Merrill Pressed by Enron

Enron Corp. pressed Merrill Lynch & Co. to upgrade its investment recommendation on the energy trader’s stock in 1998 in exchange for investment banking business, Senate investigators said Monday.

Merrill changed its Enron analysts, and its rating on Enron’s stock was upgraded from “neutral” to “accumulate.” Enron included Merrill as a co-manager of a $750-million equity offering from which Merrill had been excluded, Senate aides said, citing internal memos, e-mails and interviews.

Merrill said it earned $40 million to $50 million in fees, investigators said.

“It is clear that your responsive message was appreciated by the company and any animosity in that regard seems to have dissipated in the ensuing months,” the firm’s investment banking division wrote Jan. 18, 1999, to its president, Herb Allison, according to a copy of the e-mail.

The Senate’s Permanent Subcommittee on Investigations is looking into the role financial institutions played in the collapse of the largest energy trader. Enron’s dealings with Merrill will be discussed at a committee hearing today.

The e-mail’s stated purpose was to update Merrill’s “relationship with Enron since you spoke to their CEO Ken Lay last spring regarding our difficult relationship in research.”

Schuyler Tilney, head of energy investment banking at Merrill and an author of an April 1998 memo asking Merrill’s management to intervene with Enron, will invoke his 5th Amendment right not to speak, committee staff said.

Merrill spokesman Bill Halldin said the firm’s research was never compromised. Allison “was not asked to do anything related to our research,” Halldin said of the contacts with Lay.

Merrill analyst Donato Eassey said that the subcommittee was wrong to allege any connection between the firm’s investment banking business and his rating on Enron’s stock. Eassey was among the first analysts to downgrade Enron, dropping it to a “neutral” in August 1999 when former CEO Jeffrey Skilling resigned. “People thought I overreacted,” Eassey said.

“For the story to come out the way the Senate is trying to spin it is just frustrating,” Eassey said. “I’m ticked.”

The Department of Justice a few weeks ago informed Tilney and Robert Furst, a former Merrill investment banker also called by the subcommittee, that the department was conducting a criminal investigation into Enron’s dealings, the subcommittee staff said. After that, both decided not to testify. Merrill has said it is cooperating with the probe and the company hasn’t been informed it is a target.

Among the issues being examined by the Justice Department is examining a transaction in which Enron sold an interest in barges in Nigeria to an offshore company established by Merrill Lynch, according to the brokerage and Senate sources. Investigators are trying to determine whether the transaction allowed Enron to artificially inflate its profits, the sources said Monday, speaking on condition of anonymity.

The three barges in Nigeria are used to generate electricity. Enron asked Merrill Lynch in December 1999 to invest $7 million in them so that Enron’s African division could record a $12-million gain on the transaction and meet its earnings target, according to the subcommittee investigators. Enron gave Merrill Lynch a guarantee that it would arrange the resale of the brokerage firm’s interest in the barges at a profit within six months, the investigators said.

“It appears that Merrill Lynch, like other financial institutions,

Merrill Lynch spokesman William Halldin said the brokerage firm “believes its dealings with Enron ... were appropriate and proper based on what we knew at the time.”

On Friday, Merrill Lynch said it had placed Tilney on administrative leave for his decision not to testify before Congress. Furst, a former managing director of Merrill Lynch in Dallas, will testify voluntarily, his attorney Ira Sorkin said Monday.

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Bloomberg News and Associated Press were used in compiling this report.