United States v. Morgan Stanley; Proposed Final Judgment and Competitive Impact Statement, 62843-62850 [2011-26161]

Agencies

• Antitrust Division
• Department of Justice

[Federal Register Volume 76, Number 196 (Tuesday, October 11, 2011)]
[Notices]
[Pages 62843-62850]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26161]


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DEPARTMENT OF JUSTICE

Antitrust Division


United States v. Morgan Stanley; Proposed Final Judgment and 
Competitive Impact Statement

    Notice is hereby given pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h), that a proposed Final Judgment, 
Stipulation and Competitive Impact Statement have been filed with the 
United States District Court for the Southern District of New York in 
United States of America v. Morgan Stanley, Civil Action No. 11-Civ-
6875. On September 30, 2011, the United States filed a

[[Page 62844]]

Complaint alleging that a subsidiary of Morgan Stanley entered into an 
agreement with KeySpan Corporation, the likely effect of which was to 
increase prices in the New York City (NYISO Zone J) Capacity Market, in 
violation of Section 1 of the Sherman Act, 15 U.S.C. 1. The proposed 
Final Judgment, submitted at the same time as the Complaint, requires 
Morgan Stanley to pay the government $4.8 million dollars.
    Copies of the Complaint, proposed Final Judgment and Competitive 
Impact Statement are available for inspection at the Department of 
Justice, Antitrust Division, Antitrust Documents Group, 450 Fifth 
Street NW., DC 20530 Suite 1010 (telephone: 202-514-2481), on the 
Department of Justice's Web site at https://www.justice.gov/atr, and at 
the Office of the Clerk of the United States District Court for the 
Southern District of New York. Copies of these materials may be 
obtained from the Antitrust Division upon request and payment of the 
copying fee set by Department of Justice regulations.
    Public comment is invited within 60 days of the date of this 
notice. Such comments, and responses thereto, will be published in the 
Federal Register and filed with the Court. Comments should be directed 
to William H. Stallings, Chief, Transportation Energy and Agriculture 
Section, Antitrust Division, Department of Justice, Washington, DC 
20530, (telephone: 202-514-9323).

Patricia A. Brink,
Director of Civil Enforcement.

United States District Court for the Southern District of New York

United States of America, U.S. Department of Justice, Antitrust 
Division, 450 5th Street, NW., Suite 8000, Washington, DC 20530, 
Plaintiff,

    v.

Morgan Stanley, 1585 Broadway, New York, N.Y. 10036, Defendant.

Civil Action No.: 11-civ-6875.

Complaint

    The United States of America, acting under the direction of the 
Attorney General of the United States, brings this civil antitrust 
action under Section 4 of the Sherman Act, as amended, 15 U.S.C. 4, to 
obtain equitable and other relief from Defendant's violation of Section 
1 of the Sherman Act, as amended, 15 U.S.C. 1.
    On January 18, 2006, KeySpan Corporation (``KeySpan'') and Morgan 
Stanley Capital Group Inc. (``MSGC''), a subsidiary of defendant Morgan 
Stanley,\1\ executed an agreement (the ``Morgan/KeySpan Swap'') that 
ensured that KeySpan would withhold substantial output from the New 
York City electricity generating capacity market, a market that was 
created to ensure the supply of sufficient generation capacity for New 
York City consumers of electricity. The likely effect of the Morgan/
KeySpan Swap was to increase capacity prices for the retail electricity 
suppliers who must purchase capacity, and, in turn, to increase the 
prices consumers pay for electricity. For its part, Morgan enjoyed 
profits arising from revenues earned in connection with the Morgan/
KeySpan Swap.
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    \1\ MSCG and Morgan Stanley are collectively referred to 
hereinafter as ``Morgan.''
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I. Introduction

    1. Between 2003 and 2006, KeySpan, the largest seller of 
electricity generating capacity (``installed capacity'') in the New 
York City market, earned substantial revenues due to tight supply 
conditions. Because purchasers of capacity required almost all of 
KeySpan's output to meet expected demand, KeySpan's ability to set 
price levels was limited only by a regulatory ceiling (called a ``bid 
cap''). Indeed, the market price for capacity was consistently at or 
near KeySpan's bid cap, with KeySpan sacrificing sales on only a small 
fraction of its capacity.
    2. But market conditions were about to change. Two large, new 
electricity generation plants were slated to come on line in 2006 (with 
no exit expected until at least 2009), breaking the capacity shortage 
that had kept prices at the capped levels.
    3. KeySpan could prevent the new capacity from lowering prices by 
withholding a substantial amount of its own capacity from the market. 
This ``bid the cap'' strategy would keep market prices high, but at a 
significant cost--the sacrificed sales would reduce KeySpan's revenues 
by as much as $90 million per year. Alternatively, KeySpan could 
compete with its rivals for sales by bidding more capacity at lower 
prices. This ``competitive strategy'' could earn KeySpan more than 
bidding its cap, but it carried a risk--KeySpan's competitors could 
undercut its price and take sales away, making the strategy less 
profitable than ``bidding the cap.''
    4. KeySpan searched for a way to avoid both the revenue decline 
from bidding its cap and the revenue risks of competitive bidding. It 
decided to enter into an agreement that gave it a financial interest in 
the capacity of Astoria--KeySpan's largest competitor. By providing 
KeySpan revenues on a larger base of sales, such an agreement would 
make KeySpan's ``bid the cap'' strategy more profitable than a 
successful competitive bid strategy. Rather than directly approach its 
competitor, KeySpan turned to Morgan to act as the counterparty to the 
agreement--the Morgan/KeySpan Swap--recognizing that Morgan would, and 
in fact did, enter into an offsetting agreement with Astoria (the 
``Morgan/Astoria Hedge'').
    5. Morgan recognized that it could profit from combining the 
economic interests of KeySpan and Astoria. Morgan extracted revenues by 
entering into the financial instruments and thereby stepping into the 
middle of the two companies. With KeySpan deriving revenues from both 
its own and Astoria's capacity, the Morgan/KeySpan Swap removed any 
incentive for KeySpan to bid competitively, locking it into bidding its 
cap. Capacity prices remained as high as if no entry had occurred.

