KeySpan Swap Case Disgorgement Precedent

Seal of the United States District Court for t...

Image via Wikipedia

This is an interesting case setting new precedent because for the first time it affirms the authority of a US District Court to approve disgorgement of “ill gotten gains” under the Sherman Act.

The case is United States versus KeySpan involving an antitrust case filed by the US Department of Justice alleging that in 2006 KeySpan entered into a financial swap effectively giving it an indirect financial interest in the sale of generation capacity in the New York City market thus incentivizing KeySpan to withhold generation from the market while bidding capacity at the price cap. The DOJ says this led to higher capacity prices and as a result KeySpan manipulated the market price for its own benefit.

KeySpan denied the allegations and before trial in February 2010 settled the case with the Department of Justice agreeing to pay the US Treasury $12 million and to also disgorge $49 million in net revenues from the swap. Under the Tunney Act, the government is required to submit any antitrust consent decree proposed to the US District Court for approval to assure that the settlement is in the public interest.

The New York Public Service Commission filed comments on the proposed settlement with the US District Court saying the $12 million penalty was too small and argued for a more punitive penalty.

Common Sense and the Public Interest

But on February 2, 2011 Judge William H. Pauley III, US District Court for the Southern District of New York, approved the proposed consent decree as in the public interest thus setting two common sense precedents for the future.

Judge Pauley affirmed that the District Courts have the authority under the Sherman Act to require the disgorgement of profits to remedy anticompetitive conduct but that such disgorgement is intended to prevent the defendant from profiting from his illegal act and is in this case the only reasonable remedy available to the government.  But the judge also said disgorgement is not intended to be the same as punitive damages and thus the $12 million penalty paid was reasonable.

You can read the court order yourself at the link above to see the Judge’s logic in the case.  I routinely get the energy newsletter from Bracewell & Guliani which also has a good write up on this matter. I commend it to you.

The complexity of financial transactions today can easily lead to unintended consequences.  This case shows how one utility found itself in just such a situation with an embarrassing outcome. Judge Pauley has done a commendable job of unwinding this situation in the public interest.