British bank $470 million, stems from a broad crackdown on questionable trading that has prompted 19 actions in the last two years.

“It’s the most powerful agency that no one knows about,” said Tyson Slocum, the director of the energy program for Public Citizen, a nonprofit advocacy group.

And it is a regulator that has so far had unusually fierce clashes with Wall Street. While they may push back against regulations and enforcement actions, financial firms typically tread softly in dealing with their regulators, preferring to strike settlement deals that swiftly resolve scandals. In June, for example, Barclays paid $450 million to settle regulators’ accusations that it had manipulated interest rates during the financial crisis.

But Barclays and JPMorgan are mounting counterattacks against the Federal Energy Regulatory Commission, casting the accusations against them as wrongheaded and overreaching. Even Deutsche Bank, which faces a meager $1.5 million fine, has vowed to fight.

“People have to be held accountable, but there also has to be clarity and due process,” said Nora Mead Brownell, a former commissioner at the agency who became a founding partner at Espy Energy Solutions, an energy consulting firm.

The banks sense that a larger regulatory battle is at stake. Unlike financial regulators, the energy commission can fine firms $1 million a day for every violation. The string of recent cases, banks fear, could lay the groundwork for years of costly litigation.

The agency’s effort is rooted in a 2005 law passed in the aftermath of the Enron fraud. The law created an enforcement unit at the agency and gave it the authority to assess hefty fines.

Under the Obama administration, the enforcement unit expanded its ranks and received a nearly 50 percent budget increase.

The unit, which this year created a specialized group to analyze arcane data and detect manipulation, also hired seasoned criminal investigators. The enforcement team is led by Norman C. Bay, the former United States attorney for New Mexico. One of his top deputies is a former general counsel of the Federal Bureau of Investigation.

The overhaul is starting to bear fruit. The energy commission in March imposed a $245 million fine on Constellation Energy over charges that the company manipulated markets in New York to benefit its trading portfolio.

As several banks set up energy trading desks over the last decade, aiming to fill the business that Enron vacated, the agency expanded its focus to Wall Street.

The commission disclosed this summer that it was investigating JPMorgan Chase over potential manipulation of markets in California and the Midwest, exploring whether the firm had engaged in abusive bidding for energy prices.

The fight also centers on a technical issue: whether JPMorgan must turn over internal e-mail. The bank initially refused to turn over documents to the California agency that oversees the state’s power grid, citing attorney-client privilege.

In September, the federal energy commission ordered the bank to produce evidence that it had not violated market rules, or risk losing its license to sell power at market rates. Last month, JPMorgan apologized and turned over some of the documents, blaming miscommunication for the impasse. The broader inquiry into the bank continues.

“The message from the cases is fairly simple: Traders have to play it straight,” said Susan Court, the agency’s first enforcement director who is now the principal of SJC Energy Consultants.

JPMorgan has said in a statement: “We believe we have complied in all respects with the law, as well as FERC rules and applicable tariffs, governing this market.”

In its most significant case yet, the energy commission this week took action against Barclays. It outlined accusations that Barclays put on trades that were designed to skew the prices for electricity in what the industry calls the “physical” market.

Those prices then lifted the value of separate financial bets Barclays had placed, according to the commission. The agency argued that the gains in the financial bets were greater than the losses on the physical trades, effectively leaving Barclays with an overall profit. Citing complex calculations, the agency argued that the physical trades resulted in a loss of $4 million over the period, against gains of $35 million on the financial contracts.

The commission, emphasizing the nature of the conduct, sprinkled its order with excerpts from colorful and often explicit messages between traders.

In one e-mail, a trader wrote in vulgar terms that he would make trades that would lower one market to weigh down another.

The traders also discussed how one trader asked the others to help her “prop up” certain indexes, which would require taking a “daily loss” in the physical markets.

In testimony before the agency’s investigators, bank employees said that traders were forbidden from intentionally forcing losses.

“The golden rule was always, under no circumstances, lose money on a transaction for the intention of making money on another transaction,” the Americas head of Barclays’ commodities unit, Joseph Gold, said in testimony.

Barclays issued a statement this week challenging the commission’s allegations, saying the bank’s “trading was legitimate and aboveboard.” The bank added that it intended to “vigorously defend this matter.”

Barclays plans to challenge the agency’s tally of gains and losses, according to people briefed on the matter. Bank officials, who have 30 days to respond to the charges, are also expected to argue that regulators cherry-picked a handful of salacious e-mails from hundreds of thousands of documents.

Despite the onslaught of cases, Mr. Slocum of Public Citizen says the agency has yet to shake its backwater reputation. It still relies on private companies to police the front lines of energy manipulation, he said, and takes years to file cases.

“They’re catching a few scraps,” he said. But the recent actions have less to do with a reinvigorated agency than “companies engaging in widespread manipulation.”

Peter Eavis contributed reporting.