II. Defendant

    6. Morgan Stanley is a Delaware corporation with its principal 
place of business in New York City. Morgan Stanley provides diversified 
financial services, operating a global asset management business, 
investment banking services, and a global securities business, 
including a commodities trading division. Morgan Stanley Capital Group, 
Inc., a wholly owned subsidiary of Morgan Stanley, functions as and is 
publicly referred to as the commodities trading division for the parent 
company Morgan Stanley. In 2010, Morgan Stanley had revenues of $31.6 
billion.

III. Jurisdiction and Venue

    7. The United States files this complaint under Section 4 of the 
Sherman Act, 15 U.S.C. 4, seeking equitable relief from Defendant's 
violation of Section 1 of the Sherman Act, 15 U.S.C. 1.
    8. This court has jurisdiction over this matter pursuant to 15 
U.S.C. 4 and 28 U.S.C. 1331 and 1337.
    9. Defendant waives any objection to venue and personal 
jurisdiction in this judicial district for the purpose of this 
Complaint.
    10. Defendant engaged in interstate commerce during the relevant 
period of the allegations in this Complaint; Morgan is a worldwide 
company that regularly engages in financial transactions across the 
country and throughout the world.

IV. The New York City Installed Capacity Market

    11. Sellers of retail electricity must purchase a product from 
generators

[[Page 62845]]

known as ``installed capacity.'' Installed capacity is a product 
created by the New York Independent System Operator (``NYISO'') to 
ensure that sufficient generation capacity exists to meet expected 
electricity needs. Companies selling electricity to consumers in New 
York City are required to make installed capacity payments that relate 
to their expected peak demand plus a share of reserve capacity (to 
cover extra facilities needed in case a generating facility breaks 
down). These payments assure that retail electric companies do not sell 
more electricity than the system can deliver and also encourage 
electric generating companies to build new facilities as needed.
    12. The price for installed capacity has been set through auctions 
administered by the NYISO. The rules under which these auctions are 
conducted have changed from time to time. Unless otherwise noted, the 
description of the installed capacity market in the following 
paragraphs relates to the period May 2003 through March 2008.
    13. Because transmission constraints limit the amount of energy 
that can be imported into the New York City area from the power grid, 
the NYISO requires retail providers of electricity to customers in New 
York City to purchase 80% of their capacity from generators in that 
region. The NYISO operates separate capacity auctions for the New York 
City region (also known as ``In-City'' and ``Zone J''). The NYISO 
organizes the auctions to serve two distinct seasonal periods, summer 
(May through October) and winter (November through April). For each 
season, the NYISO conducts seasonal, monthly and spot auctions in which 
capacity can be acquired for all or some of the seasonal period.
    14. In each of the types of auctions, capacity suppliers offer 
price and quantity bids. Supplier bids are ``stacked'' from lowest-
priced to highest, and compared to the total amount of demand being 
satisfied in the auction. The offering price of the last bid in the 
``stack'' needed to meet requisite demand establishes the market price 
for all capacity bid into that auction. Capacity bid at higher than 
this price is unsold, as is any excess capacity bid at what becomes the 
market price.
    15. The New York City Installed Capacity (``NYC Capacity'') Market 
constitutes a relevant geographic and product market.
    16. The NYC Capacity Market is highly concentrated, with three 
firms--KeySpan, NRG Energy, Inc. (``NRG'') and Astoria Generating 
Company Acquisitions, L.L.C. (a joint venture of Madison Dearborn 
Partners, LLC and US Power Generating Company, which purchased the 
Astoria generating assets from Reliant Energy, Inc. in February 2006)--
controlling a substantial portion of generating capacity in the market. 
Because purchasers of capacity require at least some of each of these 
three suppliers' output to meet expected demand, the firms are subject 
to a bid and price cap for nearly all of their generating capacity in 
New York City and are not allowed to sell that capacity outside of the 
NYISO auction process. The NYISO-set bid cap for KeySpan is the highest 
of the three firms, followed by NRG and Astoria.
    17. KeySpan possessed market power in the NYC Capacity Market.
    18. It is difficult and time-consuming to build or expand 
generating facilities within the NYC Capacity Market given limited 
undeveloped space for building or expanding generating facilities and 
extensive regulatory obligations.

