On October 31, the Federal Energy Regulatory Commission proposed a record penalty of almost $500 million against the Barclays Group and four Barclays traders, charging them with manipulating prices for electricity in the Western power markets.

Violation of the Golden Rule Cited

FERC alleges that Barclays violated what Joseph Gold, the managing director and head of commodities for Barclays, described during deposition (and stressed during in-house training) as the Golden Rule: "under no circumstances, lose money on a transaction for the intention of making money on another transaction." Specifically, FERC alleges that Barclays and the traders lost money on next-day fixed-price physical electricity trades at four locations in the West from 2006 to 2008 to benefit Barclays' financial swap positions at those locations.

The record penalty, which includes a $15 million civil penalty against the Barclays trader that lead the alleged manipulative scheme, was driven, in part, by FERC's allegations that:

  • The alleged manipulative scheme cost other market participants almost $140 million.
  • Barclays manipulated the London Interbank Offer Rate during the same period.

Lessons Learned

In addition to the obvious—don't violate the Golden Rule—the following are two lessons to take from this case.

  • Companies must contemporaneously document why their trading activities have a business purpose other than to manipulate the market. In this case, Barclays and the traders had no such documentation and thus had to rely on justifications, developed after the trades in question were concluded and in the middle of a FERC investigation, for why its actions were not manipulative. For now, FERC has found those justifications "not credible" in the face of contemporaneous evidence to the contrary.
  • The "fox must not guard the hen house." Compliance departments, not the trading floor, must be responsible for (i) detecting and investigating manipulative behavior and (ii) having systems in place to detect such behavior. In this case, Barclays had no such systems and the responsibility for detecting manipulative behavior rested with the very trader that lead the allegedly manipulative conduct.

Barclays and the traders have 30 days to respond.