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Merrill Lynch Probe Widens

Jul 30, 2002 | USA Today

As securities regulators reportedly look into Merrill Lynch's financial deals with Enron, lawmakers on Tuesday accused the Wall Street bank of "aiding and abetting" Enron in suspected accounting fraud before the energy-trading firm's collapse last year.

"It's clear that Merrill Lynch has been investment banker to a big Ponzi scheme," said Sen. Peter Fitzgerald, R-Ill., of the Senate Governmental Affairs Permanent Subcommittee on Investigations.

Merrill Lynch, the largest securities firm in the nation, denied wrongdoing based on what it knew of Enron's finances at the time. In a statement, the firm said, "Merrill Lynch strongly believes that our limited dealings with Enron were appropriate and proper."

The Securities and Exchange Commission is reviewing documents disclosed by Senate investigators on Merrill Lynch's financial deals with Enron, according to a person close to the subcommittee's investigation.

The Justice Department already is investigating the transactions.

The subcommittee has been looking at the role of banks in the Enron scandal. Last week, lawmakers questioned J.P. Morgan Chase and Citigroup executives on their firms' involvement in allegedly fraudulent deals with Enron.

The subcommittee Tuesday focused on Merrill Lynch's questionable financial deals with Enron and the sudden departure in August 1998 of Merrill Lynch analyst John Olson, who had downgraded Enron's stock to "neutral" a year earlier.

Unhappy with the poor rating, former Enron CFO Andrew Fastow told Merrill Lynch executives that the bank would not run or head a lucrative Enron stock offering, according to documents released by lawmakers.

Fastow was the key architect of the Enron-related partnerships under investigation by the Justice Department and the SEC for alleged accounting fraud.

Analyst Olson, now research director at Dallas investment bank Sanders Morris Harris, declined to comment. But a source close to the investigation says Merrill Lynch forced Olson to resign — a charge the firm denies.

Shortly after Olson's departure, a new Merrill Lynch analyst upgraded Enron's stock, and Enron quickly rewarded Merrill Lynch, lawmakers charge. It made the bank the lead manager on a $1.5 billion initial public offering of Enron's water company, Azurix, and as underwriter for a $1 billion stock offering for Enron.

Lawmakers Tuesday also questioned Merrill Lynch executive G. Kelly Martin on the bank's controversial purchase in 1999 of three Nigerian barges — a sham deal to inflate Enron's sales by $12 million, Senate investigators alleged.

In one e-mail sent in December 1999 from Merrill Lynch executive Robert Furst to Jim Brown, another high-ranking Merrill Lynch executive, Furst said, "Reputational risk in (aiding and abetting) Enron income (statement) manipulation."

"Isn't that a huge red flag?" asked Sen. Susan Collins, R-Maine.

Replied Martin: "We cannot know everything (our clients) do in their transactions, but we do everything we can to make sure the transactions are vetted as thoroughly as possible."

Furst, a former Merrill Lynch executive, and Schuyler Tilney, a Merrill Lynch executive placed recently on leave by the firm, declined to testify Tuesday, citing the Justice Department investigation.

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