[ by Howard Haykin and Melanie Gretchen ]

JPMorgan Chase stands accused of devising “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and the head of its commodities business reportedly gave “false and misleading statements” under oath.

The findings appear in a confidential government document, reviewed by The NYTimes, that was sent to the bank in March, warning of a potential crackdown by the Federal Energy Regulatory Commission, or "FERC," which regulate the nation’s energy markets.

In the energy market investigation, FERC enforcement staff intends to recommend action against JPMorgan over its trading in California and Michigan electric markets.  The 70-page document also was critical of JPM Commodities Chief Blythe Masters.  Ms. Masters, 44, who is renowned in the business, began with JPMorgan in 1987 as an summer intern and returned to the firm in 1991 after graduation.  [More about Ms. Masters later in this post.]

The regulatory document cites Ms. Masters with having “knowledge and approval of schemes” carried out by a group of energy traders in Houston.  FERC investigators claim that Ms. Masters, while under oath, “falsely” denied being aware of the problems;  that same document claims that JPMorgan had made “scores of false and misleading statements and material omissions” to authorities.

It's unclear whether the agency will file an action against JPMorgan based on the investigators’ findings. A majority of the five-member commission must first endorse the case. If the regulator does proceed, it could fine the bank and Ms. Masters.  A bank spokesperson said the bank stands behind Ms. Masters, adding:  "We strongly dispute that Blythe Masters or any employee lied or acted inappropriately in this matter."

A seminal Wall Street figure, Ms. Masters is known for helping expand the boundaries of finance, including the development of credit default swaps, a derivative that played a role in the financial crisis.

Profile of Blythe Masters.   Ms. Masters grew up in Kent, England, studied economics at Cambridge University and spent her summers working in JPMorgan’s London office.  After graduation in 1991, she worked at the bank's commodities desk and moved to New York.  At the "ripe old age of" 28, Ms. Masters became a managing director - the youngest woman in the bank’s history at the time to reach that rank.

Today, she is known as a pioneer in the use of credit derivatives.  In the 1990s, she created the deal now called a credit default swap, which the Federal Reserve approved by suggesting that banks could use credit derivatives to reduce their capital reserves.  Since then, her luck has turned: the financial crisis showed the contracts made institutions even more vulnerable to mounting losses, which Ms. Masters herself conceded.

"Unfortunately, tools that transfer risk can also increase systemic risk if major counterparties fail to manage their own risk exposures properly." -- Ms. Masters, in a speech in 2008 before SIFMA.

Nevertheless, her role with JPMorgan remains significant and, since the financial crisis, she continues in her executive role.  Prior to her current role with the commodities division - she is credited with building that division - she served as CFO of the investment bank from 2004 to 2007. 

For further details about the JPMorgan Investigation, and Commodities Chief Blythe Masters, go to:  
[ Dealbook, 5/3/13: "Scrutiny Falls on a Pioneer at JPMorgan" ]  and 
[ Dealbook, 5/2/13: "JPMorgan Caught in Swirl of Regulatory Woes"].