[Federal Register Volume 77, Number 50 (Wednesday, March 14, 2012)]
[Notices]
[Pages 15125-15139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-5952]


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DEPARTMENT OF JUSTICE

Antitrust Division


United States v. Morgan Stanley; Public Comments and Response on 
Proposed Final Judgment

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)-(h), the United States hereby publishes below the comments 
received on the proposed Final Judgment in United States v. Morgan 
Stanley, Civil Action No. 1:11-CV-06875-WHP, which were filed in the 
United States District Court for the Southern District of New York on 
March 6, 2012, together with the response of the United States to the 
comments.
    Copies of the comments and the response are available for 
inspection at the Department of Justice Antitrust Division, 450 Fifth 
Street, NW., Suite 1010, Washington, DC 20530 (telephone: 202-514-
2481), on the Department of Justice's Web site at http://www.justice.gov/atr, and at the Office of the Clerk of the United 
States District Court for the Southern District of New York, 500 Pearl 
Street, New York, New York 10007. Copies of any of these materials may 
be obtained upon request and payment of a copying fee.

Patricia A. Brink,
Director of Civil Enforcement.

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW 
YORK

    UNITED STATES OF AMERICA, Plaintiff, v. MORGAN STANLEY, Defendant.
    Civil Action No.: 11-civ-6875 WHP
    Hon. William Pauley III

RESPONSE OF PLAINTIFF UNITED STATES TO PUBLIC COMMENTS ON THE PROPOSED 
FINAL JUDGMENT

    Pursuant to the requirements of the Antitrust Procedures and 
Penalties Act, 15 U.S.C. Sec.  16(b)-(h) (``Tunney Act''), the United 
States files the public comments concerning the proposed Final Judgment 
in this case and the United States' response to those comments. After 
careful consideration, the United States continues to believe that the 
relief sought in the proposed Final Judgment will provide an effective 
and appropriate remedy for the antitrust violation alleged in the 
Complaint. The United States will move the Court for entry of the 
proposed Final Judgment after the public comments and this Response 
have been published in the Federal Register, pursuant to 15 U.S.C. 
Sec.  16(d).

[[Page 15126]]

I. PROCEDURAL HISTORY

    The United States brought this lawsuit against Defendant Morgan 
Stanley on September 30, 2011, to remedy a violation of Section 1 of 
the Sherman Act, 15 U.S.C. Sec.  1. In January 2006, Morgan Stanley 
Capital Group Inc. (``MSCG''), a subsidiary of defendant Morgan 
Stanley,\1\ 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. The likely 
effect of this combination 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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    \1\ MSCG and Morgan Stanley are collectively referred to 
hereinafter as ``Morgan.''
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    Simultaneously with the filing of the Complaint, the United States 
filed a proposed Final Judgment and a Stipulation signed by the United 
States and Morgan consenting to the entry of the proposed Final 
Judgment after compliance with the requirements of the Tunney Act. 
Pursuant to those requirements, the United States filed a Competitive 
Impact Statement (``CIS'') in this Court on September 30, 2011; 
published the proposed Final Judgment and CIS in the Federal Register 
on October 11, 2011, see United States v. Morgan Stanley, Proposed 
Final Judgment and Competitive Impact Statement, 76 Fed. Reg. 62843 
(Oct. 11, 2011); and published summaries of the terms of the proposed 
Final Judgment and CIS, together with directions for the submission of 
written comments relating to the proposed Final Judgment (``PFJ''), in 
The Washington Times for seven days (October 10 through October 14 and 
October 17 and 18, 2011) and in The New York Post for seven days 
(October 25 through October 31, 2011). The 60-day period for public 
comments ended on December 30, 2011. The United States received two 
comments, as described below, which are attached hereto.

II. THE COMPLAINT AND THE PROPOSED FINAL JUDGMENT

A. Background
    As alleged in the Complaint and as discussed more fully in the CIS 
[Dkt. 2] at 2-7, this case involves Morgan's participation in 
an agreement with KeySpan that caused an anticompetitive effect in the 
New York City Capacity Market.\2\
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    \2\ In the state of New York, sellers of retail electricity must 
purchase a product from generators known as installed capacity 
(``capacity'').
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    In 2005, KeySpan, a pivotal capacity supplier, anticipated that 
tight supply and demand conditions in the New York City capacity market 
would ease due to entry of new generation. Concerned that market entry 
would lead to lower prices and revenues, KeySpan studied various 
options, including the direct purchase of Astoria. Such an acquisition, 
however, would have raised significant market power concerns. KeySpan 
decided instead to approach Morgan to arrange a financial transaction 
that would provide KeySpan an indirect financial interest in Astoria's 
capacity sales. Morgan informed KeySpan that such an agreement between 
Morgan and KeySpan would be contingent on Morgan also entering into an 
agreement with Astoria, the only other generator with sufficient 
capacity to offset Morgan's payments to KeySpan.
    In January 2006, Morgan entered into a financial derivative 
agreement with KeySpan (the ``Morgan/KeySpan Swap''), and, at the same 
time, an offsetting agreement with Astoria (the ``Morgan/Astoria 
Hedge''). Under the terms of the Morgan/KeySpan Swap, when the market 
clearing price for capacity was above a certain amount, Morgan 
essentially was required to pay KeySpan a multiple of the difference 
between the clearing price and the strike price.\3\ The terms of both 
the Morgan/KeySpan Swap and the Morgan/Astoria Hedge ran from May 2006 
through April 2009. Morgan earned approximately $21.6 million in net 
revenues from the two agreements.
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    \3\ Under the Morgan/KeySpan Swap, if the market price for 
capacity was above the strike price ($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. Under the Morgan/Astoria 
Hedge, 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. Morgan retained the differential (e.g., $7.57-$7.07 
times 1800 MW) as revenues.
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    The revenues from Astoria's capacity sales that KeySpan obtained 
through 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. As a 
result, KeySpan consistently bid its capacity into the capacity 
auctions at the highest allowed price and, despite the addition of 
significant new generating capacity in New York City, the market price 
of capacity did not decline.\4\ This result would not have been 
achieved without Morgan's participation.
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    \4\ The effects of the Morgan/KeySpan Swap continued until March 
2008, at which time changes in regulatory conditions eliminated 
KeySpan's ability to affect the market price. KeySpan was sold to 
another company in August 2007. The State of New York conditioned 
its approval of the acquisition on the divestiture of KeySpan's 
Ravenswood generating assets and required KeySpan to bid its New 
York capacity at zero from March 2008 until the divestiture was 
completed. Since then, the market price for capacity has declined.
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B. United States v. KeySpan
    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). On February 2, 
2011, after completion of the Tunney Act procedures, the Court entered 
the KeySpan Final Judgment, and, in making its public interest 
determination, found that disgorgement is available to remedy 
violations of the Sherman Act. See United States v. KeySpan Corp., 763 
F. Supp. 2d 633, 638-41 (S.D.N.Y. 2011) (WHP).
C. The Morgan Complaint and Proposed Final Judgment
    On September 30, 2011, the United States filed the current suit 
against Morgan for its role in the Morgan/KeySpan Swap. The United 
States alleges that Morgan entered into an agreement (the Morgan/
KeySpan Swap), the likely effect of which was to increase prices in the 
New York City Capacity Market, in violation of Section 1 of the Sherman 
Act, 15 U.S.C. Sec.  1. Simultaneous with the filing of its Complaint, 
the United States filed a proposed Final Judgment requiring Morgan to 
pay to the Treasury of the United States $4.8 million as disgorgement 
of ill-gotten gains. The proposed Final Judgment requires Morgan to 
disgorge profits gained as a result of its unlawful agreement in 
restraint of trade. As stated in the CIS, the proposed relief serves 
the public interest by depriving Morgan of ill-gotten gains, thereby 
deterring Morgan and others from engaging in similar anticompetitive 
conduct in the future.

[[Page 15127]]

II. STANDARDS GOVERNING THE COURT'S PUBLIC INTEREST DETERMINATION UNDER 
THE TUNNEY ACT

    The Tunney Act calls for the Court, in making its public interest 
determination, to consider certain factors relating to the competitive 
impact of the judgment and whether it adequately remedies the harm 
alleged in the complaint. See 15 U.S.C. Sec.  16(e)(1)(A) and (B) 
(listing factors to be considered).
    This public interest inquiry is necessarily a limited one, as the 
United States is entitled to deference in crafting its antitrust 
settlements, especially with respect to the scope of its complaint and 
the adequacy of its remedy. See generally United States v. Microsoft 
Corp., 56 F.3d 1448, 1458-62 (DC Cir. 1995); United States v. SBC 
Commc'ns, 489 F. Supp. 2d 1, 12-17 (D.D.C. 2007). Under the Tunney Act, 
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, 963 F. 
Supp. 235, 238 (S.D.N.Y. 1997) (quoting Microsoft, 56 F.3d at 1460) 
(emphasis in original), aff'd sub nom, United States v. Bleznak, 153 
F.3d 16 (2d Cir. 1998)).
    With respect to the scope of the complaint, the Tunney Act review 
does not provide for an examination of possible competitive harms the 
United States did not allege. See, e.g., Microsoft, 56 F.3d at 1459 
(holding that it is improper to reach beyond the complaint to evaluate 
claims that the government did not make).
    With respect to the sufficiency of the proposed remedy, the United 
States is entitled to deference as to its views of the nature of the 
case, its perception of the market structure, and its predictions as to 
the effect of proposed remedies. See, e.g., KeySpan, 763 F. Supp. 2d at 
642; SBC Commc'ns, 489 F. Supp. 2d at 17 (holding that the United 
States is entitled to deference as to predictions about the efficacy of 
its remedies). Under this standard, the United States need not show 
that a settlement will perfectly remedy the alleged antitrust harm; 
rather, it need only provide a factual basis for concluding that the 
settlement is a reasonably adequate remedy for the alleged harm. SBC 
Commc'ns, 489 F. Supp. 2d at 17. A court should not reject the United 
States' proposed remedies merely because other remedies may be 
preferable. KeySpan, 763 F. Supp. 2d at 637-38.

III. SUMMARY OF COMMENTS

    The United States received formal comments from the Public Service 
Commission of the State of New York (``PSC'') and from AARP, a 
nonprofit organization that helps people over the age of fifty.\5\ At 
the outset, both comments commend the United States for enforcing the 
antitrust laws to protect the integrity of New York capacity markets.
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    \5\ On January 13, 2012, State Senator Michael Gianaris and New 
York City Council Member Peter Vallone sent a joint letter to the 
Court asking the Court to re-evaluate the proposed settlement. The 
letter was placed in the case docket [Dkt. 9]. The letter 
raises issues similar to those raised by the PSC and AARP; 
accordingly, these issues will be fully addressed in this response 
of the United States to the formal comments submitted by the PSC and 
AARP.
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    The comments raise three central objections: (1) that the proposed 
$4.8 million dollar disgorgement is inadequate to deter similar 
anticompetitive conduct or otherwise serve its remedial purpose, 
especially given the likely magnitude of the injury to consumers from 
any increase in New York City capacity prices (PSC Cmts at 7-14; AARP 
Cmts at 11-16 and 19-25); (2) that the decree does not contain an 
admission of wrongdoing by Morgan (AARP Cmts at 16-18); and (3) that 
the disgorged proceeds, rather than being remitted to the Treasury, 
should directly or indirectly benefit electricity consumers who paid 
higher electricity rates as a result of the illegal agreement (AARP 
Cmts at 10-16).
    AARP recommends that the United States withdraw from the proposed 
settlement and proceed in the litigation or renegotiate a settlement 
with Morgan that would provide equitable relief to electric utility 
customers, an admission by Morgan of its violation of the Sherman Act, 
a quantification of the total harm to consumers, and a disgorgement of 
all profits Morgan realized from the transaction at issue. AARP Cmts at 
28. The PSC asks the Court to order the United States to supplement the 
record. PSC Cmts at 16.

