USA v Morgan Stanley (SDNY, 7 August 2012) represents the US government’s first successful attempt to get a financial services provider to disgorge profits made from derivatives transactions that facilitated anti-competitive behaviour. Morgan Stanley (MS) allegedly (it admitted no wrongdoing) helped KeySpan, an electricity provider, to acquire an interest in its largest competitor, Astoria Generating. Under a swap agreement, KeySpan gained a right to revenue that Astoria earned at auction when the market price for electricity generating capacity exceeded a certain price. This effectively made it unnecessary for KeySpan to bid competitively during the sale of its own generating capacity to retailers, driving up prices for retail consumers. As counterparty to the swap transactions, MS earned approximately $21.6 million. KeySpan settled with the feds earlier this year, and the US government moved to enter a consent decree that would require MS to disgorge $4.8 million in net revenues from the transactions.

Pauley J of the southern district of New York granted the motion, rejecting the arguments from public commenters that the government should have sought restitution for consumers of the higher prices they paid as a result of the swap transactions, rather than disgorgement of MS’s profits payable to the US treasury. The judge had misgivings that the amount of the disgorgement order was a ‘relatively mild sanction’ and an insufficient deterrent to future misconduct, but ultimately refused to second-guess the wisdom of the decision to seek disgorgement instead of restitution.