MANHATTAN (CN) – Morgan Stanley can settle antitrust claims without admitting wrongdoing by paying less than a quarter of the $21.6 million it made in an alleged scheme that cheated New York energy consumers, a federal judge ruled Tuesday.
The 6-year-old charges against Morgan Stanley stem from help it gave to KeySpan Corp. in acquiring Astoria Generating Company Acquisitions, its largest competitor, though a swap agreement.
In an interview with Courthouse News, a councilman who represents the Queens district that hosts Keyspan’s facilities blasted Morgan Stanley’s court-approved settlement as a slap on the wrist.
Councilman Peter Vallone, a Democrat and former state prosecutor with the street-crime bureau, said that the court should have ordered a full restitution, at minimum.
“Here, they’re allowed to keep what they stole,” Vallone told Courthouse News. “That is ridiculous. This is the cost of doing business for Morgan Stanley. This is pocket change for them.”
U.S. District Judge William Pauley III described the help Morgan Stanley gave to KeySpan in a 10-page order approving the settlement.
“Morgan Stanley engineered this arrangement by serving as the counterparty to two agreements – the swap with KeySpan and a hedge with Astoria – that remained in effect from May 2006 through April 2009,” the order states. “Under the swap agreement, if the market price for capacity exceeded $7.57 per kW-month, Morgan Stanley would pay KeySpan the difference between the market price and $7.57 times 1800 megawatts (‘MW’); if the market price fell below $7.57, KeySpan would pay Morgan Stanley the difference times 1800 MW. Under the hedge, if the market price rose above $7.07 per kW-month, Astoria would pay Morgan Stanley the difference times 1800 MW; if the market price dipped below $7.07, Morgan Stanley would pay Astoria the difference times 1800MW. Morgan Stanley allegedly earned approximately $21.6 million in net revenues while serving as the counterparty to KeySpan and Astoria.” (Citations omitted)
Federal prosecutors sued Morgan Stanley on Sept. 30, 2011, for violating the Sherman Act.
Weeks later, the government published its proposed consent decree in the Federal Register and two archconservative newspapers, The Washington Times and The New York Post, with a 60-day period for public comments.
The court summarized the public complaints that poured in as falling into three categories: “(1) that $4.8 million in disgorgement is inadequate to deter future misconduct, particularly given the magnitude of the injury to New York City electricity consumers; (2) that Morgan Stanley has not admitted any wrongdoing; and (3) that the disgorged money should be returned to New York City electricity customers, and not remitted to the U.S. Treasury.”
In addition, Councilman Vallone and Sen. Michael Gianaris, D-Queens, co-signed a Jan. 13, 2012, letter airing such criticisms.
“Not only would Morgan Stanley be allowed to keep most of its illicit profits, but the nominal settlement sum combined with the lack of any requirement that affected ratepayers be reimbursed disenfranchises consumers, who have been hurt the most by the illegal deal,” the letter read.
Despite these complaints, Judge Pauley ruled that he was obligated to approve a consent decree based on what was “within the reaches of the public interest,” rather than what best serves the public.
“Disgorgement of $4.8 million is an adequate remedy within the reaches of the public interest,” the order states, adding that the bank got off somewhat easier than its alleged accomplice. “The amount constitutes approximately 22% of Morgan Stanley’s net revenues from the transactions, a disgorgement percentage slightly less than that approved by this Court in KeySpan.”
The judge insisted that the settlement would deter future antitrust violations because such crimes are not usually prosecuted.
“Approving disgorgement here likely will deter financial services firms from offering derivatives that facilitate anticompetitive behavior to clients,” the order states. “The innovative application of the disgorgement remedy in this action suggests that the settlement will have meaningful deterrent effects.”
Though Pauley said he “shares” the concerns of critics, he added a trial poses its own risks.
“Given the government’s stark allegations of manipulative conduct against Morgan Stanley, disgorgement of $4.8 million is a relatively mild sanction,” he wrote. “There is a risk that a large financial services firm like Morgan Stanley could view such a modest penalty as merely a cost of doing business. But despite this court’s misgivings, the government’s decision to settle for less than full damages is entitled to judicial deference, particularly in view of the novelty of the government’s theory. … At this stage of the lawsuit, the government has not proved its case, and Morgan Stanley could assert potentially meritorious defenses if the litigation proceeded.”
But Vallone said Tuesday’s decision stands “in opposition to the representatives of the people who were ripped off.”
Justice has been denied to Vallone’s “hundreds of thousands of constituents,” the councilman said.
“We weren’t even advised that this was going to happen today,” Valone said. “First, Morgan Stanley took advantage of us. Now the court system has.”