IV. RESPONSE TO THE COMMENTS

    The United States has carefully considered these objections but 
finds that they do not warrant modification of the proposed Final 
Judgment.
A. The Proposed Remedy Is Appropriate and Deters Anticompetitive 
Conduct
    The commenters argue that disgorgement of $4.8 million is an 
inadequate remedy that will not serve as an effective deterrent, 
especially when compared to Morgan's approximately $21.6 million net 
revenues earned under the Swap and the increased prices paid by 
electricity consumers. Such concerns are misplaced.\6\
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    \6\ AARP requests access to the derivative agreements. AARP Cmts 
at 21. The agreement that the United States alleged violated the 
Sherman Act--the Morgan/KeySpan Swap--is publicly available as an 
attachment to KeySpan's January 18, 2006 Form 8-K filing with the 
SEC in which KeySpan announced that it had entered into the 
transaction, available at http://www.sec.gov/Archivesiedgar/data/10623791000106237906000004/ex101-8kjan2406.txt.
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    The proposed remedy constitutes significant and meaningful relief. 
In its action against KeySpan, the United States sought disgorgement 
under the Sherman Act for the first time. In approving that settlement, 
this Court recognized that the disgorgement by a power generator 
engaged in an alleged anticompetitive scheme would become ``an 
important marker for enforcement agencies and utility regulators 
alike.'' KeySpan, 763 F. Supp. 2d at 642. In this case, the United 
States seeks disgorgement from the financial services firm that 
facilitated the transaction. Just as the KeySpan remedy created an 
important marker for disgorgement from the principal competitor in an 
anticompetitive scheme, the proposed remedy in this unprecedented case 
demonstrates the United States' resolve to pursue financial services 
firms that leverage derivative agreements for anticompetitive ends, and 
the antitrust liability that may result from such enforcement actions. 
Financial services firms contemplating the use of such anticompetitive 
agreements will now recognize the prospect of Sherman Act liability and 
disgorgement, thereby diminishing their appetite for and deterring this 
illegal conduct. Indeed, the filing of the proposed settlement has 
already prompted legal commentators to warn about the enforcement 
issues raised by this case, including the duty of financial services 
firms to consider the implications of their agreements on competition 
in the underlying markets.\7\
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    \7\ See, e.g., Mary Arm Mason & William Monts III, Morgan 
Stanley to Disgorge Profits Earned from Anticompetitive Derivative 
Agreements, Hogan Lovells (Dec. 9, 2011) (reporting that ``[Ole key 
points from the Morgan Stanley case for financial services clients 
are: (1) the DOJ is prepared to use Section 1 to outlaw financial 
arrangements aimed at producing anticompetitive effects, (2) the DOJ 
will take enforcement action against the financial services 
companies that facilitate these arrangements, even though they do 
not participate in the underlying physical commodity market, and (3) 
pure financial players may have a duty to examine the competitive 
effects of their arrangements on the underlying markets''), 
available at http://emailcc.com/rv/ff000213bdac60e42b089aa3f84a8b12fdc2a196; Barry Nigro & Maria 
Cirincione, DOJ Orders Financial Services Firm to Disgorge Profits 
from Derivative Contract, Fried Frank Antitrust & Comp. L. (Oct. 17, 
2011) (reporting that this case ``puts firms on notice that any type 
of agreement facilitating anticompetitive conduct is subject to 
scrutiny and that the DOJ may seek penalties against indirect third 
party participants, as well as direct competitors''), available at 
http://www.friedfrank.com/siteFiles/Publications/Final%2010-17-11%20D0J%200rders%20Financial%20Services%20Firm%20to%20Disgorge%20Profits%20from%20Derivative%20Contract.pdf.

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[[Page 15128]]

    The PSC and AARP nevertheless argue that disgorgement of anything 
short of the $21.6 million in net revenues earned by Morgan under the 
Swap \8\ will not strip Morgan of the entirety of its ill-gotten gains 
and therefore will not deter the conduct at issue. This position 
ignores the deterrent value of the proposed settlement described above. 
It also ignores the disputes that would likely arise in calculating 
Morgan's ill-gotten gains for the purpose of determining disgorgement. 
The theory of the United States' case rests on the illegality of the 
Morgan/KeySpan Swap but not the Astoria Hedge. As such, were this 
matter to proceed to trial, Morgan would likely contend that but for 
the Morgan/KeySpan Swap, it would have entered into a legitimate 
transaction with someone other than KeySpan to offset the Astoria 
Hedge, and that any disgorgement remedy should be adjusted downward to 
account for a legitimate retum.\9\ Although the United States would 
have contested these arguments and sought disgorgement of the full 
$21.6 million in net revenues had this action proceeded to trial, the 
settlement reflects, among other things, the fact that there is a 
dispute about the amount of Morgan's net revenues that were ill-gotten.
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    \8\ There is no dispute that Morgan earned $21.6 million under 
the two derivative agreements.
    \9\ Though a legitimate off-setting counter-party would likely 
not have agreed to the strike price as high as the $7.57 per kW-
month found in the Morgan/KeySpan Swap, Morgan would nonetheless 
have earned revenues from a legitimate off-setting transaction so 
long as it exceeded the $7.07 per KW-month price in the Astoria 
Hedge. In the alternative, Morgan would also dispute that the entire 
$21.6 million earned under both agreements is cognizable as ill-
gotten gains. See CIS at note 4.
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    The United States recognizes that it has not proved its case at 
trial and that ``a court considering a proposed settlement does not 
have actual findings that the defendant[] engaged in illegal practices, 
as would exist after a trial.'' SBC Commc'ns, 489 F. Supp. 2d at 15 
(citing Microsoft, 56 F.3d at 1461). The $4.8 million disgorgement 
amount is the product of settlement negotiations and accounts for 
litigation risks and costs. It is appropriate to consider litigation 
risk and the context of a settlement when evaluating whether a proposed 
remedy is in the public interest.\10\ As this Court has recognized 
``Mlle adequacy of the disgorgement amount must be evaluated in view of 
the Government's decision to settle its claims and seek entry of the 
consent decree. When a litigant chooses to forgo discovery and trial in 
favor of settlement, full damages cannot be expected.'' \11\
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    \10\ Indeed, ``room must be made for the government to grant 
concessions in the negotiation process for settlements.'' SBC, 489 
F. Supp. 2d at 15.
    \11\ KeySpan, 763 F. Supp. 2d at 642 (citing In re Linerboard 
Antitrust Litig., 321 F. Supp. 2d 619, 633 (E.D. Pa 2004) 
(collecting cases) & In re Milken & Assocs. Sec Litig., 150 F.R.D. 
46, 54 (S.D.N.Y 1993) (``The Second Circuit has held that a 
settlement can be approved even though the benefits amount to a 
small percentage of the recovery sought.'')).
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    Here, the litigation costs and risks are not insignificant. The 
United States would have had to establish at trial that the KeySpan 
Swap caused anticompetitive effects in the New York capacity market, a 
complex endeavor that would have required substantial fact and expert 
testimony and evidence. And, in the present case against Morgan 
Stanley, the United States would have had the additional burden of 
establishing the liability of a financial services firm for using a 
derivative agreement to facilitate an anticompetitive effect even 
though the company itself was not a participant in the underlying 
market. Assuming the United States prevailed on liability, there would 
be additional risk, as discussed above, in establishing the proper 
disgorgement amount. While the United States is confident that it could 
prevail on these issues at trial, the settlement obviates the risk--and 
significant cost--of litigation.
    The PSC and AARP also argue that the reasonableness of the proposed 
remedy should be evaluated in light of the ratepayer harm caused by 
Morgan. PSC Cmts at 13-15; AARP Cmts at 5, 11, 16. In essence, they 
seek a disgorgement amount that takes into account the losses suffered 
by retail electricity consumers. As this Court recognized in KeySpan, 
such comments ``fail to comprehend the nature of the disgorgement 
remedy. The 'primary purpose of disgorgement is not to compensate 
investors,' but rather to divest a wrongdoer of the proceeds of their 
misconduct.'' KeySpan, 763 F. Supp. 2d at 642 (quoting SEC v. 
Cavanaugh, 445 F. 3d 105, 117 (2d Cir. 2006)). Indeed, the extent of 
market harm is not relevant to the disgorgement calculation; once a 
violation has been established, a district court ``possesses the 
equitable power to grant disgorgement without inquiring whether, or to 
what extent, identifiable private parties have been damaged by [the 
violation].'' \12\
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    \12\ SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985). See also 
SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (``Whether or not 
[any victims] may be entitled to money damages is immaterial [to 
disgorgement].'').
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    In this case, the source of Morgan's ill-gotten gains is the 
revenues it earned under the derivative agreements. Indeed, the 
derivative agreements represent Morgan's only source of revenue in this 
case. Morgan did not participate in the actual capacity market and thus 
it did not earn any auction revenues, much less pocket consumer 
overpayments. Moreover, as the United States explained in the KeySpan 
proceedings,\13\ an inquiry into consumer harm would require the Court 
to assess the price of capacity that would have prevailed absent the 
Swap, a problematic exercise given the uncertainty of determining 
market outcomes absent the Swap. Accordingly, given the difficulty of 
definitively estimating the harm to the market and its irrelevance to 
the questions relating to the adequacy of the disgorgement remedy, 
AARP's assertion that the United States is obligated to provide 
estimates of total economic harm and profits received by all market 
participants resulting from the alleged violation should be rejected.
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    \13\ See October 12, 2010 Transcript of Hearing in United States 
v. KeySpan, 1:10-cv-01415-WHP, at 10-14. In addition, in this case 
as in KeySpan, commenters' estimates of consumer harm may be 
significantly overstated. Id. at 14-15.
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B. Public Policy Rejects the Contention That a Settlement of a 
Government Antitrust Case Should Contain an Admission of Wrongdoing
    AARP argues that the proposed final judgment is not in the public 
interest because it does not contain an admission or finding that 
Morgan violated the law. Similarly, the PSC quotes language from SEC v. 
Citigroup challenging the sufficiency of a consent judgment ``that does 
not involve any admissions'' by the defendant.\14\
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    \14\ AARP Cmts at 16-18 & 28 (recommending that the PFJ be 
amended to include an ``admission by Morgan of its violation''); PSC 
Cmts at 10 (quoting SEC v. Citigroup Global Markets, Inc., Slip Op. 
at 10, 2011 WL 5903733 at *5 (S.D.N.Y. 2011)).
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    Government antitrust suits are governed by a specialized statutory 
regime that provides no basis to require that consent decrees include 
either a finding or an admission of liability.\15\ Congress has 
designed the remedial

