This article was first published in Petroleum Review.
The US Federal Energy Regulatory Commission (FERC) has imposed fines totalling $453mn on Barclays and three former employees for offences of market manipulation relating to the West Coast energy market from November 2006 to December 2008, writes David Farrer QC, a barrister at 7 Bedford Row in London. These are civil penalties imposed for alleged violations of s. 222 of the federal Power Act and s. 1(c) (2) of the Commission’s Regulations. In essence the case is that Barclays traders at that time undertook daily largely unprofitable cash trades so as to move the price index in the direction which benefited its positions in financial swap transactions, settled on the index at a specific time. FERC’s complaint seems to relate particularly to the use of such trades for purposes other than producing a profit on the trade concerned. To use it for the purpose of profit in another market amounts, it says, to price manipulation. Section 1(c)(2) refers to ‘fraudulent devices’, ‘schemes’ and ‘artifices and courses of business that operate or would operate as a fraud’. Fraud is alleged against each party charged. These are therefore highly damaging accusations for Barclays and the individuals concerned. Barclays has firmly refuted them and it seems certain that these findings and the resulting penalties will be challenged in a federal District Court.
‘Fraud’ is a concept common to UK and US jurisprudence. Although its application may vary, dishonesty is a fundamental requirement in both jurisdictions. Manipulation of the kind alleged (and Barclays may contest even the factual basis for these charges) may well be unattractive, even unethical to many. But dishonest? Is it any different from any other scheme to influence the price of a share, for instance ‘churning’ or short-selling? Dishonesty generally involves misrepresentation, concealment, hidden and damaging collusion. This case involves no feeding of false information to the market, no hidden cartel, no covert use of price-sensitive information. What was done was done openly and traceably, it seems. The fact that emails show those concerned to have been pleased with themselves and surprised at how easy it was is immaterial. The outcome of the probable litigation may be an instructive pointer to how the US courts will interpret the concepts of fraud and manipulation where the interests of that VIP, the energy consumer, are involved.
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