Federal Judge William H. Pauley III approved the settlement of an antitrust case arising from the alleged use of a financial derivative contract between KeySpan and Morgan Stanley to support gaming of bids in the NYISO electricity capacity market. According to the Times Dealbook Blog,
The Morgan Stanley case was the first attempt by the Justice Department to penalize a bank accused of using derivatives to help clients violate federal antitrust laws. Morgan Stanley, the government said, aided the efforts of KeySpan Corporation, a major utility company in New York, to manipulate electricity prices.
In 2006, the bank entered into a complex swap agreement with KeySpan that gave the company a stake in the profits of its competitor, Astoria Generating Company Acquisitions. Morgan Stanley also represented Astoria in the transaction.
The government said that the deal allowed KeySpan to push up the price of electricity in New York, costing consumers about $300 million. Morgan Stanley made $21.6 million from serving as an intermediary in the deal.
Morgan Stanley settled the accusations with a $4.8 million payment to the federal government without admitting any wrongdoing. In 2010, KeySpan, which is owned by the British energy company National Grid, paid $12 million to resolve its role in the case, also without admitting any wrongdoing.Peter Lattman, Federal Judge Grudgingly Approves Morgan Stanley Price-Fixing Case, N.Y. Times Dealbook blog, Aug. 7, 2012 See also, Morgan Stanley Derivative Accord Wins Approval, Bloomberg, Aug. 7, 2012; US Judge OKs Morgan Stanley Price-fixing Pact Opposed by AARP, Chicago Tribune, Reuters, Aug. 7, 2012; Bill Sanderson, Morgan Stanley to pay $4.8M settlement in alleged $157M price-fix scheme, N.Y. Post, Aug. 7, 2012.
AARP filed comments with the U.S. Department of Justice Antitrust Division, faulting its proposal to settle the case because the settlement found no wrongdoing, it would require no future change of conduct, it did not provide a remedy for customers, and it allows Morgan Stanley to keep the bulk of its profits from the derivative contract used as a tool to raise capacity prices in the NYISO markets to the maximum. The New York State Public Service Commission also filed comments objecting to the settlement.
The Judge approved the settlement agreement citing the legal standard under the Tunney Act that favors approval of antitrust settlements when the government does not want to litigate a case.The Judge's opinion acknowledges considerable skepticism regarding the government's claim that the settlement will deter future use of derivatives to game electricity markets:
The public commenters argue that disgorgement of $4.8 million is inadequate in view of the 21.6 million Morgan Stanley earned in net revenues and the increased prices paid by electricity consumers. They contend that the Government should not have settled the case without receiving the full $21.6 million that Morgan Stanley received, and that Morgan Stanley's damages should reflect the full harm suffered by ratepayers. This Court shares these concerns.The upshot is that consumers have no remedy from NYISO market gaming that raised prices $158 million or more, there is no bar to the use of financial derivative contracts to support NYISO market gaming strategies, and the only penalty, if detected, is giving up only about 20 -25% of net profits, with no admission of wrongdoing. Rather than being a deterrent to anti-competitive conduct and electricity market gaming, the case may teach the wrong lesson:
Given the Government's stark allegations of manipulative conduct against Morgan Stanley, disgorgement of $4.8 million is a relatively mild sanction. There is a risk that a large financial services firm like Morgan Stanley could view such a modest penalty as merely a cost of doing business.
Of course, after this case, the swaps checklist will include a “consult antitrust lawyers” item. Maybe. Lots of people have complained about this settlement that it’s pretty wrist-slappy, given that it’s only 22% of the amount that Morgan Stanley made on the swap. If Morgan Stanley had consulted antitrust lawyers they might have suggested not doing this trade – but it turns out that doing this trade and getting caught was better for Morgan Stanley than not doing this trade. And now they know it. If I were selling derivatives, after this, I might start looking around for other desirable-but-illegal mergers, and trying to replicate them synthetically.Matt Levine, When Morgan Stanley’s Merger Bankers Say No, Its Derivatives Bankers Say Yes, The Dealbreaker, Aug. 8, 2012. As we previously stated, in the context of the government's settlement of the antitrust case against Keyspan involving its economic withholding strategy in the NYISO market, backstopped by the same derivative contract with Morgan Stanley:
The issue presented, whether an electricity market player violates antitrust law by withholding supply to raise prices, coupled with a derivative contract that pays off when the price is elevated, needs to be decided.DOJ Asks Court to Approve Proposed Settlement of KeySpan Antitrust Case Despite Consumer, Utility, and Government Opposition, PULP Network, June 16, 2010.