[[Page 15129]]

provisions of the antitrust laws to encourage consent judgments, which 
allow the government to obtain relief without the ``time, expense and 
inevitable risk of litigation.'' United States v. Armour and Co., 402 
U.S. 673, 681 (1971). Thus, for nearly a century, the antitrust laws 
have expressly limited the ability of private plaintiffs seeking treble 
damages to rely on consent decrees entered in government cases. Section 
5 of the Clayton Act, originally enacted in 1914,\16\ provides that 
litigated final judgments establishing a violation in civil or criminal 
cases ``brought by or on behalf of the United States under the 
antitrust laws'' shall be ``prima facie evidence'' against the 
defendant in subsequent private litigation, but the statute specifies 
that this provision does not apply to ``consent judgments or decrees 
entered before any testimony has been taken.'' 15 U.S.C. Sec.  16(a). 
Under this regime, a defendant can elect to accept a consent decree and 
avoid the risk of a litigated judgment that would seriously weaken its 
position in follow-on private litigation. Congress provided this 
exception to the Clayton Act's prima facie evidence provision ``in 
order to encourage defendants to settle promptly government-initiated 
antitrust claims and thereby to save the government the time and 
expense of further litigation.'' United States v. National Ass'n of 
Broadcasters, 553 F. Supp. 621, 623 (D.D.C. 1982) (collecting cases). 
Requiring admissions or findings of liability as a prerequisite to 
entering a consent decree would undercut Congress's purpose and 
contravene the public interest in allowing the government to obtain 
relief without the risk and delay of litigation.
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    \15\ The district court proceedings in the Citigroup case have 
been temporarily stayed by the Court of Appeals (pending a panel 
ruling on a motion to stay pending appeal). SEC v. Citigroup Global 
Markets Inc., 2011 WL 6937373 (2nd Cir. Dec. 27, 2011).
    \16\ 63 Cong. Ch. 323, 38 Stat. 730, 731, codified as amended at 
15 U.S.C. Sec.  16(a).
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    Congress confirmed its continuing recognition of the importance of 
consent decrees when it amended the Clayton Act in 1974 to specify 
procedural requirements governing a district court's determination of 
whether entry of a proposed consent decree in a government antitrust 
case is in the public interest. Antitrust Procedures and Penalties Act, 
Sec.  2, Pub. L. No. 93-528, 88 Stat 1706 (1974), codified at 15 U.S.C. 
Sec.  16(b)-(h) (``Tunney Act''). The repeated references to the 
``alleged'' violation in the language of the Tunney Act strongly 
suggest that Congress did not expect decrees arising under the 
antitrust laws to contain admissions of liability.\17\ And the 
legislative history unambiguously demonstrates Congress' understanding 
that government antitrust settlements typically occur without an 
admission or finding of liability. The Senate Report accompanying S. 
782, the bill that became the Tunney Act, explains:
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    \17\ With one exception, every reference to ``violation'' or 
``violations'' in the Tunney Act is immediately preceded by 
``alleged.'' The only exception is a reference to ``the violations 
set forth in the complaint.'' 15 U.S.C. Sec.  16(e)(2) as enacted, 
currently 16 U.S.C. Sec.  16(e)(1)(B). The Tunney Act contains no 
reference to admissions or findings of violations or of liability. 
Congress amended the Tunney Act in 2004, but those amendments do not 
affect the analysis here.
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    The entry of a consent decree is a judicial act which requires the 
approval of a United States district court. Once entered the consent 
decree represents a contract between the government and the respondent 
upon which the parties agree to terminate the litigation. Pursuant to 
the terms of the decree, the defendant agrees to abide by certain 
conditions in the future. However the defendant does not admit to 
having violated the law as alleged in the complaint. Obviously, the 
consent decree is of crucial importance as an enforcement tool, since 
it permits the allocation of resources elsewhere.\18\
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    \18\ S. Rep. No. 298, 93d Cong., 1st Sess. (1973) (``S. Rep.'') 
at 5 (emphasis added). See also 119 Cong. Rec. 3449, 3451 (Feb. 6, 
1973 floor statement of Senator Tunney: ``Essentially the decree is 
a device by which the defendant, while refusing to admit guilt, 
agrees to modify its conduct and in some cases to accept certain 
remedies designed to correct the violation asserted by the 
Government.''). (The legislative history of the Tunney Act, 
including the House and Senate Reports and the statement of Senator 
Tunney cited herein, is available at http://www.justice.gov/jmd/ls/legislative_histories/pl93-528/pl93-528.html).
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    The corresponding House Report is equally clear on the point: 
``Ordinarily, defendants do not admit to having violated the antitrust 
or other laws alleged as violated in complaints that are settled.'' 
\19\ Moreover, both reports plainly reveal that Congress not only 
understood the practice of entering into such consent decrees, but 
encouraged it, considering them a ``legitimate and integral part of 
antitrust enforcement'' and urging that they be retained ``as a 
substantial antitrust enforcement tool.'' \20\
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    \19\ H. Rep. No. 1463, 93rd Cong., 2d Sess. (1974) (``H. Rep.'') 
at 6, reprinted at 1974 U.S. Code Cong. & Admin. News 6535, 6536-37. 
See also id. (``Present law, 15 U.S.C. Sec.  16(a), encourages 
settlement by consent decree as part of the legal policies expressed 
in the antitrust laws. * * * The bill preserves these legal and 
enforcement policies. * * *'').
    \20\ S. Rep. at 3 & 7; see also H. Rep. at 8, 1974 U.S.C.C.A.N. 
at 6539 (also describing consent decrees as a ``viable settlement 
option'').
---------------------------------------------------------------------------

    Accordingly, the government routinely enters into antitrust consent 
decrees explicitly disclaiming admissions or findings of liability.\21\ 
The Supreme Court has long endorsed the entry of consent judgments in 
which there is no finding of liability,\22\ and it has done so even 
when the defendant has affirmatively denied the alleged violation.\23\
---------------------------------------------------------------------------

    \21\ The proposed Final Judgment in this case states that the 
United States and defendant Morgan have ``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.'' PFJ at 1. Equivalent statements are conventional in 
government antitrust consent decrees negotiated pre-trial.
    \22\ Cf: Armour, 402 U.S. at 681 (interpreting consent decree in 
which defendants had denied liability for the allegations raised in 
the complaint); see also 18A Wright and Miller, Federal Practice and 
Procedure Sec.  4443, at 256-57 (2d ed. 2002) (``central 
characteristic of a consent judgment is that the court has not 
actually resolved the substance of the issues presented'').
    \23\ See Swift & Co. v. United States, 276 U.S. 311, 327 (1928) 
(refusing to vacate injunctive relief in consent judgment that 
contained recitals in which defendants asserted their innocence).
---------------------------------------------------------------------------

    Following enactment of the Tunney Act, courts have expressly 
recognized the Congressional intent to preserve the policy of 
encouraging antitrust consent decree expressed in that legislation.\24\ 
Only once, to our knowledge, has a district court objected to a 
proposed consent decree on the basis that a defendant had not admitted 
liability or wrongdoing, but this objection was specifically rejected 
on appeal. In United States v. Microsoft, the district court refused to 
enter the proposed consent decree in part because the defendant denied 
``that the conduct charged in the Government's complaint to which it 
has consented, violates the antitrust laws.'' \25\ The DC Circuit 
reversed, expressly holding ``unjustified'' the district court's 
criticism of the defendant ``for declining to admit that the practices 
charged in the complaint actually violated the antitrust laws.'' \26\ 
The Court of Appeals emphasized that the ``important question is 
whether [the defendant] will abide by the terms of the consent decree 
regardless of whether it is willing to admit wrongdoing.'' \27\ We are 
aware of no government antitrust case in which a court refused to enter 
a consent decree because a defendant had failed to admit liability.
---------------------------------------------------------------------------

    \24\ E.g., United States v. Alex. Brown & Sons, Inc., 963 F. 
Supp. 235, 238-39 (S.D.N.Y. 1997) (``In enacting the Tunney Act, 
Congress recognized the high rate of settlement in public antitrust 
cases and wished to encourage settlement by consent decrees as part 
of the legal policies expressed in the antitrust laws.'') (internal 
quotations omitted).
    \25\ United States v. Microsoft, 159 F.R.D. 318, 337 (D.D.C. 
1995), rev 'd 56 F.3d 1448 (D.C. Cir. 1995).
    \26\ United States v. Microsoft, 56 F.3d at 1448, 1461 (D.C. 
Cir. 1995).
    \27\ Id.
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    AARP's contention that absent an admission of wrongdoing or an

[[Page 15130]]

adjudication of the facts entry of the decree would not be in the 
public interest is unwarranted. The relief that would be afforded by 
the proposed decree is appropriate to the violation alleged. The Tunney 
Act and the public interest require no more. To insist on more is to 
impose substantial resource costs on government antitrust enforcement; 
to risk the possibility of litigation resulting in no relief at all; to 
contravene a century of congressional and judicial policy; and to 
establish a precedent that could impede enforcement of the antitrust 
laws in the future.
C. Disgorgement of Proceeds to the U.S. Treasury Is Appropriate
    AARP argues that Morgan's $4.8 million disgorgement payment should 
be made to entities other than the U.S. Treasury in order to benefit 
the electricity customers in New York City who paid higher prices as a 
result of Morgan's conduct. The United States shares AARP's concern for 
the New York City ratepayers and, indeed, brought this case and sought 
disgorgement in order to deter financial services firms from entering 
into financial arrangements that cause anticompetitive effects. The 
United States has carefully considered the suggested alternative uses 
for the disgorgement proceeds but has determined that payment to the 
U.S. Treasury is the most appropriate result in this circumstance.
    The alternative distribution plan proposed by AARP seeks, in 
effect, to restore funds to ratepayers. As this Court recognized in 
KeySpan, 763 F. Supp. 2d at 643. A remedy that seeks to reimburse funds 
to New York City ratepayers would raise questions relating to the filed 
rate doctrine, which bars remedies (such as damages) that result, in 
effect, in payment by customers and receipt by sellers of a rate 
different from that on file for the regulated service. See generally 
Square D Co. v. Niagara Frontier, 476 U.S. 409, 423 (1986). Indeed, a 
lawsuit filed by private plaintiffs seeking damages from KeySpan and 
Morgan based on the Swap has been dismissed on the ground that the 
action is barred as a matter of law under the filed rate doctrine.\28\
---------------------------------------------------------------------------

    \28\ See Simon v. KeySpan, 785 F. Supp. 2d at 138-39 (dismissing 
actions based on filed rate doctrine and other grounds). Plaintiffs 
have appealed this decision to the Second Circuit, but a decision 
has not yet been rendered.
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    In this case, the United States specifically chose to seek 
disgorgement, rather than restitution, as a remedy for this violation. 
As discussed in the CIS, disgorgement is particularly appropriate on 
the facts of this case to fulfill the remedial goals of the Sherman 
Act. CIS at 9-10. Disgorgement also provides finality, certainty, 
avoidance of transaction costs, and potential to do the most good for 
the most people. As in KeySpan, the proposed remedy here is well within 
the reaches of the public interest.\29\
---------------------------------------------------------------------------

    \29\ KeySpan, 763 F. Supp. 2d at 643. Moreover, the 
Miscellaneous Receipts Act (``MRA'') provides that members of the 
Executive Branch (including employees of the Department of Justice) 
who receive money for the United States are to remit such funds 
directly to the Treasury. 31 U.S.C. Sec.  3302(b) (2006). A purpose 
of the statute is to protect Congress' appropriations authority by 
ensuring that money collected from various sources cannot be used 
for programs not authorized by law. The proposed remedy avoids any 
issues of compliance with the MRA.
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VI. CONCLUSION

    After careful consideration of the public comments, the United 
States remains of the view that the proposed Final Judgment provides an 
effective and appropriate remedy for the antitrust violation alleged in 
the Complaint and that its entry would therefore be in the public 
interest.
    The United States is submitting this Response and the public 
comments to the Federal Register for publication pursuant to 15 U.S.C. 
Sec.  16(d). After publication occurs, the United States will move this 
Court to enter the proposed Final Judgment.

