July 27, 2002
U.S. Studying Merrill Lynch in Enron Deal
By RICHARD A. OPPEL Jr.
ASHINGTON, July 26 — The Justice Department is investigating a December 1999 transaction in which Enron sold a part-interest in electricity-generating barges in Nigeria to a special-purpose entity established by Merrill Lynch.
The transaction is expected to be a major subject at a hearing on Tuesday before the Senate Permanent Subcommittee on Investigations, which is looking into the role that Merrill Lynch and other financial institutions may have played in hiding the true financial condition of Enron. Among other things, Congressional investigators are studying whether the barge deal allowed Enron to inflate its profits artificially.
Today, Merrill Lynch said that Schuyler Tilney, the top officer of its investment banking practice in energy and power, had been placed on paid administrative leave because he had refused to testify at the hearing. Merrill also said that a former investment banker with the firm, Robert Furst, has also decided not to testify.
Ira Sorkin, a lawyer for Mr. Furst, said that his client had "cooperated fully" with the Senate panel and that "even innocent people have the right to avail themselves of the privilege against self-incrimination." Mr. Tilney's lawyer did not return a phone call.
Merrill disclosed the Justice Department investigation today but said that it had been "advised that it is not a target or subject" of the inquiry and that it was cooperating fully.
According to a person close to the barge deal, a former senior Enron executive, Jeffrey McMahon, approached Merrill in December 1999[emphasis mine] about obtaining an "equity bridge" investment of $7 million to acquire an interest in the barges, which were mounted with electricity generators. After a prospective buyer in Asia was unable to close the deal, Enron was eager to find another buyer quickly so it could book a profit for that year, this person said.
The "premise" for the deal was that the prospective Asian buyer would be ready by early 2000[emphasis mine] to acquire the interest, which was instead sold to EBarge, the special-purpose entity. If the deal with the Asian buyer fell through, then Enron would help identify another buyer, this person said.
Merrill made a fee of about $250,000 when the deal closed and a profit of about $500,000 in June 2000 when the interest was sold to LJM2, one of the secretive investment funds run by Enron's former chief financial officer, Andrew S. Fastow, this person said.
Another person close to the matter said that Merrill had agreed to take on $21 million in debt as part of the deal, but that Enron, which held the note, covered the interest costs. If the deal did not carry any risk for Merrill, and Enron covered the interest, that could call into question the validity of the sale and whether it was really a sham to help manage Enron's earnings, this person said. Enron booked a $12 million profit from the deal, this person added.
A spokesman for Merrill said that the financing on the barge deal was the "equivalent of a seller-financed loan" and that there was nothing improper with such arrangements.
According to notes of an interview that lawyers for a special committee of Enron's board conducted with Alan Quaintance Jr., an Enron executive, Mr. Fastow, then the chief financial officer, promised Merrill in 1999 that it would not have to hold on to the barge interest for long.
Mr. Quaintance told his interviewers that another Enron official "participated in a phone call in which Andy Fastow gave Merrill Lynch a verbal assurance that he would make sure Merrill Lynch was relieved of its interest" in the barge deal by June 2000 — the same month LJM2 bought the interest. Three months later, the interview notes say, both Enron and LJM2 sold their interests to the AES Corporation, a large multinational energy company.
Mr. Quaintance "did not like the side agreement with Merrill Lynch," the notes say.
Merrill helped LJM2 raise about $400 million in a private placement with wealthy individuals and institutions that closed in 2000. Nearly 100 Merrill employees, including Mr. Tilney, personally invested in the deal, contributing a total of $16.6 million.
Mr. Tilney has other close ties to Enron. His wife, Elizabeth, was a senior Enron marketing and communications executive; they have been good friends with Mr. Fastow and his wife, Lea, and were neighbors for a time in Houston.
G. Kelly Martin, a Merrill senior vice president, is expected to testify at the hearing on Tuesday.
In a statement today, the Senate committee said its hearing would examine "several examples of troubling actions taken by Merrill that have resulted in misleading accounting, compromised investment ratings or other questionable transactions" involving Enron.
"We will be looking at another case history showing what happened and how major financial institutions contributed to Enron's collapse," said Senator Carl Levin, the Michigan Democrat who is chairman of the committee.
The panel's ranking Republican, Susan M. Collins of Maine, said investigators had uncovered evidence that "Merrill Lynch, like other financial institutions, knowingly participated in deals that were used to make Enron's financial position appear more robust than it actually was."[emphasis mine] Last Tuesday, the committee produced evidence that two other financial institutions — Citigroup and J. P. Morgan Chase — helped Enron hide debts.
A Merrill spokesman said the firm believed that the barge deal was "appropriate, given what we knew about Enron at the time — we felt it was a real transaction, with real risk, and was consistent with Enron's core businesses." The deal was "fully reviewed by the firm's banking, credit and legal departments," he said.
Tonight, the firm denied the committee's charges about improper dealings with Enron. "At no time did we knowingly engage in transactions that falsified Enron's true financial status," the firm said in a statement. "Merrill Lynch's securities research on Enron was not compromised. We like many others were deceived by Enron's activities. We would never knowingly engage in a transaction that threatened our reputation."
