SEC charges Merill Lynch in Enron case

The US Securities and Exchange Commission (SEC) yesterday charged Merrill Lynch and four of its former senior executives with aiding and abetting Enron’s alleged securities fraud – the first time a regulator has charged a bank with aiding the Houston-based bankrupt energy trader.

The Commission's complaint, filed in US District Court in Houston, alleged that Merrill Lynch and its former executives aided and abetted Enron's earnings manipulation by engaging in two fraudulent year-end transactions in 1999. The transactions had the purpose of overstating Enron's reported financial results. Specifically, Enron used these transactions to add approximately $60 million to its fourth quarter of 1999 income (improving net income from $199 million to $259 million) and to increase its full year 1999 earnings per share from $1.09 to $1.17, the SEC said.

But the SEC agreed to accept Merrill Lynch's offer to settle the matter. Merrill Lynch, without admitting or denying the allegations in the complaint, has agreed to pay $80 million in disgorgement, penalties and interest, and has agreed to the entry of a permanent anti-fraud injunction prohibiting future violations of federal securities laws. The SEC said it intends to have these funds paid into a court account for ultimate distribution to victims of the fraud. The four former Merrill Lynch executives named in the complaint, Robert Furst, Schuyler Tilney, Daniel Bayly and Thomas Davis, are contesting the matter.

One of the Merill Lynch transactions involved the bank's purchase of two electricity-producing Nigerian barges. The deal helped Enron record $12 million in pre-tax income just before the end of the quarter. But the SEC said Merrill undertook the deal knowing that the energy company would later arrange to buy out its interest at a guaranteed premium - in effect making the transaction a bridge loan.

The second transaction involved options trades that regulators said amounted to wash trades. Their true purpose, according to the government, was to increase Enron's reported income by $50 million. Merrill demanded a fee that amounted to $17 million to participate in the deal. In 2000, Enron approached Merrill Lynch seeking to unwind the transaction before trading under the energy options was scheduled to begin. The deal was unwound in June 2000 after Merrill Lynch agreed to reduce its fee to $8.5 million to terminate the transaction.