Dated: March 6, 2012

    Respectfully submitted, /s/ Jade Alice Eaton, [email protected], 
Trial Attorney, U.S. Department of Justice, Antitrust Division, 
Transportation, Energy & Agriculture Section, 450 Fifth Street, NW, 
Suite 8000, Washington, DC 20004, Telephone: (202) 307-6316, Facsimile: 
(202) 307-2784.

AARP COMMENTS IN OPPOSITION TO PROPOSED SETTLEMENT AND IN SUPPORT OF 
FURTHER PROCEEDINGS

Preliminary Statement

    On September 30, 2011, the United States Department of Justice 
Antitrust Division (``DOT'') filed a Complaint commencing this civil 
antitrust action against defendant Morgan Stanley. On the same day, DOJ 
filed a proposed Final Judgment, agreed to by Morgan Stanley, which 
would settle the case subject to court review and approval, along with 
a Competition Impact Statement (``CIS'') in support of the proposed 
settlement.\1\ A notice inviting public comment \2\ on the proposed 
settlement of this action has been issued, as is required by the Tunney 
Act.\3\ AARP submits these comments to DOJ in response to the notice.
---------------------------------------------------------------------------

    \1\ The court papers are available at http://www.justice.gov/atr/cases/morgan.html.
    \2\ 76 Federal Register, No. 196 (Tuesday, October 11, 2011).
    \3\ The Antitrust Procedures and Penalties Act (the ``Tunney 
Act''), 15 U.S.C. Sec.  16(e)-(f), requires an opportunity for 
public comment prior to a court's review of any proposed settlement 
between the government and an alleged antitrust law violator.
---------------------------------------------------------------------------

    AARP is a nonpartisan, nonprofit organization that helps people 
over the age of 50 to exercise independence, choice, and control in 
ways beneficial to them and to society as a whole.\4\ AARP has millions 
of members, including more than 2,500,000 members who reside in New 
York state. AARP is greatly concerned about the threats to health and 
safety of vulnerable citizens caused by New York's high electricity 
costs.\5\ Because the cost of utilities has skyrocketed, many low and 
middle-income families and older people must now choose between paying 
utility bills and paying for other essentials such as food and 
medicine. AARP works to protect consumers from excessive utility rates 
and charges.
---------------------------------------------------------------------------

    \4\ For more information about AARP see http://www.aarp.org/.
    \5\ New York residential electric rates are the highest in the 
continental United States. Energy Information Agency, Electric Power 
Monthly for August, 2011, Average Retail Price of Electricity to 
Ultimate Customers by End-Use Sector, by State, table 5.6.A, (Nov. 
2011). Available at http://www.eia.gov/electricity/monthly/index.cfm.
---------------------------------------------------------------------------

    Many AARP members were adversely affected by the antitrust 
violations alleged in this action, which artificially increased prices 
in the electric capacity markets of the New York Independent System 
Operator (``NYISO''). Although the excessive charges were paid in the 
first instance by load-serving utilities such as Con Edison, they were 
directly passed on to utility customers. Utility customers had no way 
to escape payment of the inflated charges when their monthly electric 
bills were adjusted to include the costs.\6\
---------------------------------------------------------------------------

    \6\ ``Every Con Ed customer in the five boroughs overpaid an 
average total of at least $40 over two years during a price-fixing 
scheme set up by the owners of a giant Queens power plant, the feds 
charge in a court case that would let the alleged gougers get away 
with most of the gains.'' Bill Sanderson, $157 M Power Abuse, N.Y. 
Post, March 9, 2010, available at http://www.nypost.com/f/print/news/local/power_abuse_SgLN9psbhjopRMEGU68fgK.
---------------------------------------------------------------------------

    As consumers, AARP members depend upon the protection of the 
antitrust laws against the unlawful exercise of monopoly or market 
power, such as occurred in this case. They must also rely upon the 
vigorous enforcement of the antitrust laws by DOJ and the courts.
    AARP commends DOJ for challenging Morgan Stanley's use of financial 
derivatives to facilitate gaming by

[[Page 15131]]

Keyspan and Astoria in the NYISO electricity auctions. AARP urges, 
however, that the proposed settlement be withdrawn and revised, and 
that further proceedings be held.

The Complaint and the Proposed Settlement

    The Complaint alleges that Morgan Stanley violated Section 1 of the 
Sherman Act \7\ by entering into separate financial derivative 
contracts with two major competing sellers in the NYISO electric 
capacity market, effectively combining their economic interests. The 
Morgan Stanley derivatives reduced the utilities' risk of bidding 
strategically to raise the clearing price in the NYISO market, which is 
paid to all sellers. As a consequence, higher prices were paid for 
capacity by retail utilities, and the costs were passed through to 
consumers.
---------------------------------------------------------------------------

    \7\ The Sherman Act provides that Ielvery contract, combination 
in the form of trust or otherwise, or conspiracy, in restraint of 
trade or commerce among the several States, or with foreign nations, 
is declared to be illegal.'' 15 U.S.C. Sec.  1.
---------------------------------------------------------------------------

    Under Morgan Stanley's derivative contract with the largest seller 
in the relevant market, Keyspan Corporation (``Keyspan''), Morgan 
Stanley paid Keyspan whenever NYISO auction prices exceeded a fixed 
level ($7.57/MW). This rewarded Keyspan when it set the NYISO clearing 
price at the maximum. Even if all of its capacity was not sold at its 
high price, Keyspan was assured of benefitting from it through the 
derivative contract. Under Morgan Stanley's parallel derivative 
contract with Astoria, Morgan Stanley guaranteed Astoria a fixed floor 
price for all its capacity sales, regardless of the prices established 
in the NYISO auctions, and Astoria agreed to pay Morgan Stanley 
whenever the NYISO auction price exceeded the floor price in the 
derivative contract. Morgan Stanley could take profits reaped by 
Astoria due to the artificially high price, and give them to Keyspan. 
The derivatives thus worked to insure Keyspan against lost profits if 
it lost some sales by bidding high, at the market rate cap. They 
assured Astoria that it would receive a known fixed price for all of 
its capacity, regardless of the outcome of the NYISO auctions.\8\ 
Morgan Stanley's net profit from the derivatives was $21.6 million.\9\
---------------------------------------------------------------------------

    \8\ There was little risk of low prices that would require 
Keyspan to pay Morgan Stanley and Morgan Stanley to pay Astoria 
under the derivatives. Keyspan was able to set the clearing price 
because at least some of its capacity would be needed, and so it 
could confidently demand the ceiling price for all or most of it, 
confident that when some of its expensively priced capacity went 
unsold, it would receive payments from Morgan Stanley in accordance 
their derivative agreement. Keyspan ``consistently bid its capacity 
at its cap even though a significant portion of its capacity went 
unsold.'' Complaint, p. 9, ] 32.
    \9\ Complaint, p. 9, ] 35.
---------------------------------------------------------------------------

    The NYISO pays the market clearing price to all sellers, including 
those who offered capacity at a lower price. As a result, the total 
economic damage to electric customers exceeds the ill-gotten gains of 
Morgan Stanley and the two utilities. There is no quantification or 
estimate of this damage to the public and to customers in the Complaint 
or other papers in the record. One major capacity buyer, Consolidated 
Edison Company of New York, Inc. (``Con Edison''), estimated the 
inflated capacity costs to be approximately $159 Million in 2006.\10\
---------------------------------------------------------------------------

    \10\ Of that amount, approximately $119 million was paid by New 
York City area utilities, and $39 million was paid by utilities in 
the rest of the state. See Motion to Continent of Consolidated 
Edison Company of New York, Inc., etc., Re New York Independent 
System Operator, FERC Docket No. ER07-360 (Jan. 27, 2009), P. 2 and 
Affidavit of Stuart Nachmias, ]] 13-14, available at http://elibrary.ferc.gov/idmws/common/opennatasp?filelD=11236060. The 
amount of capacity overcharges in 2007 and until NYISO capacity 
market rules were changed in early 2008 were not estimated.
---------------------------------------------------------------------------

    Simultaneously with the filing of the complaint, and without 
further proceedings, DOJ and Morgan Stanley filed a proposed Final 
Judgment, which embodies their agreement to settle the case. Key 
provisions of the Final Judgment are:
     Morgan Stanley admits no wrongdoing and the lawsuit is 
terminated,
     Morgan Stanley agrees to disgorge to the government only 
$4.8 million of its $21.6 million profit from its derivative contracts.

Standard of Review

    The Tunney Act establishes the procedure and standard of review 
applicable to the proposed settlement of an antitrust case brought by 
DOJ:
    (1) Before entering any consent judgment proposed by the United 
States under this section, the court shall determine that the entry of 
such judgment is in the public interest. For the purpose of such 
determination, the court shall 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. Sec.  16(e)(1). (Emphasis added). The Tunney Act standard 
was recently applied in the context of the DOJ settlement with Keyspan, 
involving the same derivative contract:
    [T]he Tunney Act allows courts to weigh, among other things, the 
relationship between the allegations set forth in the government's 
complaint and the remedy imposed by the proposed final judgment, 
whether the proposed final judgment is overly ambiguous, whether the 
enforcement mechanisms it employs are adequate, and whether the 
proposed final judgment may affirmatively prejudice third parties. See 
United States v. Microsoft Corp., 56 F.3d 1448, 1461-62 (DCCir. 1995) 
(per curiam). The court may not, however, ``make a de novo 
determination of facts and issues'' in conducting its public interest 
inquiry. United States v. Western Elec. Co., 993 F.2d 1572, 1577 
(DCCir.), cert. denied, 510 U.S. 984, 114 S.Ct. 487, 126 L.Ed.2d 438 
(1993) (internal quotation and citation omitted). Rather, ``jtjhe 
balancing of competing social and political interests affected by a 
proposed antitrust decree must be left, in the first instance, to the 
discretion of the Attorney General.'' Id. (internal quotation and 
citation omitted). The court should therefore reject the proposed final 
judgment only if ``it has exceptional confidence that adverse antitrust 
consequences will result--perhaps akin to the confidence that would 
justify a court in overturning the predictive judgments of an 
administrative agency.'' Microsoft, 56 F.3d at 1460 (internal 
quotations and citation omitted).
    In conducting its inquiry, the court is not required to hold a 
hearing or conduct a trial. See 119 Cong. Rec. 24,598 (1973); United 
States v. Airline Tariff Pub. Co., 836 F.Supp. 9, 11 n. 2 (D.D.C. 
1993). The Tunney Act expressly allows the court to make its

[[Page 15132]]

public interest determination on the basis of the competitive impact 
statement and response to comments alone. A court may, in its 
discretion, invoke additional procedures when it determines such 
proceedings may assist in the resolution of issues raised by the 
comments. See H.R. Rep. No. 93-1463, at 8-9 (1974), reprinted in 
U.S.S.C.A.N. 6535, 6539.
    United States v. Keyspan, 763 F.Supp.2d 633, 637-638 (S.D.N.Y. 
2011) (``Keyspan''), quoting United States v. Enova Corp., 107 
F.Supp.2d 10, 17 (D.D.C. 2000) (emphasis added). It is not necessary 
for the relief proposed in a settlement to be a perfect remedy for the 
alleged antitrust violation, but there must be a factual basis to 
support any DOJ conclusions that the remedies proposed are reasonably 
adequate.\11\
---------------------------------------------------------------------------

    \11\ There must be ``a factual foundation for the government's 
decision such that its conclusions regarding the proposed settlement 
are reasonable.'' United States v. Keyspan Corp., 763 F. Supp. 2d 
633, 637-38 (S.D.N.Y. 2011) (quoting United States v. Abitibi-
Consolidated Inc., 584 F. Supp. 2d 162, 165 (D.D.C. 2008).
---------------------------------------------------------------------------

    The Keyspan decision, quoted above, misapprehends the standard of 
review. The Tunney Act not only ``allows'' courts to consider the 
listed factors in its review. It requires such consideration. The 
Tunney Act was amended in the Antitrust Criminal Penalty Enhancement 
and Reform Act of 2004 specifically to clarify that reviewing courts 
``shall'' (instead of ``may'') take each of the *enumerated factors 
into account in their review of a proposed antitrust case settlement. 
15 U.S.C. Sec. Sec.  16(e)(1)(A) and (B).
    AARP demonstrates below that the proposed settlement fails to pass 
muster under the standards for approval of DOJ antitrust settlements. 
DOJ should withdraw its consent to the settlement, and conduct further 
proceedings to develop the record and proceed to trial, if a 
renegotiated agreement which addresses the concerns in these comments 
cannot be made.

