On March 19, 2012, The U.S. Department of Justice (DOJ) made a second attempt to secure a final judgment on a $4.8 million settlement agreement with Morgan Stanley. This settlement was reached in response to a lawsuit alleging that one of the corporation's subsidiaries, Morgan Stanley Capital Group, Inc., violated Section 1 of the Sherman Act. After the U.S. and Morgan Stanley entered into the settlement agreement in September 2011, the Southern District of New York accepted the settlement for final judgment, but then withdrew the judgment after backlash from the American Association of Retired Persons (AARP) and the Public Service Commission of the State of New York (PSC).
According to the DOJ, KeySpan Corporation (KeySpan) was the largest seller of electricity generating capacity in the New York City market between 2003 and 2006. In 2006, two new competitors, NRG Energy, Inc. (NRG) and Astoria Generating Company Acquisitions, L.L.C. (Astoria), entered the market, limiting KeySpan's ability to sell at a high price. In order to offset the effect of these competitors entering the market, KeySpan allegedly decided to take a financial interest in nearly all of Astoria's capacity, and employed Morgan Stanley to craft the deal. Morgan Stanley acted as the middle man between KeySpan and Astoria, entering into derivative contracts with each corporation in order to assure payment to KeySpan despite the revenues it made on its electricity. The U.S. asserts that this limited the competition that would otherwise exist in the market. The U.S.'s complaint alleged that these contracts allowed Morgan Stanley to earn approximately $21.6 million in net revenue on its contracts with KeySpan and Astoria.
The U.S. and Morgan Stanley eventually agreed to a settlement in which Morgan Stanley would pay $4.8 million to the U.S. Treasury and would not have to admit to violating the Sherman Act.1 In its Competitive Impact Statement, the U.S. claimed that the settlement amount is enough to "prevent and restrain" future anticompetitive behavior of this type.2 The U.S. further claimed that while the amount is but a small percentage of the revenues that Morgan Stanley made off of the derivatives contracts, it had to take into account litigation risks and costs when calculating the appropriate settlement amount.
During the 60-day comment period, which is required for consent judgments in antitrust cases brought by the U.S., both PSC and AARP disagreed that this punishment was in the public interest. PSC argued that the fact that Morgan Stanley only has to hand over 22 percent of its revenues from the derivative agreements with KeySpan and Astoria will not be looked at as a deterrent, but as a cost of doing business.3 In its reply, the U.S. justified its settlement amount by pointing out that litigation risks are rightfully taken into account when calculating settlement amounts.4 PSC also argued that the U.S. has not provided enough evidence to claim that the settlement amount is enough to be what is best for the public interest.
The AARP claimed that the settlement should not be accepted because it includes no provision for benefits to the customers harmed by the agreements.5 The U.S. responded, claiming that distributing the settlement amount to customers is inappropriate, as it could possibly violate the filed rate doctrine, which "bars remedies that result in payment by customers and receipt by sellers of a rate different from that on file for the regulated services."6 The AARP further argued that the U.S. failed to discuss its reasoning for allowing Morgan Stanley to settle without admitting any wrongdoing. In its reply, the U.S. pointed out that an admission of liability is not a requirement and that the legislative history suggests that such admissions were never intended in the circumstances of a case like the one against Morgan Stanley.
The court has scheduled a hearing on the proposed settlement for June 12, 2012.
Footnotes
1. Plaintiff's Motion for Judgment, United States of America v. Morgan Stanley, No. 11-cv-06875 (S.D.N.Y. Mar. 19, 2012).
2. Plaintiff's Competitive Impact Statement at 9, U.S. v. Morgan Stanley, No. 11-cv-06875 (S.D.N.Y. Oct. 3, 2011).
3. Comments of the Public Service Commission of the State of New York, U.S. v. Morgan Stanley, No. 11-cv-06875 (S.D.N.Y. Dec. 30, 2011).
4. Response of Plaintiff United States to Public Comments on the Proposed Final Judgment, U.S. v. Morgan Stanley, No. 11-cv- 06875 (S.D.N.Y. Mar. 6, 2012).
5. AARP Comments in Response to Proposed Settlement and in Support of Future Proceedings, U.S. v. Morgan Stanley, No. 11-cv- 06875 (S.D.N.Y. Mar. 6, 2012).
6. Response of Plaintiff United States to Public Comments on the Proposed Final Judgment at 17.
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