V. Keyspan's Plan To Avoid Competition

    19. From June 2003 through December 2005, KeySpan set the market 
price in the New York City spot auction by bidding its capacity at its 
cap. Given extremely tight supply and demand conditions, KeySpan needed 
to withhold only a small amount of capacity to ensure that the market 
cleared at its cap.
    20. KeySpan anticipated that the tight supply and demand conditions 
in the NYC Capacity Market would change in 2006, due to the entry of 
approximately 1000 MW of new generation. Because of the addition of 
this new capacity, KeySpan would have to withhold significantly more 
capacity from the market and would earn substantially lower revenues if 
it continued to bid all of its capacity at its bid cap. KeySpan 
anticipated that demand growth and retirement of old generation units 
would restore tight supply and demand conditions in 2009.
    21. KeySpan could no longer be confident that ``bidding the cap'' 
would remain its best strategy during the 2006-2009 period. It 
considered various competitive bidding strategies under which KeySpan 
would compete with its rivals for sales by bidding more capacity at 
lower prices. These strategies could potentially produce much higher 
returns for KeySpan but carried the risk that competitors would 
undercut its price and take sales away, making the strategy less 
profitable than ``bidding the cap.''
    22. KeySpan also considered acquiring Astoria's generating assets, 
which were for sale. This would have solved the problem that new entry 
posed for KeySpan's revenue stream, as Astoria's capacity would have 
provided KeySpan with sufficient additional revenues to make continuing 
to ``bid the cap'' its best strategy. KeySpan consulted with Morgan 
about acquiring the assets. But KeySpan soon concluded that its 
acquisition of its largest competitor would raise serious market power 
issues and communicated that conclusion to Morgan.
    23. Instead of purchasing the Astoria assets, KeySpan decided to 
acquire a financial interest in substantially all of Astoria's 
capacity. KeySpan would pay Astoria's owner a fixed revenue stream in 
return for the revenues generated from Astoria's capacity sales in the 
auctions.
    24. KeySpan did not approach Astoria directly, instead approaching 
Morgan to arrange a financial agreement providing KeySpan with payments 
derived from the market clearing price for an amount of capacity 
essentially equivalent to what Astoria owned. KeySpan recognized that 
Morgan would need simultaneously to enter into an off-setting financial 
agreement with another capacity supplier. Morgan agreed to such a Swap 
but, as expected, informed KeySpan that the agreement was contingent on 
Morgan entering into an offsetting agreement with the owner of the 
Astoria assets.

VI. Morgan's Agreements With Keyspan and Astoria

    25. Over the course of late 2005, Morgan negotiated the terms of 
the derivative agreements with Astoria and KeySpan. Those negotiations 
illustrate that Morgan recognized its role as a principal in 
effectively combining the capacity of the two companies. Under the 
terms initially discussed with Astoria, Morgan would have controlled 
the bidding of Astoria's capacity. Morgan also proposed that the 
financial derivative with Astoria be converted into a physical 
contract, transferring the rights to Astoria's capacity to Morgan in 
exchange for fixed payments, in the event that the structure of the 
auction market was disrupted; and, at the same time, Morgan proposed in 
its negotiations with KeySpan to transfer this physical capacity to 
KeySpan should a market disruption occur.
    26. On or about January 9, 2006, KeySpan and Morgan finalized the 
terms of the Morgan/KeySpan Swap. Under the agreement, if the market 
price for capacity was above $7.57 per kW-month, Morgan would pay 
KeySpan the difference between the market price and $7.57 times 1800 
MW; if the market price was below $7.57, KeySpan would

[[Page 62846]]

pay Morgan the difference times 1800 MW.
    27. The Morgan/KeySpan Swap was executed on January 18, 2006. The 
term of the Morgan/KeySpan Swap ran from May 2006 through April 2009.
    28. On or about January 9, 2006, Morgan and Astoria finalized the 
terms of the Morgan/Astoria Hedge. Under that agreement, if the market 
price for capacity was above $7.07 per kW-month, Astoria would pay 
Morgan the difference times 1800 MW; if the market price was below 
$7.07, Astoria would be paid the difference times 1800 MW.
    29. The Morgan/Astoria Hedge was executed on January 11, 2006. The 
term of the Morgan/Astoria Hedge ran from May 2006 through April 2009, 
matching the duration of the Morgan/KeySpan Swap.

VII. The Competitive Effect of the Morgan/Keyspan Swap

    30. The clear tendency of the Morgan/KeySpan Swap was to alter 
KeySpan's bidding in the NYC Capacity Market auctions.
    31. Without the Morgan/KeySpan Swap, KeySpan likely would have 
chosen from a range of potentially profitable competitive strategies in 
response to the entry of new capacity. Had it done so, the price of 
capacity would have declined. By transferring a financial interest in 
Astoria's capacity to KeySpan, however, the Morgan/KeySpan Swap 
effectively eliminated KeySpan's incentive to compete for sales in the 
same way a purchase of Astoria or a direct agreement between KeySpan 
and Astoria would have done. By providing KeySpan revenues from 
Astoria's capacity, in addition to KeySpan's own revenues, the Morgan/
KeySpan Swap made bidding the cap KeySpan's most profitable strategy 
regardless of its rivals' bids.
    32. After the Morgan/KeySpan Swap went into effect in May 2006, 
KeySpan paid and received revenues under the agreement with Morgan and 
consistently bid its capacity at its cap even though a significant 
portion of its capacity went unsold. Despite the addition of 
significant new generating capacity in New York City, the market price 
of capacity did not decline.
    33. In August 2007, the State of New York conditioned the sale of 
KeySpan to a new owner on the divestiture of KeySpan's Ravenswood 
generating assets and required KeySpan to bid its New York City 
capacity at zero from March 2008 until the divestiture was completed. 
Since March 2008, the market price for capacity has declined.
    34. But for the Morgan/KeySpan Swap, installed capacity likely 
would have been procured at a lower price in New York City from May 
2006 through February 2008.
    35. From May 2006 to April 2008, Morgan earned approximately $21.6 
million in net revenues from the Morgan/KeySpan Swap and the Morgan/
Astoria Hedge.
    36. The Morgan/KeySpan Swap produced no countervailing 
efficiencies.