Argument

    1. The Proposed Settlement Is Not in the Public Interest Because It 
Provides No Benefit to Customers Harmed.
    The Morgan Stanley/Keyspan/Astoria derivatives supported gaming of 
the NYISO market, causing very serious financial harm to customers by 
artificially inflating the NYISO market prices for electric capacity. 
The DOJ Complaint and Competitive Impact Statement (``CIS'') very 
prominently state that the ``likely effect'' of the alleged antitrust 
violation ``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.'' Complaint, pp. 1-2, CIS 1-2 
(emphasis added). The prayer for relief in the DOJ Complaint includes a 
request for equitable relief to ``dissipate the anticompetitive effects 
of the violation.'' Complaint If 40. The only ``anticompetitive 
effects'' identified in the record are the artificial increase in NYISO 
prices and the higher prices paid by consumers.
    The record at this stage contains no evidence of the magnitude of 
the injury to consumers, including many AARP members living in the New 
York City area. As previously discussed, there are indications outside 
the record that the price of capacity was artificially raised by 
approximately $157 million in 2006 by the gambit supported by the 
Morgan Stanley derivatives, and the term of the agreements went beyond 
2006. The New York State Public Service Commission stated in its 
comments on the settlement of the Keyspan case arising from the same 
transactions that the harm to consumers ``could have totaled hundreds 
of millions of dollars.* * *'' \12\ The CIS does not attempt to address 
the magnitude of this harm to customers, which far exceeded the total 
profits of the participants in the scheme to raise NYISO prices.\13\ As 
a consequence, the record is insufficiently developed for a reviewing 
court to test whether the remedy proposed is appropriate.
---------------------------------------------------------------------------

    \12\ NYPSC Comments in United States v. Keyspan, available at 
http://www.justice_gov/atr/cases/f259700/259704-5.htm.
    \13\ The total harm is greater than the profits because under 
NYISO market rules, artificially high prices achieved by 
participants in the scheme were paid to all sellers.
---------------------------------------------------------------------------

    Under the proposed settlement there is not one penny for the 
injured consumers. Instead, the entire $4.8 million of monetary relief 
is to be paid to the United States Treasury. This does nothing to 
address the injury to those most directly harmed, the electric 
customers whose bills were artificially increased. There is no 
explanation in the CIS of why this is so.
    The Tunney Act requires DOJ, in its CIS, to provide ``a description 
and evaluation of alternatives to such proposal actually considered by 
the United States.'' 15 U.S.C. Sec.  16(b)(6). The CIS, however, 
contains no description or evaluation of alternative relief that would 
provide at least some benefit to the injured customers. Any claim by 
DOJ that equitable relief for the benefit of injured consumers was 
never ``actually considered'' would not be credible. In the Keyspan 
case, involving the same derivative agreement, the settlement also 
provided no relief to consumers. The absence of any equitable relief 
for consumers drew vigorous protest in that case, in the comments of 
the New York State Public Service Commission, the New York State 
Consumer Protection Board, the City of New York, Con Edison, and AARP. 
Surely DOJ would at least have considered, however briefly, whether to 
seek some measure of relief for electric customers who suffered from 
the wrong.
    AARP expects that DOJ, in its response to these comments, will cite 
the recent court approval of the Keyspan settlement, which lacked any 
relief to customers. That, however, does not bar inclusion of such 
relief in the settlement of this case.
    In rejecting requests for equitable relief to consumers the court 
in the Keyspan case relied upon a perceived ``filed rate'' barrier and 
potential ``transaction costs'' of administering monetary relief to 
customers, stating:
    Finally, this Court rejects the notion that the Consent Decree 
should only be approved if the disgorged proceeds are returned to New 
York City consumers. While such relief might be optimal, payment of the 
disgorged proceeds to the Treasury is nevertheless ``within the reaches 
of the public interest.'' Alex. Brown, 963 F. Supp. at 238 (quotations 
omitted). It can be effectuated without incurring transaction costs and 
inures to the public benefit. See Sec. & Exchange Commin v. Bear, 
Steams & Co. Inc:, 626 F. Supp. 2d 402,419 (S.D.N.Y. 2009) (answering 
``the question of how [disgorged money] can be used to do 'the greatest 
good for the greatest number of people' by ordering its transfer to the 
``Treasury to be used by the Government for its operations'').
    Moreover, the Government raises valid concerns regarding potential 
violation of the filed-rate doctrine.
    ``The filed rate doctrine bars suits against regulated utilities 
grounded on the allegation that the rates charged by the utility are 
unreasonable. Simply stated, the doctrine holds that any `filed rate'--
that is, one approved by the governing regulatory agency is per se 
reasonable and unassailable in judicial proceedings brought by 
ratepayers.'' Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17, 18-19 (2d Cir. 
1994); see also Keogh v. Chi. & Northwestern Ry. Co., 260 U.S. 156, 163 
(1922) (holding that the filed rate doctrine bars recovery for 
antitrust damages against carriers colluding to set artificially high 
shipment rates). In view of that prohibition, return of the disgorged 
proceeds to New York City electricity customers could circumvent the 
filed-rate doctrine. A court must extend ``deference to the 
Government's

[[Page 15133]]

evaluation of the case and the remedies available to it.'' Alex. Brown, 
963 F. Supp. at 239.
    United States v. Keyspan Corp., 763 F. Supp. 2d 633, 643 (S.D.N.Y. 
2011) (S.D.N.Y 2011) (emphasis added).
    This case does not involve any utility rate filed by Morgan 
Stanley. It involves profits extracted from large numbers of customers 
by sellers using Morgan Stanley's services and derivative instruments 
as tools. Thus the ``filed rate'' rationale for not providing any 
relief to customers, perceived by the court to be a barrier in 
Keyspan,\14\ clearly is not applicable here.
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    \14\ At issue was Keyspan's $48 million profit from its 
derivative contract with Morgan Stanley. As the contract was neither 
filed nor part of Keyspan's rates, which are set by the NYISO in its 
auctions, applicability of the ``filed rate'' doctrine to customer 
relief in that case is questionable.
---------------------------------------------------------------------------

    The transaction cost issue perceived to be a barrier to customer 
relief in Keyspan is also easily hurdled. Just as utilities paid 
artificially inflated NYISO charges for capacity and passed those 
charges on to their customers, utilities can pass on equitable monetary 
relief intended for the benefit of their customers in the normal course 
of business without excessive transaction costs. For example, Con 
Edison passes on variations in capacity costs to its customers every 
month, in monthly rate adjustments, through its ``Market Adjustment 
Clause.'' The Market Adjustment Clause takes into account 36 variable 
factors every month, including ``(8) certain NYISO-related charges and 
credits * * *.'' \15\ is Equitable monetary relief from the inflated 
NYISO charges could be provided as a credit to customers in the normal 
course of making rate adjustments. Refunds to utility customers 
relating to past overcharges are also a well-established remedy. 
Section 113 of the New York Public Service Law provides:
---------------------------------------------------------------------------

    \15\ Con Edison Electric Service Tariff, General Information, 
Part VII, A(1)(a)(8), available at http://www.coned.com/documents/elec/159-164a.pdf.
---------------------------------------------------------------------------

    2. Whenever any public utility company or municipality, whose rates 
are subject to the jurisdiction of the commission, shall receive any 
refund of amounts charged and collected from it by any source, the 
commission shall have power after a hearing, upon its own motion, upon 
complaint or upon the application of such public utility company or 
municipality, to determine whether or not such refund should be passed 
on, in whole or in part, to the consumers of such public utility 
company or municipality and to order such public utility company or 
municipality to pass such refunds on to its consumers, in the manner 
and to the extent determined just and reasonable by the commission.
    The New York State Public Service Commission supported the return 
of overcharges as equitable relief to customers in Keyspan. Surely the 
Public Service Commission would cooperate, if necessary in the 
oversight of monetary relief intended for utility customers when a 
provision for such relief is contained in an antitrust case settlement.
    In sum, unlike Keyspan, there is no ``filed rate'' barrier in this 
case, and AARP has demonstrated that consumer benefits could be 
efficiently administered without the speculative transaction costs 
feared in Keyspan. The proposed remedy allowing the government to 
receive all the profits that Morgan Stanley agrees to cede, without 
consideration of the amount of harm suffered by customers and without 
any equitable relief to the customers, is not equitable and is not in 
the public interest.
    2. The CIS Should Be Withdrawn or Amended by DOJ To Support Its 
Reasons for Termination of the Action With No Finding of Wrongdoing by 
Morgan Stanley.
    As required by the Tunney Act, DOJ filed a Competitive Impact 
Statement (``CIS'') \16\ in which it sets out the facts of the case, 
its reasoning and its conclusions in support of the settlement. The DOJ 
Antitrust Division Manual, 4th Ed., states that in a CIS, ``[a]ll 
material provisions of the proposed judgment should be discussed.'' 
Id., at IV-57. Notably missing from the CIS in this case, however, is 
any discussion by DOJ of the critical provision which allows 
termination of the case with no admission of any wrongdoing by Morgan 
Stanley. The proposed final judgment states that Morgan Stanley:

    \16\ The CIS is available at http://www.justice.gov/atr/cases/f275800/275857.pdf.
---------------------------------------------------------------------------

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 * * *.
    Proposed Final Judgment, p. 1. The importance of this provision 
letting Morgan Stanley off the hook is underscored by the Complaint, in 
which DOJ demands ``What 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.'' Complaint, ] 39. Also, DOJ makes numerous references in 
the CIS to Morgan Stanley's conduct as having constituted a violation 
of the Sherman Act:
    The United States brought this lawsuit against Defendant Morgan 
Stanley * * * to remedy a violation of Section 1 of the Sherman Act, 15 
U.S.C. Sec.  1. [CIS 1]
    The proposed Final Judgment remedies this violation * * * [CIS 2].
    Disgorgement will deter Morgan and others from future violations of 
the antitrust laws. [CIS 2]
    [D]isgorgement 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. 
[CIS 9]
    Despite these assertions by DOJ in its CIS that there were 
violations of the law, it is the Final Judgment that counts most. The 
Final Judgment affirmatively disavows any finding or admission that the 
law was violated by Morgan Stanley. There is no explanation or factual 
basis in the CIS to support DOJ's abandonment in the Final Judgment of 
the primary object of the action. It is incumbent upon DOJ to withdraw 
and amend its CIS to include its rationale for ending the case with no 
finding or admission that Morgan Stanley violated the antitrust laws, 
and with no commitment by Morgan Stanley that it will not engage in 
similar conduct in the future. The public should then be allowed an 
additional opportunity to respond to any amended or new CIS.
    With no finding that Section 1 of the Sherman Act is violated by 
the use of financial derivatives to backstop risks when sellers game 
electricity markets, no one, including Morgan Stanley, really knows 
whether this gambit is actually illegal. As a result, Morgan Stanley 
and any other future wrongdoers will still lack scienter, an essential 
element for criminal sanctions under Section 2 of the Sherman Act. 
Thus, future wrongdoers can try the gambit again and need be concerned 
only about trivial civil sanctions.
    3. DOJ Should Withdraw its Consent to the Settlement or Amend its 
CIS to Provide Support for its Conclusion that the Disgorgement 
Proposed in this Case will be a Deterrent.
    Disgorgement of profits is one of the equitable remedies available 
to address violations of the Sherman Act. United States v. Keyspan 
Corp., 763 F. Supp. 2d 633, 638-641 (SDNY 2011). DOJ repeatedly 
emphasizes the settlement's

