US regulators have threatened to fine Barclays bank roughly $470 million to settle allegations that the bank and four traders manipulated California electricity markets, reviving the spectre of a sector-wide crackdown on energy trading.
The Federal Energy Regulatory Commission (FERC) proposed fine, which was announced on Wednesday, would be the largest penalty ever levied by the commission and potentially exceeds the fine Barclays paid over the Libor bid-rigging scandal that cost Chief Executive Robert Diamond his job.
The bank has 30 days to show why it should not be penalised for an alleged scheme of manipulating physical electricity prices at a loss in order to make profits in related positions in the swaps market, a strategy known as a "loss-leader".
British bank Barclays said it would fight the agency, likely setting up a landmark legal battle that could set a precedent over whether the once-common trading ploy in commodity markets is illegal or simply ill-advised.
It will have huge implications across the market, as the FERC - which won expanded powers to tackle manipulation in 2005 after the California power trading scandal and related Enron meltdown - pursues similar investigations against companies including BP and Deutsche Bank.
The FERC also said four of the company's power traders -- Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith -- have 30 days to show why they should not be assessed a total of $18 million in civil penalties.
It said their activity accounted for nearly a quarter of all trading in the next-day power market during the period, accruing gains of an estimated $34.9 million.
Bank documents showed how the traders bragged about how they would "crap on" certain markets to profit in other ones, the order shows.
Barclays "strongly disagreed" with the order, which it said was "by nature a one-sided document, and does not reflect a balanced and full description of the facts."
"We believe that our trading was legitimate and in compliance with applicable law," Barclays spokesman Mark Lane said in an email.
"We have cooperated fully with the FERC investigation, which relates to trading activity that occurred several years ago. We intend to vigorously defend this matter."
The four traders left Barclays over the past five years for reasons unrelated to the investigation, according to a source familiar with the matter. The bank closed its Portland office in 2011 and effectively quit the Western power market this year.
It is the latest blow for Barclays, which has fired staff, clawed back pay and taken other disciplinary action after being fined $450 million by US and British regulators over Libor.
New CEO Antony Jenkins, who took over at the end of July, is in the middle of a review to change the bank's culture and lift profitability. The changes are due to be unveiled in February.
Earlier on Wednesday, Barclays announced that the US Department of Justice and the Securities and Exchange Commission were investigating whether it was complying with US laws in its ties with third parties who help it win or retain business.
The FERC order is tantamount to an indictment, suggesting the issue may go to court after settlement talks were unsuccessful, said Craig Pirrong, a University of Houston professor and expert in energy trade regulation.