Merrill Officials Invested Their Funds In Enron Partnership That They Sold
By CHARLES GASPARINO and RANDALL SMITH
Staff Reporters of THE WALL STREET JOURNAL
Wednesday, January 30, 2002
Nearly 100 Merrill Lynch & Co. executives invested more than $16 million of their own money in a controversial partnership that the securities firm was selling for Enron Corp., even as other senior Merrill officials decided to turn down the offer, people close to Merrill said.
Among the top Merrill officials who put their own money into the Enron partnership were current Vice Chairman Thomas Davis; Daniel Bayly, Merrill's investment-banking chief; and Schuyler Tilney, who heads Merrill's energy investment-banking department and directly oversees the firm's dealing with Enron on corporate-finance matters, the people said.
Though each executive invested less than $1 million, the people said, their involvement highlights the role played by senior Wall Street officials in helping to create some of the partnerships that Enron used to pad its earnings and hide debt from investors -- and that eventually resulted in huge losses that led to the energy-trading company's downfall.
Mr. Davis, Mr. Tilney and Mr. Bayly didn't return calls for comment. Joseph Cohen, a Merrill spokesman, said the investments were entirely appropriate, and common on Wall Street.
The personal investments were part of a total of $22 million Merrill and its officials committed to invest in the partnership, known as LJM2 Co-Investment LP. This partnership was particularly controversial because it allowed some Enron officials to make far more money working part time on the partnerships than they did working full time for Enron. The energy company has estimated, for instance, that Andrew Fastow, whom Enron replaced as chief financial officer in October as pressures on the company mounted, made more than $30 million since 1999 running LJM2 and a smaller partnership, called LJM Cayman LP.
At issue for Merrill is the potential for conflicts of interest. Merrill, like other Wall Street firms, wore a number of different hats with Enron: The big securities firm acted at various times as securities underwriter and investor with Enron. Since 1990, Merrill was among the top five underwriters of Enron's stock and bond deals, according to Thomson Financial, earning fees for helping to raise about $3.7 billion in stocks and bonds for the company. Thus, some critics question whether Merrill officials would let their personal investments with Enron entities interfere with their business decisions in dealing with the energy company.
"Merrill's involvement as underwriter for Enron and its executives' investments raises serious conflict-of-interest questions," says Jacob Zamansky, a New York-based plaintiffs' lawyer. "It gives the appearance that Merrill did this to get Enron deals. Merrill had a vested interest in ... the partnership and investing" in it.
There are other conflicts as well, securities lawyers say. Some top executives at Merrill declined to invest themselves because they believed that the Enron partnership -- which kept assets off Enron's balance sheet -- wouldn't get the best investments, which would be kept by the corporate parent. Another concern: Enron's Mr. Fastow suggested the idea of investing in the partnership to Mr. Tilney, whose wife until last week was a managing director of Enron's energy-services unit. Mr. Fastow through a spokesman had no comment.
It is unclear if top Merrill executives, who also worked on Enron's financings, had more information about the nature of the LJM2 partnership than Merrill's individual customers who were offered opportunities to invest in the partnership. "I'm not saying that Merrill violated the law here," says John Coffee, a professor of securities law at Columbia University in New York. "But this is a big public policy issue. Merrill has an obligation because Enron is a client not to reveal some confidential information, but it also has a fiduciary obligation to its investors to tell them if these securities aren't suitable for them."
Mr. Cohen, the Merrill spokesman, brushes aside such concerns. "The investment partnership was reviewed and deemed appropriate by parties on all sides of the transaction," Mr. Cohen said, reading from a prepared statement. "Consistent with common industry practice, it was offered to qualified external as well as internal investors, and this is not a conflict of interest."
Mr. Cohen added that Merrill high-net-worth clients "in the partnership offering were given the same information as all Merrill executives who wanted to invest."
Mr. Davis, who at the time of the investment headed the institutional-securities group, appears to be the only official on Merrill's executive committee to invest in the partnership. Even though close to 100 Merrill executives invested in the partnership, neither Chief Executive Officer David Komansky, nor his heir apparent, President E. Stanley O'Neal, were in the group, people close to the deal said. One person with knowledge of the matter said some top executives balked at investing their own private money because they were uncomfortable with some LJM2 investments. Mr. Davis, however, headed the institutional group, which counted Enron as one of its big clients.
Merrill, which helped market LJM2 to more than three dozen institutional and individual investors through its vast brokerage network, was only one of many Wall Street firms to invest in the $386.6 million partnership. Other corporate investors in the partnership included Lehman Brothers Holdings Inc. two different units of Credit Suisse Group's Credit Suisse First Boston, Citigroup Inc., Deutsche Bank AG, J.P. Morgan Chase & Co., First Union Corp., and the CIBC World Markets unit of Canadian Imperial Bank of Commerce.
The funds for a $15 million investment from J.P. Morgan Chase came from the private-equity unit of J.P. Morgan, which invests the firm's own funds. While individual Morgan bankers may have stakes in those funds, they didn't have any direct, separate stakes in LJM2, a spokeswoman said.
At Citigroup and Lehman Brothers, which committed $10 million each, and CIBC World Markets, which committed $15 million, the funds came from the firm's own assets and not from outside clients or individual investment bankers, according to people familiar with the investments.
Officials declined to comment at CSFB, a unit of Credit Suisse Group, whose DLJ Fund Investment Partners III, LP made a $5 million commitment, while a CSFB affiliate named Merchant Capital Inc. committed $10 million. Spokespeople had no comment at Deutsche Bank, where an affiliate of its former Bankers Trust unit, BT Investment Partners, committed $10 million, and First Union, whose First Union Investors Inc. committed $25 million.
Officials at some of these Wall Street firms said their investment committees felt pressured to make the investments in order to stay in the running for investment-banking assignments. Some bankers also were concerned about whether they were being asked to make uneconomical investments in corporate castoffs that wouldn't appreciate in value. Indeed, it is unclear what returns, if any, the LJM2 partnership investment has generated for limited partners and investors.
Wall Street securities firms have long made investments associated with their investment-banking business. Sometimes the investments are made to provide extra capital to help clients complete deals. Sometimes the investments are used to acquire an asset a client wants to sell. The funds may come from the securities firm itself, from investment clients, or individuals at the firm who may be offered the chance to make the investments as part of their compensation packages.
What was unusual about the Merrill investment in the Enron vehicle was that some senior bankers chose not to participate out of concern about what the partnership would invest in. In addition, some of Merrill's top executives, including Mr. Komansky, Merrill's chief executive, had been embarrassed in 1998 by disclosure that they had taken personal stakes in Long-Term Capital Management, the highflying hedge fund for which Merrill had raised funds and whose near collapse jeopardized the entire financial system.
______________________________
Write to Charles Gasparino at charles.gasparino@wsj.com and Randall Smith at randall.smith@wsj.com |