VIII. Violation Alleged

    37. Plaintiff incorporates the allegations of paragraphs 1 through 
36 above.
    38. Morgan entered into an agreement the likely effect of which has 
been to increase prices in the NYC Capacity Market, in violation of 
Section 1 of the Sherman Act, 15 U.S.C. 1.

IX. Prayer for Relief

    Wherefore, Plaintiff prays:
    39. That the Court adjudge and decree that the Morgan/KeySpan Swap 
constitutes an illegal restraint in the sale of installed capacity in 
the New York City market in violation of Section 1 of the Sherman Act;
    40. That Plaintiff shall have such other relief, including 
equitable monetary relief, as the nature of this case may require and 
as is just and proper to prevent the recurrence of the alleged 
violation and to dissipate the anticompetitive effects of the 
violation; and
    41. That Plaintiff recover the costs of this action.

    Dated: September 30, 2011.

    Respectfully submitted,

For Plaintiff United States.

Sharis A. Pozen,
Acting Assistant Attorney General for Antitrust.

Joseph F. Wayland,
Deputy Assistant Attorney General.

Patricia A. Brink,
Director of Civil Enforcement.

Wlliam H. Stallings,
Chief, Transportation, Energy & Agriculture Section.

Jade Eaton,
Attorney, Transportation, Energy & Agriculture Section, Antitrust 
Division, U.S. Department of Justice, 450 Fifth Street, NW., Suite 
8000, Washington, DC 20530, Telephone: (202) 353-1560, Facsimile: 
(202) 616-2441, e-mail: jade.eaton@usdoj.gov.

J. Richard Doidge,
John W. Elias, Attorneys for the United States.

United States of America, Plaintiff,

    v.

Morgan Stanley, Defendant.

Civil Action No.: 11-civ-6875.

Competitive Impact Statement

    Plaintiff United States of America (``United States''), pursuant to 
Section 2(b) of the Antitrust Procedures and Penalties Act (``APPA'' or 
``Tunney Act''), 15 U.S.C. 16(b)-(h), files this Competitive Impact 
Statement relating to the proposed Final Judgment submitted for entry 
in this civil antitrust proceeding.

I. Nature and Purpose of the Proceedings

    The United States brought this lawsuit against Defendant Morgan 
Stanley (``Morgan'') on September 30, 2011, to remedy a violation of 
Section 1 of the Sherman Act, 15 U.S.C. 1. In January 2006, Morgan 
Stanley Capital Group Inc. (``MSGC''), a subsidiary of defendant Morgan 
Stanley,\2\executed agreements with KeySpan Corporation (``KeySpan'') 
and Astoria Generating Company Acquisitions, L.L.C. (``Astoria'') that 
would effectively combine the economic interests of the two largest 
competitors in the New York City electric capacity market. By creating 
this combination, the likely effect of the agreements was to increase 
capacity prices for the retail electricity suppliers who must purchase 
capacity, and, in turn, to increase the prices consumers pay for 
electricity.
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    \2\ MSCG and Morgan Stanley are collectively referred to 
hereinafter as ``Morgan.''
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    The proposed Final Judgment remedies this violation by requiring 
Morgan to disgorge profits obtained through the anticompetitive 
agreement. Under the terms of the proposed Final Judgment, Morgan will 
surrender $4.8 million to the Treasury of the United States. 
Disgorgement will deter Morgan and others from future violations of the 
antitrust laws.
    The United States and Morgan have stipulated that the proposed 
Final Judgment may be entered after compliance with the APPA, unless 
the United States withdraws its consent. Entry of the proposed Final 
Judgment would terminate this action, except that this Court would 
retain jurisdiction to construe, modify, and enforce the proposed Final 
Judgment and to punish violations thereof.

II. Description of the Events Giving Rise to the Alleged Violation of 
the Antitrust Laws

A. The Defendant
    Morgan Stanley is a Delaware corporation with its principal place 
of business in New York City. Morgan Stanley provides diversified 
financial services, operating a global asset

[[Page 62847]]