[[Page 15134]]

requirement that Morgan Stanley disgorge $4.8 million of its profits 
from the derivatives, claiming this payment to the government would 
serve as a deterrent:
    Disgorgement will deter Morgan and others from future violations of 
the antitrust laws. [CIS 2]
    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. [CIS 
8]
* * * * *
    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. [CIS 8]
    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 obtained through litigation * * * 
[CIS 11]
    There is no evidence in the record, however, to support these broad 
claims that the settlement crafted by Morgan Stanley and DOJ would have 
any deterrent effect on anyone.
    According to the CIS, ``Morgan earned approximately $21.6 million 
in net revenues from the Morgan/Keyspan Swap and the Morgan/Astoria 
Hedge.'' CIS 6 DOJ acknowledges that only a portion of Morgan Stanley's 
profits would be disgorged if the proposed settlement is approved, 
attempting to put the best light on a small recovery:
    While the disgorged sum represents less than all of Morgan's net 
transaction revenues under the two agreements, [fn. omitted] 
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. [CIS 9] 
(emphasis added).
    If the 21% to be disgorged under the proposed settlement is ``less 
than all'' of the $21.6 million profit, as DOJ puts it, perhaps the 
amount of ill-gotten gains retained by Morgan Stanley--$16.8 million, 
or 79%--might be said to be ``nearly all'' of the net profit.
    The CIS fails to explain how disgorgement of only $4.8 million, and 
allowing Morgan Stanley to keep $16.8 million of its profits from the 
scheme would deter similar future conduct by Morgan Stanley or anyone. 
There is simply no evidence in the record to support DOJ's conclusion 
that the proposed settlement ``will send a message of deterrence to 
those in the financial services community considering the use of 
derivatives for anticompetitive ends.'' Id. Given the minimal 
development of the record, no one can see the derivative instruments 
used by Morgan Stanley. If the offending derivative agreements are not 
disclosed, there is even less likelihood of deterring similar 
transactions by others. These should have been provided by DOJ with the 
CIS as ``determinative documents.\17\
---------------------------------------------------------------------------

    \17\ The DOJ Competitive Impact Statement asserts there are no 
``determinative'' documents required to be submitted under the 
Tunney Act. See United States v. Central Contracting Co., Inc., 537 
F. Supp. 571 (E.D. Va. 1982).
---------------------------------------------------------------------------

    DOJ is ordinarily entitled to deference in assessing the 
effectiveness of a remedy it agrees to, but here its conclusion that 
disgorgement of only $4.8 million is sufficient is refuted by every day 
common sense and arithmetic. The CIS does not explain in plain language 
how allowing a wrongdoer to keep 79% of its ill-gotten gains can be 
seen as any kind of ``message of deterrent.'' Rather, the ``message'' 
to some may really be that large profits can still be made from gaming 
electricity markets using financial derivative agreements to support 
bidding strategies. If found out, there will probably be no criminal 
antitrust sanction, and at worst one may keep the majority of the 
profit in a settlement with DOJ. The real lesson taught by the proposed 
settlement to potential manipulators could actually encourage similar 
conduct and further harm competition. This is not a remote or 
speculative concern. ``Manipulation is a potentially serious problem in 
all derivatives markets, energy included.'' \18\ The CIS does not 
consider this possibility and therefore does not sufficiently address 
the impact on competition as required by the Tunney Act. 15 U.S.C. 
Sec.  16(e)(1)(A).
---------------------------------------------------------------------------

    \18\ Craig Pirrong, Energy Market Manipulation: Definition, 
Diagnosis, and Deterrence, 31 Energy Law Journal 1-2 (2010) 
(emphasis added).
---------------------------------------------------------------------------

    The $4.8 million disgorgement is probably well within the range of 
what Morgan Stanley's litigation expenses might be if the case is 
litigated. The real lesson of the disclaimer and the small disgorgement 
is that this is merely a nuisance settlement. As recently stated by 
Judge Rakoff in the course of rejecting a settlement proposed of the 
SEC:
    [A] consent judgment that does not involve any admissions and that 
results in only very modest penalties is just as frequently viewed, 
particularly in the business community, as a cost of doing business 
imposed by having to maintain a working relationship with a regulatory 
agency, rather than as any indication of where the real truth lies.
    SEC v Citigroup Global Markets, Inc., 11 Civ. 7387 (Nov. 28, 2011).
    4. The CIS Fails to Support the Claim that the Settlement is 
Reasonable Because it Avoids Litigation Risk.
    DOJ attempts to justify the proposed settlement by invoking its 
risk of litigation, i.e., that it might lose the case if it goes to 
trial:
    The $4.8 million disgorgement amount is the product of settlement 
and accounts for litigation risks and costs. [CIS 9]
    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. [CIS 9, fn 4].
    While DOJ is ordinarily given considerable deference to its 
assessment of the merits of its case, it does not cite any authority or 
facts to show that this case is difficult. Based on the CIS and the 
record, there are written derivative contracts evidencing the profit-
sharing arrangement of the utility counterparties, facilitated by 
Morgan Stanley as middleman. The utilities' bidding records should be 
readily available from the NYISO. What is the problem with the case? 
DOJ gives no hint that its case is in any way doubtful.
    This case is only a variation on classic bid-rigging and price 
fixing. Here, Keyspan bid high, in order to elevate the auction price 
paid to all sellers, Astoria paid Morgan Stanley some of the extra 
profits it made due to the elevated price, and Morgan Stanley paid 
Keyspan, keeping a net $21.6 million profit for its services in 
facilitating the price raising game. Had the utility sellers made an 
agreement bilaterally with the same results, it would be seen as a 
crystal clear antitrust violation. See Addyston Pipe & Steel Co. v. 
United States, 175 US 211, 243 (1899) (``the defendants enter, not in 
truth as competitors, but under an agreement or combination among 
themselves which eliminates all competition between them for the 
contract, and permits one of their number to make his own bid and 
requires the others to bid over him''). It should be equally clear that 
a middleman like Morgan Stanley, who

[[Page 15135]]

effectuates the economic alignment of the sellers with its derivative 
agreements, is part of the ``combination'' and is also a Sherman Act 
violator.
    The CIS makes an exaggerated claim that DOJ has won victory in the 
proposed settlement, stating:
    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 obtained through litigation. * * * 
[CIS 11] (emphasis added).
    If the $4.8 million to be disgorged is ``a significant portion'' of 
the relief sought in the complaint, then the $16.8 million retained by 
Morgan Stanley could be said to be three times as ``significant'' 
because Morgan Stanley keeps the bulk of its profit from facilitating 
the scheme.
    5. The Keyspan Case Is Not A Barrier to a Consumer Remedy in This 
Case.
    DOJ relies heavily on the prior decision approving the settlement 
of its antitrust case against Keyspan, involving the same derivative 
contract, where $12 million of Keyspan's $48 million profit was 
disgorged, with no equitable relief for consumers:
    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.3 See United States v. Keyspan Corp., 763 T. 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.
    CIS 8, (emphasis added). If disgorgement of $4.8 million 
constitutes a ``substantial portion of the fruits of the agreement,'' 
then the amount of ill-gotten profits retained by Morgan Stanley is 
three times as ``substantial.''
    As the emphasized language in the quotation above shows, the 
successful gaming of the NYISO market could not have been achieved by 
the utilities without Morgan Stanley acting as middleman. It was not 
something Keyspan and Astoria could have accomplished themselves in a 
bilateral agreement without flagrant and knowing violation of antitrust 
law, which might expose them to possible criminal charges and large 
fines under Section 2 of the Sherman Act. Because its role as middleman 
was crucial to the scheme, it is appropriate to require Morgan Stanley 
to disgorge proportionately more than Keyspan, not less.
    The proposed settlement not only fails to ``deprive the antitrust 
defendants of the benefits of their conspiracy.'' Intl Boxing Club v. 
United States, 358 U.S. 242 at 253 (1959). (quotation omitted), it does 
not even come close to that goal. Instead, it allows Morgan Stanley to 
retain the lion's share, 79%, of the benefits. ``[A]dequate relief in a 
monopolization case should * * * deprive the defendants of any of the 
benefits of the illegal conduct * * *'' United States v. Grinnell 
Corp., 384 U.S. 563, 577 (1966). Accord, United States v. E.I. du Pont 
de Nemours & Co., 366 U.S. 316, 368 (1961) (``Those who violate the Act 
may not reap the benefits of their violations * * *'' (quotations 
omitted)). In any settlement parties may obtain something less in the 
compromise than they initially sought when commencing the litigation, 
but the woefully trivial disgorgement by Morgan Stanley of only $4.8 
million of its profits cannot possibly be an adequate equitable remedy 
or in the public interest.

AARP Recommendations

    AARP recommends that DOJ withdraw from the proposed settlement and 
proceed in the litigation, or renegotiate with Morgan Stanley to 
include the following in any new or revised settlement agreement:
    A. Allocation of profits made by Morgan Stanley to provide 
equitable relief to electric utility consumers harmed by the violation,
    B. Admission by Morgan Stanley of its violation of the Sherman Act 
as described in the Complaint,
    C. Quantification of the total harm to consumers and markets, and
    D. Disgorgement by Morgan Stanley of all profits it realized from 
the derivatives used to implement the price raising scheme.

STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE

THREE EMPIRE STATE PLAZA, ALBANY, NY 12223-1350

www.dps.state.ny.us

PUBLIC SERVICE COMMISSION
GARRY A. BROWN
Chairman

PATRICIA L ACAMPORA
MAUREEN F. HARRIS
ROBERT E. CURRY JR.
JAMES L LAROCCA
Commissioners

PETER McGOWAN
General Counsel
JACLYN A. BRILLING
Secretary

December 30, 2011
VIA E-MAIL
William H. Stallings, Chief, Transportation Energy & Agriculture 
Section, Antitrust Division, United States Department of Justice, 
Washington, DC 20530, E-Mail: [email protected].
Re: United States of America v. Morgan Stanley, Civil Case No. 11-civ-
6875 Comments of the Public Service Commission of the State of New York

Dear Chief Stallings:

    Pursuant to the Tunney Act, 15 U.S.C. Sec.  16(e)(1), enclosed 
please find comments of the Public Service Commission of the State of 
New York in response to the notice published in the Federal Register on 
October 11, 2011. See U.S. Dep't of Justice, Antitrust Div., United 
States v. Morgan Stanley, Proposed Final Judgment and Competitive 
Impact Statement, 76 Federal Register 62843 (October 11, 2011).
    Please contact me at (518) 474-7663, if you have any questions. 
Thank you.
    Very truly yours,
Sean Mullany
Assistant Counsel

Enclosure

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW 
YORK

    Civil Case No. 11-civ-6875, United States of America, Plaintiff v. 
Morgan Stanley, Defendant.

