On September 30, 2011, the United States Department of Justice (“DOJ”) announced a settlement with Morgan Stanley concerning its violation of antitrust laws in connection with swap agreements it entered into concerning New York City’s electricity generating capacity market in 2006.  On the same day, DOJ filed a civil antitrust complaint in U.S. District Court for the Southern District of New York against Morgan Stanley, along with the proposed settlement.  If approved, Morgan Stanley will pay the U.S. treasury $4.8 million in disgorgement of profits.

DOJ’s September 30th complaint alleges that Morgan Stanley Capital Group entered into a financial derivative agreement with KeySpan Corporation (“KeySpan”) while concurrently entering into an off-setting derivative with Astoria Generating Company, KeySpan’s largest competitor in the capacity market.  This ensured that KeySpan would withhold substantial output from the New York City electricity generating capacity market.  DOJ’s complaint alleges that Morgan Stanley recognized its role in “effectively combining the capacity of the two companies.”  The effect of these agreements was to increase capacity prices to suppliers who purchase capacity, and by extension, prices that consumers pay.  These effects extended until March 2008, when regulatory conditions changed.   DOJ estimated in its September 30th complaint that Morgan Stanley earned $21.6 million in net revenues from the agreements it entered into with KeySpan and Astoria.  KeySpan has already entered into a stipulation and agreement with the DOJ and paid $12 million to settle its antitrust case (See February 28, 2010 edition of the WER).

Notably, the Federal Energy Regulatory Commission’s (“FERC” or the “Commission”) staff reviewed the KeySpan swap and recommended against enforcement.  FERC staff concluded that that KeySpan’s behavior was not altered by the swap.  Nevertheless, the DOJ moved forward with this matter, and has now pursued two settlements.   This case illustrates how DOJ’s antitrust enforcement may act to supplement FERC’s market manipulation authority (See February 24, 2010 edition of the WER).

A copy of the complaint is available here

A copy of the settlement is available here.