management business, investment banking services, and a global 
securities business, including a commodities trading division. In 2010, 
Morgan Stanley had revenues of $31.6 billion. Morgan Stanley Capital 
Group, Inc., a wholly owned subsidiary of Morgan Stanley, functions as 
and is publicly referred to as the commodities trading division for the 
parent company Morgan Stanley.
B. The Market
    In the state of New York, sellers of retail electricity must 
purchase a product from generators known as installed capacity 
(``capacity'').\3\ Electricity retailers are required to purchase 
capacity in an amount equal to their expected peak energy demand plus a 
share of reserve capacity. These payments assure that retail electric 
companies do not use more electricity than the system can deliver and 
encourage electric generating companies to build new facilities as 
needed. Because transmission constraints limit the amount of energy 
that can be imported into the New York City area from the power grid, 
the New York Independent System Operator (``NYISO'') requires retail 
providers of electricity to customers in New York City to purchase 80% 
of their capacity from generators in that region. Thus, the New York 
City Installed Capacity (``NYC Capacity'') Market constitutes a 
relevant geographic and product market.
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    \3\ Except where noted otherwise, this description pertains to 
the market conditions that existed from May 2003 through March 2008.
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    The price for installed capacity has been set through auctions 
administered by the NYISO. The NYISO organizes the auctions to serve 
two distinct seasonal periods, summer (May though October) and winter 
(November through April). For each season, the NYISO conducts seasonal, 
monthly, and spot auctions in which capacity can be acquired for all or 
some of the seasonal period. Capacity suppliers offer price and 
quantity bids in each of these three auctions. Supplier bids are 
``stacked'' from lowest-priced to highest. The stack is then compared 
to the amount of demand. The offering price of the last bid in the 
``stack'' needed to meet requisite demand establishes the market price 
for all capacity sold into that auction. Any capacity bid at higher 
than this price is unsold, as is any excess capacity bid at what 
becomes the market price.
    The NYC Capacity Market was highly concentrated during the relevant 
period, with three firms--Astoria, NRG Energy, Inc., and KeySpan--
controlling a substantial portion of the market's generating capacity. 
These three were designated as pivotal suppliers by the Federal Energy 
Regulatory Commission, meaning that at least some of each of these 
three suppliers' output was required to satisfy demand. The three firms 
were subject to bid and price caps--KeySpan's being the highest--for 
nearly all of their generating capacity in New York City and were not 
allowed to sell their capacity outside of the NYISO auction process.
C. The Alleged Violation
    1. KeySpan Assesses Plans for Changed Market Conditions
    From June 2003 through December 2005, almost all installed capacity 
in the market was needed to meet demand. With these tight market 
conditions, KeySpan could sell almost all of its capacity into the 
market, even while bidding at its cap. KeySpan did so, and the market 
cleared at the price established by the cap, with only a small fraction 
of KeySpan's capacity remaining unsold.
    KeySpan anticipated that the tight supply and demand conditions in 
the NYC Capacity Market would end in 2006 due to the entry into the 
market of approximately 1000 MW of generation capacity, and would not 
return until 2009 with the retirement of old generation units and 
demand growth.
    KeySpan could no longer be confident that ``bid the cap'' would 
remain its best strategy during the 2006-2009 period. The ``bid the 
cap'' strategy would keep market prices high, but at a significant 
cost. KeySpan would have to withhold a significant additional amount of 
capacity to account for the new entry. The additional withholding would 
reduce KeySpan's revenues by as much as $90 million per year. 
Alternatively, KeySpan could compete with its rivals for sales by 
bidding more capacity at lower prices. KeySpan considered various 
competitive bidding strategies. These could potentially produce much 
higher returns for KeySpan than bidding the cap but carried the risk 
that competitors would undercut its price and take sales away, making 
the strategy potentially less profitable than bidding the cap.
    KeySpan also considered acquiring Astoria's generating assets from 
Reliant Energy, Inc., which was putting them up for sale. This would 
have solved the problem that new entry posed for KeySpan's revenue 
stream, as Astoria's capacity would have provided KeySpan with 
sufficient additional revenues to make continuing to ``bid the cap'' 
its best strategy. Simultaneously, Morgan was interested in buying the 
same assets and seeking a strategic partner with whom to bid. Morgan 
and KeySpan discussed such a partnership and the market power issues of 
a bid involving KeySpan. KeySpan soon concluded that its acquisition of 
its largest competitor would raise serious market power issues and 
communicated that conclusion to Morgan.
2. Morgan Facilitates the Anticompetitive and Unlawful Agreement
    Instead of purchasing the Astoria assets, KeySpan decided to 
acquire a financial interest in substantially all of Astoria's 
capacity. KeySpan would pay Astoria's owner a fixed revenue stream in 
return for the revenues generated from Astoria's capacity sales in the 
auctions.
    KeySpan realized that it could not approach the owner of Astoria 
assets directly, so it turned to Morgan to act as a counter-party. 
Morgan agreed to serve as the counter-party but informed KeySpan that 
the agreement was contingent on it entering into an offsetting 
agreement with the owner of the Astoria generating assets.
    On or about January 9, 2006, KeySpan and Morgan finalized the terms 
of a financial derivative arrangement between the two companies, ``the 
Morgan/KeySpan Swap.'' Under the agreement, if the market price for 
capacity was above $7.57 per kW-month, Morgan would pay KeySpan the 
difference between the market price and $7.57 times 1800 MW; if the 
market price was below $7.57, KeySpan would pay Morgan the difference 
times 1800 MW. The Morgan/KeySpan Swap was executed on January 18, 
2006. The term of the Morgan/KeySpan Swap ran from May 2006 through 
April 2009.
    On or about January 9, 2006, Morgan and Astoria finalized the terms 
of the offsetting agreement (``Morgan/Astoria Hedge''). Under that 
agreement, if the market price for capacity was above $7.07 per kW-
month, Astoria would pay Morgan the difference times 1800 MW; if the 
market price was below $7.07, Astoria would be paid the difference 
times 1800 MW. The Morgan/Astoria Hedge was executed on January 11, 
2006. The term of the Morgan/Astoria Hedge ran from May 2006 through 
April 2009, matching the duration of the Morgan/KeySpan Swap.
    Morgan earned approximately $21.6 million in net revenues from the 
Morgan/KeySpan Swap and the Morgan/Astoria Hedge.
3. The Effect of the Morgan/KeySpan Swap
    After the Morgan/KeySpan Swap went into effect in May 2006, KeySpan

[[Page 62848]]

consistently bid its capacity into the capacity auctions at its cap 
even though a significant portion of its capacity went unsold. Despite 
the addition of significant new generating capacity in New York City, 
the market price of capacity did not decline.
    The clear tendency of the Morgan/KeySpan Swap was to alter 
KeySpan's bidding in the NYC Capacity Market auctions. The swap 
effectively eliminated KeySpan's incentive to compete for sales in the 
same way a purchase of Astoria or a direct agreement between KeySpan 
and Astoria would have done. By adding revenues from Astoria's capacity 
to KeySpan's own, the Morgan/KeySpan Swap made bidding the cap 
KeySpan's most profitable strategy regardless of its rivals' bids. 
Without the swap, KeySpan likely would have chosen from a range of 
potentially profitable competitive strategies in response to the entry 
of new capacity and, had it done so, the price of capacity would have 
declined. The swap produced no countervailing efficiencies.

