By Scott DiSavino
NEW YORK, July 30 (Reuters) - JPMorgan Chase & Co agreed on Tuesday to pay $410 million to settle allegations ofpower market manipulation in California and the Midwest, thelatest in a series of high-profile inquiries by U.S. federalenergy regulators.
The settlement, announced by the Federal Energy RegulatoryCommission (FERC), will allow Chief Executive Jamie Dimon toclose the books on one of several costly run-ins with regulatorsover the past year. It came days after the bank said it wasquitting the physical commodities business.
JPMorgan Ventures Energy Corp, the commodity trading unitthat became one of the biggest U.S. electricity traders with the2008 acquisition of Bear Stearns, agreed to pay a civil penaltyof $285 million and disgorge $125 million for "manipulativebidding strategies" from September 2010 through November 2012.
It is the second largest penalty in FERC history, and comesas the once-quiet government regulator steps up its pursuit ofmarket malfeasance after gaining expanded powers from Congressin 2005, part of efforts to crack down on market manipulationafter Enron Corp's spectacular collapse.
JPMorgan spokesman Brian Marchiony said the settlement would"not have a material impact on our earnings" because the bankhad previously set aside reserves.
FERC said JPMorgan admitted the facts in the agreement, but"did not admit or deny the violations."
Dimon has moved this year to resolve multiple governmentinvestigations and correct problems regulators have found at thebank in an effort to take a more conciliatory stance as newrules are imposed more than five years after the start of thefinancial crisis.
The deal also came amid unprecedented political scrutiny ofWall Street's involvement in the raw materials supply chain.Lawmakers have questioned whether banks should own metalswarehouses and power plants, while the U.S. Federal Reservereviews a landmark 2003 decision that first let them tradecommodities.
The FERC deal did not cite specific traders or JPMorgan'scommodities chief Blythe Masters for any wrongdoing. Mastersspent billions of dollars over the past five years to buildJPMorgan's oil, power, gas and metals business into the biggeston Wall Street.
JPMorgan had vowed in May to fight the FERC charges anddisputed allegations that employees lied or actedinappropriately during the investigation. After a court battleover the disclosure over documents, the bank entered settlementdiscussions.
On Tuesday, FERC laid out Masters knowledge of the tradersabusive bidding strategies, including spreadsheets given to herdetailing a seven-year plan to churn up to $2 billion in profitsfrom potentially loss-making power plants.
FERC Commissioner Tony Clark heralded the settlement as"historic," but said he was frustrated over the bank'sevasiveness during the investigation. FERC had accused JPMorganon several occasions of being late in responding to datarequests and alleged it sometimes submitted "misleadinginformation."
"In this investigation and others, it has become too commonfor subjects of an investigation to take steps to obfuscate thetrue intent of their business strategies as a litigation posturefor dealing with their regulators," he said in a statement.
(For a FACTBOX on JPMorgan's power deals: )
(For details of one of the trading schemes: )
MANIPULATIVE BIDDING
In May, JPMorgan sold the so-called "tolling agreements" itowned for several power plants in California owned by AES Corp, for which it had been paying $170 million a year inrent. The agreements effectively gave the bank the right tooperate the plants, supplying natural gas as fuel and thenselling electricity into the market.
FERC said its investigators found the bank's Houston-basedtraders engaged in 12 "manipulative bidding strategies designedto make profits from power plants." The plants built in the1950s and 1960s were less efficient than modern units andwithout the bidding strategies would not have operated veryoften, potentially costing the bank millions.
FERC said the company created "artificial conditions" bymanipulating power grid operators into paying the bank to runthe plants at low levels and getting "premium rates."
Lawyers for three JPMorgan employees from the trading desk -Francis Dunleavy, Andrew Kittell and John Bartholomew - who wereidentified in the investigation, said the decision not to presscharges against them indicated they had done nothing that brokethe law. The three oversaw the bidding strategies, according toFERC.
"Francis, Andrew and John were very clear in theircommunications with the commission," said their attorney,William Scherman of Gibson, Dunn & Crutcher LLP, "that if thecommission were to make any finding that they had engaged in anymisconduct, they were fully prepared to defend and prove thelegality of their conduct in court."
Dunleavy reported to Masters and was head of JPMorganVentures' Principal Investments unit. Dunleavy joined the bankafter the takeover of Bear Stearns and supervised Kittell andBartholomew, according to the FERC order.
FERC levied a $470 million penalty against British bankBarclays Plc and four of its traders earlier thismonth. The tougher enforcement has rattled many traders in thepower market, who say FERC is delving into a gray area thatseparates legitimate entrepreneurial trading from intentionalmanipulation.
Barclays said it will fight the fine in court.
Barclays (BARC)
