SEC Charges Merrill in Enron Case
The Securities and Exchange Commission on Monday charged Merrill Lynch & Co. and four of its former executives with securities fraud, accusing them of helping Enron Corp. to pad its profit.
“Merrill Lynch and its former executives aided and abetted Enron Corp.’s earnings manipulation by engaging in two fraudulent year-end transactions in 1999,” the SEC said in a 22-page complaint filed in U.S. District Court in Houston.
Merrill said it agreed to pay $80 million to settle the case, a move that it said “concludes the SEC’s investigation into Enron-related matters with respect to the company.”
Merrill, one of several Wall Street firms under scrutiny for their dealings with the energy-trading group that collapsed in scandal in 2001, announced the settlement in principle last month.
In a statement, the SEC said the four former Merrill executives named in the complaint -- Robert Furst, Schuyler Tilney, Daniel Bayly and Thomas Davis -- are contesting the charges.
At issue in the investigations were a deal between Enron and Merrill involving power-generating barges in Nigeria and a series of trades involving Enron and Merrill’s energy trading division, which has since been sold.
Enron used the transactions to add about $60 million to its 1999 fourth-quarter income and to increase its full-year 1999 earnings to $1.17 per share from $1.09, the SEC said.
According to the SEC, Merrill bought an interest in the Nigerian barges from Enron at the end of 1999 with the understanding that Enron would arrange for its sale within six months at a specified rate of return.
“In substance, this transaction was, at best, a bridge loan because the risks and rewards of ownership did not pass to Merrill Lynch,” the SEC said.
The other transaction involved energy trades that Merrill believed “were essentially a wash” and that it “knew had the purpose and effect of inflating Enron’s income by approximately $50 million,” the SEC said.
SEC Enforcement Director Stephen Cutler said the $80 million was one of the five largest penalties ever imposed in a civil securities enforcement action.
“Even if you don’t have direct responsibility for a company’s financial statements, you cannot turn a blind eye when you have reason to know that what you are doing will help make those statements false and misleading,” Cutler said in a statement.
Ira Sorkin, Furst’s attorney, said, “We do not believe he did anything improper or anything that violated federal securities laws, and we intend to defend the action.”
Tilney’s attorney, Robert Trout, said, “Schuyler Tilney did not engage in any wrongdoing. He is a person of great integrity and would never participate in a fraudulent scheme.”
Thomas Fitzpatrick, attorney for Davis, a former Merrill Lynch vice chairman, said his client “gave final approval to the Nigerian barge transaction after it had been thoroughly vetted by legal counsel.... He did not aid Enron in fraudulently accounting for the transaction and he did not even know how Enron booked the transaction.”
Fitzpatrick said Davis “had no involvement in the energy trade and is not charged concerning that transaction. He intends to vigorously defend the only charge against him.”
Bayly’s attorney could not immediately be reached.
Merrill neither admitted nor denied wrongdoing. The firm said last month it also would consent to an injunction barring it from violating federal securities laws under the deal.
J.P. Morgan Chase & Co. and Citigroup Inc. also have been the focus of government investigations into loans and other financing they arranged for Enron.