III. United States v. Keyspan Corporation

    On February 22, 2010, the United States filed suit against KeySpan 
for its role in the Morgan/KeySpan Swap. Simultaneous with the filing 
of its Complaint, the United States filed a proposed Final Judgment 
requiring KeySpan to pay to the United States $12 million as 
disgorgement of ill-gotten gains. See Complaint, United States v. 
KeySpan Corp., No. 10-1415 (S.D.N.Y. Feb. 22, 2010). After completion 
of the procedures set forth in the Tunney Act, including public notice 
and comment, the United States moved for entry of the proposed Final 
Judgment. In the course of making its public interest determination, 
the Court found that disgorgement is available to remedy violations of 
the Sherman Act. See United States v. KeySpan Corp., 763 F. Supp. 2d 
633, 638-641. The KeySpan Final Judgment was entered on February 2, 
2011.

IV. Explanation of the Proposed Final Judgment

    The proposed Final Judgment requires Morgan to disgorge profits 
gained as a result of its unlawful agreement restraining trade. Morgan 
is to surrender $4.8 million to the Treasury of the United States.
    KeySpan, pursuant to a Final Judgment sought by the United States, 
has surrendered $12 million as a result of its role in the Morgan/
KeySpan Swap.\4\ See United States v. KeySpan Corp., 763 F. Supp. 2d 
633, 637-38 (S.D.N.Y. 2011). Securing similar disgorgement from the 
other responsible party to the anticompetitive agreement will protect 
the public interest by depriving Morgan of a substantial portion of the 
fruits of the agreement. The effect of the swap agreement was to 
effectively combine the economic interests of KeySpan and Astoria, 
thereby permitting KeySpan to increase prices above competitive rates, 
and this result could not have been achieved without Morgan's 
participation in the swap agreement. Requiring disgorgement in these 
circumstances will thus protect the public interest by deterring Morgan 
and other parties from entering into similar financial agreements that 
result in anticompetitive effects in the underlying markets, or from 
otherwise engaging in similar anticompetitive conduct in the future.
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    \4\ Had the KeySpan case proceeded to trial, the United States 
would have sought disgorgement of the approximately $49 million in 
net revenues that KeySpan received under the Swap, contending that 
these net revenues reflected the value that KeySpan received from 
trading the uncertainty of competing for the certainty of the bid-
the-cap strategy. See Plaintiff United States's Response to Public 
Comments at 14-18, United States v. KeySpan Corp., No. 10-1415 
(S.D.N.Y. June 11, 2010).
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    The $4.8 million disgorgement amount is the product of settlement 
and accounts for litigation risks and costs. While the disgorged sum 
represents less than all of Morgan's net transaction revenues under the 
two agreements,\5\ disgorgement will effectively fulfill the remedial 
goals of the Sherman Act to ``prevent and restrain'' antitrust 
violations as it will send a message of deterrence to those in the 
financial services community considering the use of derivatives for 
anticompetitive ends.
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    \5\ Had the case against Morgan proceeded to trial, the United 
States would have sought disgorgement of the $21.6 million in net 
transaction revenues Morgan earned under both the Morgan/KeySpan 
Swap and the Morgan/Astoria Hedge. At trial, Morgan--in addition to 
raising arguments as to its lack of liability in general--would have 
disputed that the entire $21.6 million earned under both agreements 
would be cognizable as ill-gotten gains.
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V. Remedies Available to Potential Private Litigants

    Section 4 of the Clayton Act, 15 U.S.C. 15, provides that any 
person who has been injured as a result of conduct prohibited by the 
antitrust laws may bring suit in federal court to recover three times 
the damages the person has suffered, as well as costs and reasonable 
attorneys' fees. Entry of the proposed Final Judgment will neither 
impair nor assist the bringing of any private antitrust damage action. 
Under the provisions of Section 5(a) of the Clayton Act, 15 U.S.C. 
16(a), the proposed Final Judgment has no prima facie effect in any 
subsequent private lawsuit that may be brought against Morgan.

VI. Procedures Available for Modification of the Proposed Final 
Judgment

    The United States and the Defendant have stipulated that the 
proposed Final Judgment may be entered by the Court after compliance 
with the provisions of the APPA, provided that the United States has 
not withdrawn its consent. The APPA conditions entry upon the Court's 
determination that the proposed Final Judgment is in the public 
interest.
    The APPA provides a period of at least sixty (60) days preceding 
the effective date of the proposed Final Judgment within which any 
person may submit to the United States written comments regarding the 
proposed Final Judgment. Any person who wishes to comment should do so 
within sixty (60) days of the date of publication of this Competitive 
Impact Statement in the Federal Register, or the last date of 
publication in a newspaper of the summary of this Competitive Impact 
Statement, whichever is later. All comments received during this period 
will be considered by the United States, which remains free to withdraw 
its consent to the proposed Final Judgment at any time prior to the 
Court's entry of judgment. The comments and the response of the United 
States will be filed with the Court and published in the Federal 
Register.
    Written comments should be submitted to: William H. Stallings, 
Chief, Transportation, Energy & Agriculture Section, Antitrust 
Division, United States Department of Justice, 450 Fifth Street, NW.; 
Suite 8000, Washington, DC 20530.
    The proposed Final Judgment provides that the Court retains 
jurisdiction over this action, and the parties may apply to the Court 
for any order necessary or appropriate for the modification, 
interpretation, or enforcement of the Final Judgment.