COMMENTS OF THE PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, 
PURSUANT TO THE ANTITRUST PROCEDURES AND PENALTIES ACT, ON THE PROPOSED 
FINAL JUDGMENT

SUMMARY

    The Public Service Commission of the State of New York (``PSC'') 
submits

[[Page 15136]]

these comments pursuant to the Antitrust Procedures and Penalties Act, 
15 U.S.C. Sec. Sec.  16(b)-(h), in response to the notice published in 
the Federal Register on October 11, 2011, in this matter. U.S. Dep't of 
Justice, Antitrust Div., United States v. Morgan Stanley, Proposed 
Final Judgment and Competitive Impact Statement, 76 Federal Register 
62843 (October 11, 2011).
    The Department of Justice (``DOJ'') is to be commended for its 
faithful enforcement of the antitrust law to protect the integrity of 
electricity markets in New York City. The electric capacity market for 
New York City is highly concentrated. The antitrust law is properly 
applied in this case to address wrongful anti-competitive practices of 
Morgan Stanley. DOJ's enforcement of the antitrust law is critical to 
protect consumers against the harmful effects of Morgan Stanley's anti-
competitive conduct in this case and, more generally, to protect the 
public interest in the integrity of the newly-created competitive 
electricity markets.
    DOJ proposes to settle this litigation by having Morgan Stanley pay 
the United States government $4.8 million. DOJ asserts such a 
settlement will be in the public interest because Morgan Stanley's 
payment of this amount into the U.S. Treasury will deprive Morgan 
Stanley of ``a substantial portion'' of its unjust enrichment. 
Competitive Impact Statement, at 8. DOJ admits it seeks only partial 
disgorgement of Morgan Stanley's ill-gotten gains, saying that, if it 
proceeded to trial, it would have sought disgorgement of all of Morgan 
Stanley's net transaction revenues, which DOJ asserts were $21.6 
million. Competitive Impact Statement, at 9 & n. 4. DOJ nonetheless 
claims the lesser amount of $4.8 million ``will effectively fulfill the 
remedial goals of the Sherman Act'' to ``prevent and restrain'' 
antitrust violations because the settlement will ``send a message of 
deterrence'' to the financial services community. Competitive Impact 
Statement, at 9. According to DOJ, the lesser amount of $4.8 million 
will still prevent market participants from using such financial 
agreements to manipulate the capacity markets in the future. 
Competitive Impact Statement, at 8-9.
    These claims are central to DOJ's assertion that the settlement is 
in the public interest, a finding that the Court must make in order to 
approve DOJ's proposal. DOJ, however, has offered nothing to support 
its claims that this settlement, which would allow Morgan Stanley to 
retain almost 80 percent of its ill-gotten gains, will deter such 
anticompetitive conduct. Because of this, DOJ has not demonstrated that 
this settlement will achieve a central purpose of the Sherman Antitrust 
Act, namely preventing anticompetitive arrangements such as those 
facilitated by Morgan Stanley in this case. POINT I, below.
    To remedy this, the Court should, under the authority of the Tunney 
Act, direct DOJ to supplement the record to show how and why the 
settlement will prevent such violations from recurring. POINT II, 
below.
    DOJ has not shown that a settlement for $4.8 million would be 
reasonable. DOT alleges Morgan Stanley's net revenues were $21.6 
million. It asserts that $4.8 million is reasonable given the risks and 
costs of fully litigating the case. However, DOJ has offered only a 
summary statement of Morgan Stanley's anticipated position at trial. 
Competitive Impact Statement, at 9 & n. 4. This statement does not shed 
light on the actual risks and costs of litigation. Moreover, in 
considering whether a $4.8 million settlement would be reasonable, the 
Court should weigh the nature of Morgan Stanley's wrongdoing, the 
impact of such a settlement on DOJ's enforcement role, and the overall 
efficacy of antitrust law as a mechanism for preventing such harmful 
market manipulation.
    DOJ has already settled with KeySpan for $12 million, an amount 
equal to 24.5 percent of KeySpan's alleged wrongful gain. That 
settlement was approved by the court on February 2, 2011. United States 
v. KeySpan Corporation, 10 Civ. 1415 (WHP) Memorandum and Order, 
(S.D.N.Y. Feb. 2, 2011). Now DOJ proposes to settle with Morgan 
Stanley, the financial institution that allegedly actively facilitated 
KeySpan's wrongful manipulation of the capacity market. DOJ alleges 
that KeySpan, knowing it could not directly buy an interest in Astoria 
(its largest competitor), enlisted Morgan Stanley to act as an 
intermediary. Thus, Morgan Stanley's involvement was designed to allow 
KeySpan to do indirectly what it could not do directly. In effect, DOJ 
alleges that Morgan Stanley actively facilitated KeySpan's attempt to 
evade the law. Despite allegations of such egregious conduct, DOJ 
proposes to settle with Morgan Stanley for only 22.2 percent of Morgan 
Stanley's wrongful gain. Such an arrangement, however, is more akin to 
a tax than a penalty.
    The settlement amount is particularly unreasonable given the fact 
that Morgan Stanley's illegal conduct had a much larger harmful impact. 
As the PSC noted in its comments on DOJ's earlier settlement with 
KeySpan, the illegal market manipulation that KeySpan and Morgan 
Stanley orchestrated imposed unnecessary costs on consumers which may 
have totaled tens of millions of dollars. Even if DOJ could not recover 
all those damages under the Sherman Antitrust Act, the reasonableness 
of seeking only 22.2 percent of what DOJ can recover should be 
measured, in part at least, by the larger consumer harm KeySpan and 
Morgan Stanley caused. United States v. KeySpan Corporation, 10 Civ. 
1415 (S.D.N.Y.) (WHP), Comments of the Public Service Commission of the 
State of New York, Pursuant To the Antitrust Procedures and Penalties 
Act, On the Proposed Finaljudgment, (Apr. 30, 2010). POINT III, below.

BACKGROUND

    In this civil antitrust action, brought DOJ under Section 1 of the 
Sherman Act, 15 U.S.C. Sec.  1, the government seeks equitable and 
other relief against Morgan Stanley for violating the antitrust law. 
According to DOJ, in late 2005 and early 2006, Morgan Stanley entered 
into a ``swap'' agreement with KeySpan Corporation (``KeySpan''), then 
the largest electricity producer in the New York City metropolitan 
area. DOJ asserts this agreement (the ``Morgan/KeySpan Swap'') ensured 
that KeySpan would withhold substantial output from the New York City 
electric generating capacity market, thereby discouraging competitive 
bidding and increasing capacity prices. On or about the same time, 
Morgan Stanley entered into an offsetting ``swap'' agreement with 
Astoria--KeySpan's largest competitor (the ``Morgan/Astoria Swap''). 
Morgan Stanley, acting as the intermediary between KeySpan and Astoria, 
extracted revenues for its role. Thus, Morgan Stanley facilitated an 
arrangement ``[t]he likely effect * * * 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.'' 76 
Federal Register, at 62844.
    According to DOJ, the Morgan/KeySpan Swap unlawfully restrained 
competition in New York City's electric capacity market. KeySpan 
entered into that agreement to protect itself against increased losses 
from its preferred bidding strategy, due to the entry of new 
competitors into the capacity market. 76 Federal Register, at 62844. 
Under the Morgan/KeySpan Swap, KeySpan, which already possessed 
substantial market power in the highly concentrated and constrained New 
York City capacity market, ``enter[ed] into an agreement that gave it a 
financial interest in the capacity of Astoria-- KeySpan's largest 
competitor.'' 76

[[Page 15137]]

Federal Register, at 62844. By giving KeySpan revenues not only from 
its own sales, but also from the capacity sales of its largest 
competitor, the Morgan/KeySpan Swap ``effectively eliminated KeySpan's 
incentive to compete for sales'' of capacity. 76 Federal Register, at 
62846. Thus, ``[t]he clear tendency of the Morgan/KeySpan Swap was to 
alter KeySpan's bidding in the NYC Capacity Market auctions.'' 76 
Federal Register, at 62846.
    As a result, electric capacity prices remained unlawfully inflated, 
and Morgan Stanley earned approximately $21.6 million in net revenues 
from the Morgan/KeySpan Swap and the Morgan/Astoria Swap. 76 Federal 
Register, at 62846. In addition, the elimination of competitive 
pressures, due to the anti-competitive Morgan/KeySpan Swap imposed 
unnecessary costs on consumers which may have totaled tens of millions 
of dollars.

POINT I

DOJ HAS NOT PROVIDED ENOUGH INFORMATION TO DETERMINE WHETHER THE 
PROPOSED SETTLEMENT IS IN THE PUBLIC INTEREST

    Before entering any consent judgment proposed by the United States, 
the court must first determine that entry of such a judgment ``is in 
the public interest.'' 15 U.S.C. Sec.  16(e)(1). In doing so, ``the 
court shall 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. Sec.  16(e)(1)(A) &(B).
    In seeking this Court's approval, DOJ has the burden to ``provide a 
factual basis for concluding that the settlements are reasonably 
adequate remedies for the alleged harms.'' United States v. SBC 
Communs., Inc., 489 F. Supp. 2d 1, 17 (D.D.C. 2007). In this case, DOJ 
has not met this burden. Neither the competitive impact statement, nor 
the proposed consent decree provides the information needed to evaluate 
whether this settlement would be a reasonably adequate remedy for the 
harm caused by KeySpan.
    Under the proposed settlement, Morgan Stanley would be required to 
pay the United States government a total of $4.8 million dollars. 
United States v. Morgan Stanley, Proposed Final Judgment and 
Competitive Impact Statement, 76 Federal Register 62843, 9949 (October 
11, 2011). According to DOJ, this amount ``remedies [Morgan Stanley's] 
violation by requiring Morgan to disgorge profits obtained through the 
anticompetitive agreement.'' 76 Federal Register, at 62846. According 
to DOJ, ``[d]isgorgement will deter Morgan and others from future 
violations of the antitrust laws.'' 76 Federal Register, at 62846. 
Thus, according to DOJ, the public interest is served because the 
proposed settlement will both prevent Morgan Stanley's unjust 
enrichment, and will deter such wrongful conduct in the future.
    Preventing Morgan Stanley's unjust enrichment is a legitimate 
purpose of any proposed settlement. In fashioning relief in response to 
a violation of the antitrust law, ``[o]ne of [the] objectives * * * is 
to 'deny to the defendant the fruits of its statutory violation.'' 
Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1232 (DC Cir. 2004) 
(quoting United States v. Microsoft Corp., 253 F.3d 34, 103 (DC Cir. 
2001)). However, the unstated premise underlying DOJ's claims (that 
disgorgement is necessary to prevent unjust enrichment, and a $4.8 
million penalty is adequate) is that Morgan Stanley's unjust enrichment 
totaled only $4.8 million. Yet DOJ itself asserts that Morgan Stanley's 
net revenues totaled $21.6 million. 76 Federal Register, at 62847. 
Thus, DOJ itself acknowledges it is seeking only partial disgorgement.
    DOJ nonetheless claims such partial disgorgement will ``send a 
message of deterrence[,]'' thereby ``deterring Morgan and other parties 
from entering into similar financial agreements ... or from otherwise 
engaging in similar anticompetitive conduct in the future.'' 76 Federal 
Register, at 62848. While these claims are central to DOJ's contention 
that the settlement would be in the public interest, DOJ has not 
offered any evidence to support the proposition that this settlement 
will act as a deterrent. This lack of evidence showing the settlement 
would prevent and deter such conduct is a critical omission. As DOJ 
acknowledges, preventing and restraining antitrust violations are ``the 
remedial goals'' of the Sherman Antitrust Act. 76 Federal Register; at 
62848. Yet the absence of any evidence supporting these claims makes it 
virtually impossible for the Court to meaningfully evaluate whether a 
$4.8 million settlement ``represents a reasonable method of eliminating 
the consequences of the illegal conduct.'' National Soc. of 
Professional Engineers v. United States, 435 U.S. 679, 698 (1978). This 
holds true both with respect to depriving Morgan Stanley of its unjust 
enrichment, and with respect to evaluating whether the settlement will 
deter such wrongful conduct in the future. Thus, on the current record, 
the Court has no basis for finding the proposed settlement would be 
``in the public interest.''
    Given what DOJ has presented, the settlement would not be in the 
public interest. DOJ seeks only partial disgorgement, so the settlement 
would not prevent Morgan Stanley's unjust enrichment, since anything 
less than full disgorgement would not fully strip Morgan Stanley of its 
wrongful gains. The proposed settlement amount, however, is only a 
minor fraction (22.2%) of Morgan Stanley's unjust enrichment.\1\ Why 
would such a penalty deter similar violations of the antitrust law in 
the future? Common sense suggests that such an amount will instead be 
viewed as merely a cost of doing business. S.E.C. v. Citigroup Global 
Markets, Inc., Slip Op. at 10 (S.D.N.Y. Nov. 28, 2011) (``[A] consent 
judgment that does not involve any admissions and that results in only 
very modest penalties is just as frequently viewed, particularly in the 
business community, as a cost of doing business imposed by having to 
maintain a working relationship with a regulatory agency * * *''). 
Allowing Morgan Stanley to retain almost 80 percent of its ill-gotten 
gains can hardly be characterized as an effective deterrent without 
something more to support

