Adam Hunger/AP Images
Jamie Dimon, chairman and CEO of JPMorgan Chase, speaks at the Chase NYC flagship branch, June 25, 2019, in New York.
After months of denials, mega-bank JPMorgan Chase has finally admitted that the company seeking to purchase energy utility El Paso Electric can be classified as its affiliate, not an unrelated entity. The Infrastructure Investment Fund, or IIF, had numerous ties to JPMorgan that were not disclosed on its applications for the purchase with federal regulators.
A December 18 stipulated agreement with the Public Utility Commission (PUC) of Texas labels Sun Jupiter Holdings, an on-paper corporation created by IIF to own El Paso Electric, as an affiliate of JPMorgan. Just five days earlier, in a filing with the Nuclear Regulatory Commission (NRC), IIF repeatedly denied any affiliated relationship with JPMorgan, calling suggestions to this effect “unsupported assertions.” In addition, IIF stated in October to the Federal Energy Regulatory Commission (FERC) that it was “not an affiliate” of JPMorgan.
The stipulated agreement with the Texas PUC added safeguards to the deal like independent board members. JPMorgan now claims it will maintain an “arm’s length relationship” with Sun Jupiter. Tyson Slocum, Energy Program director for consumer advocacy group Public Citizen, who initiated the objection to the El Paso Electric sale, believes this allows for continued ties with the bank. “If JPMorgan can offer commodity/interest rate hedging services, that may qualify as a legitimate service,” he explains. “Or proposing to expand El Paso Electric service where JPMorgan just may happen to own some production interests.”
An IIF spokesperson insisted in an email to the Prospect that, "There have been no contradictions made in IIF’s statements to Federal or other regulators, and they remain accurate," adding that establishing the arm's-length relationship "does not mean that IIF and Sun Jupiter are actual affiliates of JPMorgan." This is technically accurate but a strained distinction. Under the agreement, the parties will be treated as affiliates but not legally classified as such under Texas law. So they're applying regulations only affiliates would have to apply, while being freed from being legally termed affiliates. "They’re walking an absurd legal tightrope," says Slocum.
It appears to be part of a pattern of banks hiding their purchases of commercial interests, after a backlash to these actions going back years.
Given how many times IIF stated in print that JPMorgan was not an affiliate whatsoever, the clever parsing could still create difficulties for IIF winning NRC and FERC approval. Moreover, it appears to be part of a pattern of banks hiding their purchases of commercial interests, after a backlash to these actions going back years.
The Prospect wrote in October about the proposed purchase of El Paso Electric, a utility with 429,000 customers in Texas and New Mexico. After the $4.3 billion deal was announced in June, Public Citizen raised concerns about IIF’s deep, obvious ties to JPMorgan, demanding an evidentiary hearing to untangle the relationship. Among its findings: the IIF’s 48 executives were all paid employees of JPMorgan, and its “owners” appeared to be selected members of a board of directors with documented ties to the mega-bank.
It appeared that JPMorgan was laundering the El Paso Electric purchase through an affiliated fund. A mega-bank in possession of an electric utility could enable information advantages exploitable in energy trading markets. JPMorgan has previously been fined for manipulating electric power markets for its own profit, paying $410 million in 2013.
Critics warn that JPMorgan will be tempted to put personal investment priorities ahead of customer needs. In a more general sense, mergers of banking and commerce raises questions about market dominance and opportunities for fraud. The Justice Department last month charged a former JPMorgan employee with manipulating precious metals markets.
In several regulatory filings, IIF insisted that JPMorgan was merely its investment adviser and not an affiliate, condemning Public Citizen’s “jumbled mix of conclusory and ill-defined allegations.” But Public Citizen would find more irregularities, calling IIF’s confusing structure “a decidedly non-entertaining game of ‘whack-a-mole’” in a November 6 letter.
For example, IIF admitted to Texas regulators that its “owners” were limited to three-year terms, a rare circumstance. In fact, one of the owners, Christopher Ward, recently announced his intention to resign today, December 31. Ward and Dennis Clarke only took “ownership” after JPMorgan recommended them for the positions through a nominating committee filled with their executives. All three owners appear to have invested no capital to obtain the ownership stake. One document shows that the owners purchased 1000 shares at a penny each, for a total contribution of $10.00.