VII. Alternatives to the Proposed Final Judgment

    The United States considered, as an alternative to the proposed 
Final Judgment, a full trial on the merits against the Defendant. The 
United States is satisfied, however, that the disgorgement of profits 
is an appropriate remedy in this matter. A disgorgement remedy should 
deter Morgan and others from engaging in similar conduct and thus 
achieves a significant portion of the relief the United States would 
have

[[Page 62849]]

obtained through litigation but avoids the time, expense, and 
uncertainty of discovery and a full trial on the merits of the 
Complaint.

VIII. Standard of Review Under the APPA for Proposed Final Judgment

    The Clayton Act, as amended by the APPA, requires that proposed 
consent judgments in antitrust cases brought by the United States be 
subject to a sixty-day comment period, after which the court shall 
determine whether entry of the proposed Final Judgment ``is in the 
public interest.'' 15 U.S.C. 16(e)(1). In making that determination, 
the court is directed to consider:
    (A) The competitive impact of such judgment, including termination 
of alleged violations, provisions for enforcement and modification, 
duration of relief sought, anticipated effects of alternative remedies 
actually considered, whether its terms are ambiguous, and any other 
competitive considerations bearing upon the adequacy of such judgment 
that the court deems necessary to a determination of whether the 
consent judgment is in the public interest; and
    (B) the impact of entry of such judgment upon competition in the 
relevant market or markets, upon the public generally and individuals 
alleging specific injury from the violations set forth in the complaint 
including consideration of the public benefit, if any, to be derived 
from a determination of the issues at trial.

15 U.S.C. 16(e)(1)(A) & (B); see generally United States v. KeySpan 
Corp., 763 F. Supp. 2d 633, 637-38 (S.D.N.Y. 2011) (WHP) (discussing 
Tunney Act standards); United States v. SBC Commc'ns, Inc., 489 F. 
Supp. 2d 1 (D.D.C. 2007) (assessing standards for public interest 
determination). In considering these statutory factors, the court's 
inquiry is necessarily a limited one as the United States is entitled 
to ``broad discretion to settle with the Defendant within the reaches 
of the public interest.'' United States v. Microsoft Corp., 56 F.3d 
1448, 1461 (D.C. Cir. 1995).
    Under the APPA a court considers, among other things, the 
relationship between the remedy secured and the specific allegations 
set forth in the United States' complaint, whether the decree is 
sufficiently clear, whether enforcement mechanisms are sufficient, and 
whether the decree may positively harm third parties. See Microsoft, 56 
F.3d at 1458-62. With respect to the adequacy of the relief secured by 
the decree, the court's function is ``not to determine whether the 
proposed [d]ecree results in the balance of rights and liabilities that 
is the one that will best serve society, but only to ensure that the 
resulting settlement is within the reaches of the public interest.'' 
KeySpan, 763 F. Supp. 2d at 637 (quoting United States v. Alex Brown & 
Sons, Inc., 963 F. Supp. 235, 238 (S.D.N.Y. 1997) (internal quotations 
omitted). In making this determination, ``[t]he [c]ourt is not 
permitted to reject the proposed remedies merely because the court 
believes other remedies are preferable. [Rather], the relevant inquiry 
is whether there is a factual foundation for the government's decision 
such that its conclusions regarding the proposed settlement are 
reasonable.'' Id. at 637-38 (quoting United States v. Abitibi-
Consolidated Inc., 584 F. Supp. 2d 162, 165 (D.D.C. 2008).\6\ The 
government's predictions about the efficacy of its remedies are 
entitled to deference.\7\
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    \6\ United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 
1981) (``The balancing of competing social and political interests 
affected by a proposed antitrust consent decree must be left, in the 
first instance, to the discretion of the Attorney General.''). See 
generally Microsoft, 56 F.3d at 1461 (discussing whether ``the 
remedies [obtained in the decree are] so inconsonant with the 
allegations charged as to fall outside of the `reaches of the public 
interest' '').
    \7\ Microsoft, 56 F.3d at 1461 (noting the need for courts to be 
``deferential to the government's predictions as to the effect of 
the proposed remedies''); United States v. Archer-Daniels-Midland 
Co., 272 F. Supp. 2d 1, 6 (D.D.C. 2003) (noting that the court 
should grant due respect to the United States' prediction as to the 
effect of proposed remedies, its perception of the market structure, 
and its views of the nature of the case).
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    Courts have greater flexibility in approving proposed consent 
decrees than in crafting their own decrees following a finding of 
liability in a litigated matter. ``[A] proposed decree must be approved 
even if it falls short of the remedy the court would impose on its own, 
as long as it falls within the range of acceptability or is `within the 
reaches of public interest.' '' United States v. Am. Tel. & Tel. Co., 
552 F. Supp. 131, 151 (D.D.C. 1982) (citations omitted) (quoting United 
States v. Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975)), aff'd 
sub nom. Maryland v. United States, 460 U.S. 1001 (1983); see also 
United States v. Alcan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 
1985) (approving the consent decree even though the court would have 
imposed a greater remedy). To meet this standard, the United States 
``need only provide a factual basis for concluding that the settlements 
are reasonably adequate remedies for the alleged harms.'' SBC Commc'ns, 
489 F. Supp. 2d at 17.
    Moreover, the court's role under the APPA is limited to reviewing 
the remedy in relationship to the violations that the United States has 
alleged in its Complaint, and does not authorize the court to 
``construct [its] own hypothetical case and then evaluate the decree 
against that case.'' Microsoft, 56 F.3d at 1459; KeySpan, 763 F. Supp. 
2d at 638 (``A court must limit its review to the issues in the 
complaint * * *.''). Because the ``court's authority to review the 
decree depends entirely on the government's exercising its 
prosecutorial discretion by bringing a case in the first place,'' it 
follows that ``the court is only authorized to review the decree 
itself,'' and not to ``effectively redraft the complaint'' to inquire 
into other matters that the United States did not pursue. Microsoft, 56 
F.3d at 1459-60.
    In its 2004 amendments, Congress made clear its intent to preserve 
the practical benefits of utilizing consent decrees in antitrust 
enforcement, adding the unambiguous instruction that ``[n]othing in 
this section shall be construed to require the court to conduct an 
evidentiary hearing or to require the court to permit anyone to 
intervene.'' 15 U.S.C. 16(e)(2). This language effectuates what 
Congress intended when it enacted the Tunney Act in 1974, as Senator 
Tunney explained: ``[t]he court is nowhere compelled to go to trial or 
to engage in extended proceedings which might have the effect of 
vitiating the benefits of prompt and less costly settlement through the 
consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement of 
Senator Tunney). Rather, the procedure for the public interest 
determination is left to the discretion of the court, with the 
recognition that the court's ``scope of review remains sharply 
proscribed by precedent and the nature of Tunney Act proceedings.'' SBC 
Commc'ns, 489 F. Supp. 2d at 11.\8\
---------------------------------------------------------------------------

