Enron deals haunt Merrill
Firm helped energy trader cook books, panel says
By Richard A. Oppel Jr. (The New York Times)
Thursday, August 1, 2002
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WASHINGTON: Using internal documents, e-mail messages and even a
videotape as evidence, lawmakers on a Senate panel contended that Merrill
Lynch Co., one of America's largest and most respected brokerage firms,
repeatedly cut corners and compromised its business practices to win more
investment banking fees from Enron Corp. In one deal, in which Merrill
acquired an interest in a Nigerian barge operation that allowed Enron to book a
last-minute $12 million profit for 1999, a senior Merrill executive worried that
the firm might "aid/abet" the manipulation of Enron's income statement,
documents obtained by the Senate's permanent subcommittee on
investigations show. Merrill said the executive's concerns were resolved.
Committee investigators also said Tuesday that a Merrill analyst, John Olson,
was dismissed from the firm in 1998 because Merrill was upset that his
skeptical coverage of Enron was costing the firm millions of dollars in
investment banking revenue. A Merrill official testified Tuesday that it was
common for companies to take research coverage into account in awarding
investment banking business, but he said Olson's departure was "not in any
way connected" to his Enron research.
"Merrill Lynch helped Enron artificially and deceptively create revenue,"
Senator Carl Levin, Democrat of Michigan, who is chairman of the
subcommittee, said Tuesday. "Enron couldn't have engaged in the deceptions
it did without help from a major financial institution," he said. "Merrill Lynch
assisted Enron in cooking its books."
Defending Merrill at a four-hour hearing before the committee, G. Kelly Martin,
the president of Merrill's international private client division, testified that the
firm "strongly believes that our limited dealings with Enron were appropriate
and proper based on what we knew at the time."
"At no time did we engage in transactions that we thought were improper," he
added. Two investment bankers who played a role at Merrill in the deals that
were scrutinized Tuesday, Schuyler Tilney and Robert Furst, both appeared at
the hearing but declined to testify, invoking their Fifth Amendment right against
self-incrimination and citing a pending Justice Department inquiry into one
Merrill transaction with Enron. Tilney has been placed on paid leave by Merrill,
where he is head of the firm's energy investment banking practice; Furst left
Merrill last year.
Merrill's two top executives, David Komansky, its chairman and chief
executive, and Stanley O'Neal, its president, issued a statement Tuesday
afternoon that sought to reassure employees about Merrill's conduct while also
mildly criticizing the Senate panel. "The tenor of the subcommittee hearing
reflected a disturbing skepticism and mistrust - not only of Merrill Lynch and
our motives but also of financial institutions and the business community
generally," their statement said.
"As Merrill Lynch employees, all of us play an important role in restoring the
confidence and trust of our clients, government officials and the public. The
misdeeds of some companies or individuals must not be allowed to cast a
shadow on the fundamental integrity of our global capital markets system."
But lawmakers on the panel highlighted several episodes that they said
showed Merrill's willingness to abandon judgment and impartiality to curry
favor with Enron, including Olson's dismissal and the Nigerian barge deal.
Lawmakers also questioned Merrill's role in raising close to $400 million for
LJM2, one of the secretive partnerships controlled by Enron's former chief
financial officer, Andrew Fastow, that played a central role in Enron's collapse.
A Merrill official responded that Enron's former chief executive, Jeffrey Skilling,
had assured Merrill that the Fastow partnership dealings were appropriate.
Olson left Merrill in August 1998 after two Merrill bankers complained that his
coverage of Enron risked costing Merrill investment banking business. The
analyst who replaced Olson soon awarded Enron a higher rating, and on Jan.
15, 1999, Tilney sent an e-mail message to Merrill's president at the time,
Herbert Allison, stating that Enron's "animosity" over Merrill's research had
"dissipated," and "to that end" the company had awarded the firm business
that should bring in at least $45 million in fees.
Merrill officials say Olson left because of a consolidation in the research
department.
Citing terms of his severance agreement with Merrill, Olson declined to
discuss whether Enron's complaints had led to his departure. But he said
Merrill's explanation of a consolidation was "entirely news to me," adding that
such a move "was never part of any discussion."
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