Merrill Faces $605M Suit Alleging Sham Energy TradesSep 26, 2002 | USA Today
Allegheny Energy is suing Merrill Lynch for $605 million plus unspecified punitive damages in the latest case involving the alleged use of sham energy trades to pump up corporate revenue.
In a lawsuit filed Wednesday in New York state court, Merrill is accused of inflating revenue at its energy-trading unit, Global Energy Markets, before selling it to Allegheny for $490 million last year.
The Maryland electric utility says Merrill improperly booked revenue at GEM through a series of so-called "round-trip" trades with former industry giant and banking client Enron.
Merrill is at the center of several civil and criminal probes involving its dealings with Enron. Last week, two top Merrill bankers were fired for failing to cooperate with Justice Department and Securities and Exchange Commission investigations into complex transactions that might have helped hide Enron's massive debt from investors.
Allegheny's lawsuit was filed a day after Merrill sued Allegheny, seeking to collect $115 million that the financial services giant claims it is still owed from the deal.
"Based on published reports about Merrill's dealings with Enron, we suspected that we might have bought tainted goods," Allegheny lawyer Stanley Arkin said. He said Allegheny was rebuffed when asking Merrill for information about the Enron-related trades. "We warned them we would sue," he added. "Their lawsuit is simply a diversionary tactic."
"The allegations are unfounded and untrue," said Merrill spokesman Bill Halldin. "This is an effort to divert attention from the fact that they owe us $115 million."
Round-trip trades involve the simultaneous purchase and sale of energy at the same price and quantity with the same party. They appear to inflate revenues but add no profit.
Several energy trading companies are under federal and state investigation for allegations of such sham trading. On Tuesday, Houston-based Dynegy became the first to settle federal charges, agreeing to a $3 million fine.
The Allegheny lawsuit also claims the trading practices of Merrill's former energy unit are now the focus of "criminal and regulatory" investigations.
Allegheny also accuses Merrill of misrepresenting the qualifications of the energy unit's head, Daniel Gordon.
Among Allegheny's allegations are that Gordon, who ran the unit, contracted with companies that he had an interest in. Allegheny says Gordon and his father both had an interest in one of those companies. Gordon was later fired for violating the company's conflict of interest rules.
Allegheny also claims Merrill misrepresented Gordon's age and experience. Allegheny says Merrill told Allegheny that Gordon, who is in his 20s, was several years older.