    \8\ See United States v. Enova Corp., 107 F. Supp. 2d 10, 17 
(D.D.C. 2000) (noting that the ``Tunney Act expressly allows the 
court to make its public interest determination on the basis of the 
competitive impact statement and response to comments alone'').
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IX. Determinative Documents

    There are no determinative materials or documents within the 
meaning of the APPA that the United States considered in formulating 
the proposed Final Judgment.

Dated: September 30, 2011.

    Respectfully submitted,

For Plaintiff
the United States of America.
Jade Alice Eaton,
Trial Attorney, United States Department of Justice, Antitrust 
Division, Transportation, Energy & Agriculture Section, 450 5th 
Street, NW., Suite 8000, Washington, DC 20530,

[[Page 62850]]

Telephone: (202) 307-6316, jade.eaton@usdoj.gov.

United States of America, Plaintiff,

    v.
Morgan Stanley, Defendant.

Civil Action No.

Final Judgment

    Whereas Plaintiff United States of America filed its Complaint 
alleging that Defendant Morgan Stanley (``Morgan'') violated Section 1 
of the Sherman Act, 15 U.S.C. 1, and Plaintiff and Morgan, through 
their respective attorneys, having consented to the entry of this Final 
Judgment without trial or adjudication of any issue of fact or law, for 
settlement purposes only, and without this Final Judgment constituting 
any evidence against or an admission by Morgan for any purpose with 
respect to any claim or allegation contained in the Complaint:
    Now, Therefore, before the taking of any testimony and without 
trial or adjudication of any issue of fact or law herein, and upon the 
consent of the parties hereto, it is hereby Ordered, Adjudged, and 
Decreed:

I. Jurisdiction

    This Court has jurisdiction of the subject matter herein and of 
each of the parties consenting hereto. The Complaint states a claim 
upon which relief may be granted to the United States against Morgan 
under Sections 1 and 4 of the Sherman Act, 15 U.S.C. 1 and 4.

II. Applicability

    This Final Judgment applies to Morgan and each of its successors, 
assigns, and to all other persons in active concert or participation 
with it who shall have received actual notice of the Settlement 
Agreement and Order by personal service or otherwise.

III. Relief

    A. Within thirty (30) days of the entry of this Final Judgment, 
Morgan shall pay to the United States the sum of four million eight 
hundred thousand dollars ($4,800,000.00).
    B. The payment specified above shall be made by wire transfer. 
Before making the transfer, Morgan shall contact Janie Ingalls, of the 
Antitrust Division's Antitrust Documents Group, at (202) 514-2481 for 
wire transfer instructions.
    C. In the event of a default in payment, interest at the rate of 
eighteen (18) percent per annum shall accrue thereon from the date of 
default to the date of payment.

IV. Retention of Jurisdiction

    This Court retains jurisdiction to enable any party to this Final 
Judgment to apply to this Court at any time for further orders and 
directions as may be necessary or appropriate to carry out or construe 
this Final Judgment, to modify any of its provisions, to enforce 
compliance, and to punish violations of its provisions. Upon 
notification by the United States to the Court of Morgan's payment of 
the funds required by Section III above, this Section IV will have no 
further force or effect.

V. Public Interest Determination

    Entry of this Final Judgment is in the public interest. The parties 
have complied with the requirements of the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16, including making copies available to the 
public of this Final Judgment, the Competitive Impact Statement, and 
any comments thereon and Plaintiff's responses to comments. Based upon 
the record before the Court, which includes the Competitive Impact 
Statement and any comments and response to comments filed with the 
Court, entry of this Final Judgment is in the public interest.

Dated:-----------------------------------------------------------------

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United States District Judge.

[FR Doc. 2011-26161 Filed 10-7-11; 8:45 am]
BILLING CODE 4410-11-P