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Allegheny Energy Sues Merrill Lynch Over Purchase of Energy Trading Unit

Sep 27, 2002 | AP Allegheny Energy Inc. and Merrill Lynch & Co. are accusing each other in separate lawsuits of trying to avoid fallout from the Enron scandal.

Allegheny, based in Hagerstown, sued the nation's largest brokerage Wednesday over the utility's purchase last year of Merrill's energy trading unit. The lawsuit, filed in New York state court, accuses Merrill of misrepresenting the unit's trading volume, revenues and growth so it could unload the division.

Merrill Lynch responded in its suit filed Tuesday that Allegheny was trying to avoid paying $115 million it still owes Merrill for the New York-based unit, Global Energy Markets.

"The allegations are baseless and without merit," Merrill spokesman Mark Herr said Thursday. "This is the reddest of red herrings to distract attention from the fact that they are not paying us money they owe us."

Allegheny said Global Energy Markets, while owned by Merrill, engaged in "wash" trades with Enron Corp. to artificially boost revenues, trading volumes and growth rates. Wash trades occur when traders sell power to other companies and then simultaneously buy it back at the same price, a practice under scrutiny by federal securities regulators investigating Enron's collapse.

Allegheny's complaint, filed in New York state court, said the trades "allowed Merrill Lynch to fob off its energy trading business to Allegheny Energy for far more than it was worth."

Allegheny paid about $490 million for Global Energy Markets and gave Merrill a 2 percent stake in Allegheny Energy Supply LLC, Allegheny's unregulated power-generating subsidiary.

"Using its Enron trades, Merrill Lynch painted a false portrait of its energy trading business and its ongoing prospects, and has saddled Allegheny Energy with tarnished goods," said Allegheny attorney Stanley A. Arkin.

Merrill Lynch said Allegheny was seeking to revise the deal because the energy trading business has faltered badly since the sale, largely as a result of Enron's failure. Merrill sued Allegheny in U.S. District Court in New York.

Allegheny said Merrill filed the complaint to divert Allegheny from inquiring into the unit's past dealings with Enron.

Merrill fired two top executives earlier this week for declining to testify in federal investigations into the company's dealings with Enron Corp. in 1999

Allegheny fired Global Energy Markets President Daniel L. Gordon Sept. 5, saying he had violated internal conflict-of-interest rules.

Allegheny's utility division provides electricity and natural gas to about 3 million people in Maryland, Ohio, Pennsylvania, Virginia and West Virginia.

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