Washington (Platts)--29Jan2013/455 pm EST/2155 GMT

Barclays Bank and four of its former traders have failed to show they did not manipulate physical and financial energy markets in the western US nor have they justified lowering the $435 million penalty initially recommended by enforcement staff, US Federal Energy Regulatory Commission staff said Tuesday in documents posted on the agency's website.

"While Barclays and its individual traders now deny they engaged in this manipulative scheme, the trading data and contemporaneous communications show they intentionally manipulated" the markets and neither Barclays nor the traders "are able to offer any credible explanation to show their conduct was proper," enforcement staff said in responding to claims of innocence by the bank and traders.

Barclays spokesman Marc Hazelton on Tuesday said the bank believes the trades in question were "legitimate and in compliance with applicable law." If FERC does not terminate the investigation without any further proceedings, "we intend to vigorously defend this matter in federal court," Hazelton said.

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The penalty amount, staff added, is justified because of the size and scope of the alleged violations and money involved.

While losing about $4.1 million through its cash trades, Barclays "reaped gains" of about $34.9 million in its financial position, staff said. Moreover, "Barclays manipulative scheme cost other market participants at least $139.3 million," according to staff.

FERC in late October proposed a record-setting $435 million civil penalty against the bank plus the repayment of $34.9 million in profits it made when it allegedly manipulated energy markets in and around California.

The commission alleged that Barclays and four of its former traders -- Scott Connelly, Daniel Brin, Karen Levine and Ryan Smith -- "engaged in a coordinated scheme to manipulate trading" of day-ahead electricity at four major Western trading hubs to benefit Barclays' IntercontinentalExchange financial swap positions in those markets from November 2006 through 2008.

FERC also proposed a $15 million fine against Connelly, Barclays' managing director of North American power and head of the West power trading desk. And it would impose $1 million fine against each of the three other traders.

Barclays and the traders falsely claimed that market fundamentals and legitimate business purposes explain their behavior, staff said. Instead of addressing the alleged scheme, Barclays and the traders constructed "an alternative universe that does not reflect the applicable law or actual facts uncovered in this investigation," staff said.

FERC CALLS ICE INVESTIGATION 'CURSORY'

Enforcement staff also addressed claims by Barclays, Connelly and Levine that they did not manipulate markets because ICE had investigated them for some of the period in question and found no wrongdoing.

FERC staff said "ICE performed a cursory examination of the day's trading (one day of which is not even a day where staff concluded that Barclays was manipulating) and determined that internal escalation or referral to the government was not warranted."

ICE "seems to have" reviewed the participants' market shares and compliance with bid-offer spread rules for those two trading days only and considered whether credit issues resulted in the computer not allowing some counterparties to trade directly with Barclays, staff said.

"ICE did not perform the detailed examination of Barclays' trading that [FERC] staff has performed," staff said. "It did not review internal Barclays' communications, analyze Barclays' financial positions or take testimony from individual traders."

Barclays and Smith also incorrectly claim that they are protected from civil penalties because the actions in question date back more than five years, staff said.

Smith sign a so-called tolling agreement in 2011 that said the FERC investigation would be considered ongoing until enforcement staff provides written termination that the inquiry was terminated, staff said.

Smith claimed that staff's issuance of a notice of alleged violations last April terminated the investigation. He pointed to FERC's 2011 order establishing its policy on notice of alleged violations in which the commission said staff would issue notices after it concluded investigations.

But FERC staff argued that the 2011 policy "read as a whole, clearly contemplates that further investigation may occur following the" notice.

Staff on Tuesday revealed that Smith recently used the same argument before a New York federal court "in an attempt to avoid" testifying to staff "about recently discovered conversations he had with a third-party in which he explained and confessed Barclays' manipulative scheme and his participation therein."

The court magistrate judge on January 25 recommended that Smith's request to quash the FERC subpoena be denied.

--Esther Whieldon, esther_whieldon@platts.com
--Edited by Jeff Barber, jeff_barber@platts.com

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