California scheming? Barclays facing record $470m fine

Barclays suffered another huge blow to its reputation yesterday as America's main energy regulator said it wants to fine the bank a record $470m (£292m) for rigging the Californian electricity market, echoing the Enron debacle of 2000.

This is the latest scandal to break at the bank, whose chief executive Bob Diamond was forced to resign in July after Barclays was fined £290m by regulators on both sides of the Atlantic for rigging the key Libor interest rate.

Barclays has had to set aside £2bn for mis-selling payment protection insurance and £450m for mis-selling interest rate swaps to small businesses. It is also facing inquiries into how much it paid advisers when it was bailed out by Middle Eastern investors in 2008.

Electronic communications revealed between Barclays traders on the west coast of the US contained colourful and obscene language as they discussed how to rig the markets.

In one a trader says how he "fuckked [sic] with the Palo mkt" indicating he had moved the electricity price for that region to make profits on his complex financial bets.

In another a trader wrote: "I'm gonna try to crap on the NP light and it should drive the SP light lower", meaning by selling off-peak power in northern California the price in the south of the state would be driven down again, making him a profit. The Federal Energy Regulatory Commission said Barclays and four of its traders had consistently rigged the markets between 2006 and 2008. As well as proposing a $435m fine it wants Barclays to pay the equivalent of the $34.9m profit it made and the traders together to pay $18m.

Barclays said it would "vigorously" defend itself against the US regulator, which has given it 30 days under an order to show cause notice to appeal against its findings.

A Barclays spokesman said: "We believe that our trading was legitimate and in compliance with applicable law. The Order To Show Cause is by its very nature a one-sided document, and does not reflect a balanced and full description of the facts or the applicable legal standard. We have co-operated fully with the FERC investigation, which relates to trading activity that occurred several years ago."

The FERC was created in 2005 in response to Enron and has been steadily clamping down on the energy trading arms of banks. It is investigating Deutsche Bank and JPMorgan as well as the oil giant BP.

In a 67-page order to show cause and notice of penalty", the FERC details how the four traders manipulated local and national markets between them and includes some of their electronic messages to each other.

The four, Daniel Brin, Scott Connelly, Karen Levine and Ryan Smith previously worked for another energy trading business Miran, which was fined hundreds of millions of dollars for false trading in the California power-trading scandal a decade ago.

The FERC said for over two years Barclays had "engaged in loss-generating trading of the next-day fixed-price physical electricity on the Intercontinental Exchange to benefit Barclays' financial swap positions at the primary electricity trading points in the western United States".

This, the regulator claimed, cost rival power traders $139m and made Barclays profits of $34.9m. There is no immediate indication that the alleged rigging affected prices charged to consumers.

In one message Mr Brin stated he was "doing phys[ical] so I am trying to drive price in the fin[ancial] direction" while in another Mr Smith described how he "fuckked [sic] with the Palo mkt", "propped up the Palo index" and was "gonna try to crap on the NP light and it should drive the SP light lower". In other words he was trading physical electricity in small local markets to shift prices to make huge financial bets on derivatives profitable.

In another round of electronic messages Mr Smith discussed with another trader at a different firm his tactics of dumping physical power he had bought through index trading into the cash market to push down the price.

Trader You blow your index load yet?

Smith Not yet. Why?

Trader Watching to see how low the hr's [hourly rates] can get

Trader It's like that battle scene from Braveheart: hold ... hold ... unleash hell!

Smith Ha

Trader With no load/low volume, a hvy handed index dump really moves it

Smith That's funny as hell. Good Braveheart

In another exchange Mr Smith and Mr Brin discuss their tactics trading between the different local markets including South Path, North Path, Palo Verde and Mid Columbia.

Smith Don't buy any SP light [off-peak electricity] index. I'm gonna try and crap on the NP light and should drive the SP light lower

Brin That is fine

Smith Don't buy any too early

Brin Yup

Smith I got the Palo hvy. You do midc hvy

Brin Okay

And in another exchange with a friend who traded at rival firm Mirant Mr Smith again boasts of cornering the North Path market.

Smith If you are long NP light I suggest selling it early

Trader We're short 1,000

Smith You'll see me offered there. Well, ten [minutes] have your bid behind and I will send it your way

Trader Why you buy index if it's going to tank

Smith My lil secret

Trader You crazy

Smith Tell you about it later

Trader Call me on the bat line [mobile phone]

A rival trader who has had a conversation with the Barclays traders about their seemingly absurd market positions which can only make them lose money concludes: "I need a mentor, these guys are retards."

The FERC said Barclays head of commodities Americas had made it clear that loss-making trading was unacceptable. Joseph Gold told the commission: "The golden rule was always under no circumstances lose money on a transaction for the intention of making money on another transaction."

All four traders have left Barclays in the past five years.

Energy transfers: How it worked

The four Barclays traders exploited the differences between the daily prices of electricity in four local Californian markets – Mid-Columbia, South Path 15, North Path 15 and Palo Verde – and longer-term financial instruments known as swaps on the Intercontinental Exchange. The traders then took huge bets on the local physical markets – which are where the local power companies buy their daily needs – to move their longer-term bets, which generally ran for a month. The regulator said this was "highly co-ordinated" and produced "substantial, repeated and avoidable losses" for Barclays in the local markets but ensured that energy indices favoured their swaps.