Morgan Stanley to Disgorge $4.8 Million over KeySpan Agreement

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Financial services company Morgan Stanley has agreed to pay $4.8 million to settle Department of Justice Antitrust Division charges that it entered into an agreement with KeySpan Corporation that restrained competition in the New York City electricity capacity market, in violation of the Sherman Act.

The settlement marks the second time the Antitrust Division has sought disgorgement of profits as a remedy under the Sherman Act. In February, the federal district court in New York City approved an antitrust consent decree (2011-1 Trade Cases ¶77,321), resolving allegations against KeySpan over the agreement, which effectively combined the economic interests of the two largest competitors in the New York City electric capacity market.

A complaint against Morgan Stanley and the proposed consent decree were filed in the federal district court in New York City on September 30. The proposed consent decree, if approved by the court, would resolve the Antitrust Division’s complaint.

According to the complaint, KeySpan and Morgan Stanley Capital Group, Inc.—a subsidiary of Morgan Stanley—executed a financial derivative agreement in 2006 ensuring that KeySpan would withhold substantial output from the New York City electricity generating capacity market. Morgan also entered into an offsetting agreement with Astoria Generating Company, KeySpan’s largest competitor in the capacity market, according to the Justice Department.

By transferring a financial interest in Astoria’s capacity to KeySpan, the agreement effectively eliminated KeySpan’s incentive to compete and sell its electricity capacity at lower prices, the government alleged. Meanwhile, Morgan Stanley earned revenues by retaining the spread between the fixed prices of the two derivative agreements.

The anticompetitive effects of the Morgan/KeySpan agreement lasted until March 2008, when regulatory conditions eliminated KeySpan’s ability to affect the market price of electricity capacity, the government contended.

“This settlement with a major financial institution will signal to the financial services community that use of derivatives for anticompetitive ends will not be tolerated,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division. “Disgorgement of ill-gotten gains, as was paid here, is an effective Antitrust Division tool to remedy harm to competition.”

The September 30 complaint in United States v. Morgan Stanley is available here on the Department of Justice Antitrust Division website. Further details will appear in CCH Trade Regulation Reporter.