[ by Howard Haykin ] A settlement deal between Morgan Stanley and the Justice Department was complete - except for the approval of Federal Judge William H. Pauley III.  On Tuesday, over objections from consumer groups and New York officials, the judge approved a $4.8 million settlement deal between the Justice Department and Morgan Stanley over accusations of the firm had fixed prices in the electricity market. Judge Pauley, conflicted by the decision even as he signed off on the settlement expressed "misgivings" about the deal, saying the dollar amount was too low. In his opinion, Judge Pauley wrote:  "Given the government's stark allegations of manipulative conduct against Morgan Stanley, disgorgement of $4.8 million is a relatively mild sanction.  There is a risk that a large financial services firm like Morgan Stanley could view such a modest penalty as merely the cost of doing business." Nevertheless, he agreed to the settlement out of deference to government's arm's-length negotiations with Morgan Stanley and, in his ruling, the Judge cited a recent decision by a federal appeals court that criticized another federal judge – Jed Rakoff – suggesting that he might have overstepped his authority when he rejected a contentious settlement between the government and Citigroup. The Morgan Stanley case was the first attempt by the Justice Department to penalize a bank accused of using derivatives to help clients violate federal antitrust laws.  Morgan Stanley, the government said, aided the efforts of KeySpan Corporation, a major utility company in New York, to manipulate electricity prices.

In 2006, the bank entered into a complex swap agreement with KeySpan that gave the company a stake in the profits of its competitor, Astoria Generating Company Acquisitions. Morgan Stanley also represented Astoria in the transaction.

The government said that the deal allowed KeySpan to push up the price of electricity in New York, costing consumers about $300 million.  Morgan Stanley made $21.6 million from serving as an intermediary in the deal. Related Settlements. Morgan Stanley settled the accusations with a $4.8mn payment to the federal government without admitting any wrongdoing.  In 2010, KeySpan – owned by British energy company National Grid – paid $12 million to resolve its role in the case, also without admitting any wrongdoing. For further details, go to: [Dealbook, 8/7/12].