Public Citizen also uncovered that IIF, which controls and manages 19 separate companies, has on eight occasions installed JPMorgan executives on their boards. JPMorgan also induced IIF to consummate a deal to purchase 120 million shares in a company called Coastal States Wind from JPMorgan, seemingly a conflicted situation of an alleged investment advisor recommending that a client enrich them directly.
FERC responded to Public Citizen’s findings on December 5, determining IIF’s application to purchase El Paso Electric deficient, and asking for additional information. Most of the questions FERC had lined up with Public Citizen’s evidence, but in addition, FERC pointed out that Sun Jupiter Holdings’ business address was listed as JPMorgan Chase’s headquarters, and its email address had a jpmorgan.com domain.
“If the Commission were to deem J.P. Morgan Investment as an affiliate of Sun Jupiter,” FERC wrote in its order, “please detail the impact of doing so on Applicants’ analysis of the Proposed Transaction.” In other words, FERC was ready to deem Sun Jupiter and IIF affiliates of JPMorgan already. The statement from the Public Utility Commission of Texas only provides confirmation. IIF has until next month to respond to FERC.
The Nuclear Regulatory Commission also has jurisdiction over JPMorgan’s purchase, because El Paso Electric owns a minority stake in a nuclear power station in Arizona called Palo Verde. Public Citizen also sought an evidentiary hearing with the NRC, but IIF rejected that in a December 13 letter, claiming that the organization lacked standing to challenge them.
In early December, JPMorgan scheduled a bus tour of the Permian Basin, one of the largest fracking fields in the country, which is located within El Paso Electric’s service area. So at the same time JPMorgan was denying affiliation with El Paso Electric’s would-be purchaser, it was sending buses down to the area to show off the goods. If JPMorgan purchases interests in the Permian Basin, and advises IIF to expand El Paso Electric service in the region, it could profit handsomely, despite the alleged “arm’s length” relationship.
Incredibly, Public Citizen’s Slocum has found another similar arrangement of a major investment bank denying a clear affiliate relationship with an energy investment fund. In this case, the bank didn’t even bother changing the name. Goldman Sachs Renewable Power Marketing LLC claimed in a December 9 letter to FERC that it is not an affiliate of Goldman Sachs, even though, according to an objection from Slocum, “they share a name, employees, the same offices, the same phone number, and the provision of significant interrelated financial services.”
Just like in the JPMorgan case, Goldman Sachs Renewable Power claims to have three board members with “management and control” over the company, though it gives no information about them (though their names can be found in this Securities and Exchange Commission disclosure). Like in the JPMorgan case, Goldman Sachs provides “investment manager” services for Goldman Sachs Renewable Power. Like in the JPMorgan case, the arrangement keeps physical assets off Goldman Sachs’ books while still running day-to-day management of the affiliate it claims is not an affiliate.
“The fact that we now have two Wall Street banks operating nearly identical sham shell companies for the sole purpose of evading Federal Reserve oversight appears to establish a trend,” Slocum says. Regulators and members of Congress condemned mega-banks for secretly acquiring physical commodity businesses back in 2014, and banks vowed to scale back these holdings. “I think some lawyers working for Wall Street developed what they think is a grand loophole to conceal their bank’s involvement in ownership and control over various energy infrastructure assets,” Slocum concludes.
"The fact that we now have two Wall Street banks operating nearly identical sham shell companies for the sole purpose of evading Federal Reserve oversight appears to establish a trend."
Slocum has repeatedly argued that IIF should sever all ties with JPMorgan, and that regulators should hold public hearings, with IIF’s so-called “owners” testifying under oath. Local lawmakers have sided with him. State Senator José Rodriguez pronounced himself “in full support” of Public Citizen’s request for a public hearing at the NRC, and Representative Veronica Escobar (D-TX) seconded the request. “It is imperative that El Paso Electric’s customers have clarity as to who is acquiring the sole electric utility in our region and insight into its operations and finances,” Escobar wrote in a letter to the NRC.
Escobar also wants the El Paso city council to consider buying the utility from the private owners, something urged by the local chapter of the Sunrise Movement. The council has given preliminary approval for the sale, but it also is working to assess the feasibility of buying El Paso Electric down the road.
JPMorgan did not responded to a request for comment.
The Texas Public Utility Commission still must finalize the sale, along with FERC, NRC, and the New Mexico Public Regulation Commission.
The biggest problem JPMorgan now faces could be one of trust. As Public Citizen has noted in a letter to FERC, IIF has made multiple misrepresentations “to every regulatory body considering the acquisition.”