[[Page 15138]]

such a claim.\2\ Thus, the proposed $4.8 million settlement would not 
satisfy either of DOJ's rationales (i.e., preventing Morgan Stanley's 
unjust enrichment, and deterring such wrongful conduct in the future) 
for a judicial finding that the settlement is in the public interest.
---------------------------------------------------------------------------

    \1\ In approving DOJ's earlier $12 million settlement with 
KeySpan, the court noted that, according to DOJ, KeySpan ``did not 
necessarily earn additional revenues'' by not competing. Instead, 
the swap offered greater revenue certainty even though ``competing 
could have earned the company greater revenues * * *'' United States 
v. KeySpan Corporation, 10 Civ. 1415 (WHP) Memorandum and Order, at 
14-15 (S.D.N.Y. Feb. 2, 2011). Because of this, in part, the Court 
found the $12 million settlement with KeySpan to be reasonable. 
Here, Morgan Stanley's swap revenues (aside from transactional 
costs) were profits since it would have had no revenues if KeySpan 
competed instead of entering into the swap. Accordingly, the court's 
rationale for finding the KeySpan settlement amount reasonable does 
not support this proposed settlement with Morgan Stanley.
    \2\ Arguably, even total disgorgement would have only a limited 
deterrent effect. ``[T]o 'limit the penalty * * * to disgorgement is 
to tell a violator that he may [break the law] with virtual 
impunity; if he gets away undetected, he can keep the proceeds, but 
if caught, he simply has to be give back the profits of his wrong.'' 
SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402,406 (S.D.N.Y. 2009) 
(quoting SE.C. v. Rabinovich & Assoc., 2008 U.S. Dist. LEXIS 93595, 
2008 WL 4937360, at *6 (S.D.N.Y. Nov. 18, 2008)).
---------------------------------------------------------------------------

POINT II

THE COURT SHOULD DIRECT DOJ TO SUPPLEMENT THE RECORD ON THE DETERRENT 
EFFECT(S) OF THE PROPOSED SETTLEMENT

    The Morgan/KeySpan Swap, in both purpose and effect, violated the 
antitrust law. Its purpose was to ``effectively eliminate[] 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.'' 76 
Federal Register, at 62848. Thus, regardless of its effect on the 
market, the Morgan/KeySpan Swap violated the Sherman Act. Cf. Summit 
Health v. Pinhas, 500 U.S. 322, 330 (1991) (1131ecause the essence of 
any violation of Sec.  1 [of the Sherman Act] is the illegal agreement 
itself[,] rather than the overt acts performed in furtherance of it, * 
* * proper analysis focuses, not upon actual consequences, but rather 
upon the potential harm that would ensue if the conspiracy were 
successful'').
    The Morgan/KeySpan Swap also violated the Sherman Act because of 
its effect on the market. Its ``clear tendency'' was to alter KeySpan's 
bidding, in order to prevent competition and keep prices high. 76 
Federal Register, at 62848. CI United States v. Stasztcuk, 517 F.2d 53, 
60 & n.17 (7th Cir. Ill. 1975) (``The federal power to protect the free 
market may be exercised to punish conduct which threatens to impair 
competition even when no actual harm results'').
    However, because, as discussed in POINT I, DOJ has not proffered 
evidence sufficient to enable the Court to evaluate whether the 
proposed settlement is in the public interest, DOJ should be directed 
to do so. Under-the Tunney Act, ``[t]he court may `take testimony of 
Government officials or experts' as it deems appropriate, 15 U.S.C. 
16(f)(1); authorize participation by interested persons, including 
appearances by amici curiae, id. Sec.  16(f)(3); review comments and 
objections filed with the Government concerning the proposed judgment, 
as well as the Government's response thereto, id. Sec.  16(f)(4); and 
`take such other action in the public interest as the court may deem 
appropriate,' id. Sec.  16(f)(5).'' Massachusetts v. Microsoft Corp., 
373 F.3d 1199, 1206 (DC Cir. 2004).
    Requiring DOJ to adduce facts relating to whether such a minimal 
penalty will prevent and deter such anti-competitive conduct will 
provide a record basis for any public interest determination made by 
the Court. Cf. SE.0 v. Bank Of America Corp., -------- F. Supp.2d------
--, 2010 U.S. Dist. LEXIS 15460 (S.D.N.Y. Feb. 22, 2010) (approving a 
proposed consent judgment because, inter alia, after the court rejected 
an earlier proposed settlement, the parties conducted extensive 
discovery which established facts supporting the new proposal).

POINT III

THE REASONABLENESS OF THE PROPOSED SETTLEMENT SHOULD BE EVALUATED IN 
LIGHT OF THE RATEPAYER HARM CAUSED BY MORGAN STANLEY

    In determining whether the settlement is in ``the public 
interest,'' the Court should consider the impact of the proposed 
settlement on the ratepayers that were harmed by Morgan Stanley's anti-
competitive conduct. See 15 U.S.C. Sec.  16(e)(1)(B) (``the court shall 
consider the impact of entry of such judgment upon * * * the public 
generally * * *'').\3\ DOJ acknowledges ratepayers were harmed, in the 
form of inflated capacity prices, because of Morgan Stanley's conduct. 
According to DOJ, ``[w]ithout 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.'' 76 Federal Register; at 
62846. Because KeySpan decided to withhold capacity rather than 
compete, ratepayers were harmed in amounts far exceeding Morgan 
Stanley's $21.6 million in wrongful profit.
---------------------------------------------------------------------------

    \3\ Cf. United States v. SBC Communs., Inc., 489 F. Supp. 2d 1, 
17 (D.D.C. 2007) (``the court should be concerned with any 
allegations that the proposed settlement will injure a third 
party'').
---------------------------------------------------------------------------

    Yet, in its earlier settlement with KeySpan, DOJ indicated 
ratepayers may have no recourse under the antitrust law because of the 
``filed rate'' doctrine. See 75 Federal Register, at 9951. Moreover, 
ratepayers may not be able to obtain any relief from FERC because, in 
early 2008, well before DOJ brought its civil antitrust action against 
KeySpan, FERC's Staff concluded there was no evidence that KeySpan's 
bidding behavior violated FERC's Anti-Manipulation Rule, 18 C.F.R. 
Sec.  1c2(a). FERC Docket Nos. IN08-2-000 & EL07-39-000, Enforcement 
Staff Report, Findings of a Non-Public Investigation of Potential 
Market Manipulation by Suppliers in the New York City Capacity Market, 
p. 17 (February 28, 2008). Thus, in this case ratepayers harmed by 
KeySpan's anti-competitive conduct may have no meaningful recourse 
under either the antitrust law or the Federal Power Act.
    Even if DOJ could not recover damages under the Sherman Antitrust 
Act for harm suffered by ratepayers, and is limited to Morgan Stanley's 
$21.6 million total net revenues, the Court should, when weighing the 
reasonableness of settling for roughly 20 cents on the dollar, consider 
the larger consumer harm Morgan Stanley caused, and the apparent lack 
of any other effective remedy for consumers that were harmed. This lack 
of a remedy for customers is highly significant given the potential 
size of the consumer harm Morgan Stanley caused by violating the 
antitrust law. Yet DOJ has not offered any evidence of how much Morgan 
Stanley's alleged illegal conduct increased electricity capacity market 
prices.
    If Morgan Stanley's illegal conduct harmed consumers by preventing 
price declines that could have totaled tens of millions of dollars, 
then the proposed $4.8 million settlement is so low it would not be 
fair, reasonable, adequate or in the public interest. Cf. S.E.C. v. 
Bank Of America Corp., 653 F. Supp.2d 507 (S.D.N.Y. 2009) (disapproving 
a proposed settlement in part because the proposed $33 million fine was 
``a trivial penalty for a false statement that materially infected a 
multi-billion-dollar merger''). But 4: S.E.C. v. Bank Of America Corp., 
-------- F. Supp.2d--------, 2010 U.S. Dist. LEXIS 15460 (S.D.N.Y. Feb. 
22, 2010) (approving a $150 million fine even though it would have only 
``a very modest impact on corporate practices or victim 
compensation'').
    Accordingly, the Court should direct DOJ to address this defect in 
the settlement proposal. Although exactitude is not required, some 
evidence should be proffered on this point. See New York v. Julius 
Nasso Concrete corp., 202 F.3d 82, 88-89 (2d Cir. 2000) (``Where * * * 
there is a dearth of market information unaffected by the collusive 
action of the

[[Page 15139]]

defendants, the plaintiff's burden of proving damages, is, to an 
extent, lightened[,] [and] the State need only provide the court with 
some relevant data from which the district court can make a reasonable 
estimated calculation of the harm suffered.* * *'') (citations and 
internal quotations omitted); id, 202 F.3d at 89 rino do otherwise 
would be a perversion of fundamental principles of justice [and would] 
deny all relief to the injured person, and thereby relieve the 
wrongdoer from making any amends for his acts''); New York v. 
Hendrickson Bros., Inc., 840 F.2d 1065, 1078 (2d Cir. 1988) (``The most 
elementary conceptions of justice and public policy require that the 
wrongdoer shall bear the risk of the uncertainty which his own wrong 
has created') (quoting Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 
251, 264 (1946)); Fishman v. Estate of Wirtz, 807 F.2d 520, 551 (7th 
Cir. Ill. 1986) (``The concept of a `yardstick' measure of damages, 
that is, linking the plaintiffs experience in a hypothetical free 
market to the experience of a comparable firm in an actual free market, 
is also well accepted'').

CONCLUSION

    For the reasons stated above, the Court should direct DOJ to 
supplement the record to demonstrate why this settlement will prevent 
such violations in the future.

Respectfully submitted,

Peter McGowan
General Counsel

By: Sean Mullany, Assistant Counsel Of Counsel, Public Service 
Commission, Of the State of New York, Three Empire State Plaza, Albany, 
New York 12223-1350.

Dated: December 30, 2011, Albany, New York

[FR Doc. 2012-5952 Filed 3-13-12; 8:45 am]
BILLING CODE M