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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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