Former Merrill Lynch execs face fraud charges
3 allegedly helped Enron inflate earnings with loan
The Associated Press
HOUSTON -- Three former
Merrill Lynch executives were
charged with fraud
Wednesday for allegedly
helping Enron Corp. inflate
earnings with a loan the
energy trader disguised as a
sale.
The criminal charges do not
involve Merrill Lynch, which
reached a side agreement that
would allow the brokerage to
avoid any corporate culpability
if it implements "a series of
sweeping reforms" to improve
the integrity of its transactions
with clients and third parties.
Daniel Bayly, Robert Furst and James Brown were named in a three-count federal
indictment unsealed Wednesday in Houston. They were scheduled to appear before
a judge later in the day.
All three were charged with conspiracy to commit wire fraud and falsifying books
and records.
Brown was named in two additional counts accusing him of committing perjury
before a grand jury investigating the Enron scandal and of obstruction before the
same grand jury.
The charges stem from a scheme in which Enron, with Merrill's knowledge, allegedly
booked a short-term investment from the brokerage firm as profit from the sale of
Nigerian barges. The income was then used to make Enron appear to have met
earnings targets.
The three agreed to buy the Nigerian barges only because Merrill Lynch "knew the
'purchase' was not real," according to the indictment.
In Washington, meanwhile, the Justice Department announced Merrill Lynch has
accepted responsibility for its employees' conduct and plans to implement reforms.
An independent auditor and outside monitor will oversee Merrill Lynch's compliance
with these changes, officials said.
"The American public is entitled to a full accounting of the circumstances behind
Enron's collapse, and the department is committed to prosecuting those who lie or
mislead in order to obstruct our investigation," said Assistant Attorney General
Christopher Wray, head of the Justice Department's criminal division.
Wray said the government has entered into similar agreements in the past with
companies seeking for avoid criminal charges.
Wray told reporters that Merrill Lynch can avoid any corporate culpability if it lives up
to the agreement over the next 18 months. Wray said the deal could be a model for
future prosecutions of corporate wrongdoing.
"There's a right way and a wrong way to respond when the government comes
knocking at your door. Merrill Lynch responded the right way," Wray said. "I do
think that what happened here to Merrill should be instructive to other companies
who find themselves in a criminal investigation."
Merrill Lynch spokesman Mark Herr said the New York-based company had no
comment on the indictments, but said the new internal policies "will help ensure that
these kinds of transactions do not occur in the future."
"We have cooperated fully with this investigation and will continue to do so," Herr
said.
In Houston, federal prosecutor Andrew Weissmann said the agreement with Merrill
Lynch turned the financial institution "into a watchdog of its clients, not just the
lapdog, or even worse, a conspirator."
Merrill Lynch in March settled a civil complaint with the Securities and Exchange
Commission partially over the same Nigerian barge deal and agreed to pay $80
million into a fund to benefit Enron fraud victims.
The three defendants indicted Wednesday face a maximum sentence of five years in
prison on the conspiracy charge. Brown also faces maximum sentences of five
years on the perjury count and 10 years for obstruction.
Bayly and Furst are among four facing similar allegations in a civil complaint filed in
March by the Securities and Exchange Commission. The third defendant is not
charged by the SEC, which also named Merrill Lynch.
Bayly, former global head and chairman of investment banking, retired from Merrill
last year. Furst, former managing director in investment banking, quit in 2001. Their
lawyers either declined to comment Tuesday or didn't return calls.
The Houston Chronicle first reported the indictments Tuesday.
The barge transaction is among numerous schemes former Enron finance chief
Andrew Fastow, named Wednesday as a co-conspirator along with former Enron
finance executive Dan Boyle, is alleged to have masterminded to promote Enron's
illusion of financial success. Fastow has pleaded innocent to nearly 100 charges
including fraud, money laundering and insider trading and is scheduled for trial April
20. Boyle faces trial next August on two counts of conspiracy.
In December 1999, then-treasurer Jeff McMahon approached Merrill about buying an
interest in the barges so Enron could book $12 million in profit after efforts to sell
them to Tokyo-based Marubeni Corp. had failed.
Merrill agreed to pay $7 million of the $28 million purchase price -- Enron put up the
rest -- with verbal assurances that the investment would be bought out within six
months.
LJM2, one of several Fastow-run partnerships that did deals with Enron, bought
Merrill's interest for $7.5 million in June 2000.
Internal Merrill e-mails and documents noted in the most recent report by Neal
Batson, appointed by the U.S. Bankruptcy Court to investigate Enron's 2001
collapse, show Furst knew Enron needed the deal to match earnings targets.
The examiner's report also said, citing testimony from other Merrill executives, that
Bayly squelched concerns of others by calling Fastow to confirm the buyback
promise before instructing the third executive to close the deal.
Merrill was LJM2's sole financial adviser. Batson's report also said Furst personally
invested $200,000 in LJM2.
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