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Report: Enron, Merrill Lynch In Sham Power Deal

Aug 8, 2002 | AP

Enron Corp. and its banker, financial services giant Merrill Lynch & Co. Inc., hastily contrived a complex deal of energy trades that enabled Enron to meet profit expectations in late 1999, triggered significant bonuses for Enron executives and earned Merrill Lynch dlrs 8 million from its client, according to a published report.

"This was absolutely a sham transaction, and it was an 11th-hour deal," one unidentified former Enron executive who knew of the deal told The New York Times for a story published Thursday.

The newspaper said details of the deal were confirmed by five other former executives of the Houston energy trading company, now in federal bankruptcy proceedings in New York. It said none of the people would be quoted by name.

One former Enron executive who worked on the transaction disputed the deal was a sham, the newspaper reported.

New York-based Merrill Lynch denied any wrongdoing, calling the transactions legitimate.

"At no time did Merrill Lynch knowingly assist Enron in misstating revenues," the company said in a statement. "Like many others, we were deceived by Enron, and had we known what we know today, we would not have done business with them."

An Enron spokesman declined comment.

According to the newspaper report, the transactions in December 1999 allowed Enron to boost fourth-quarter profits by dlrs 60 million and match analysts' expectations of dlrs 259 million, or 31 cents per share. Without the transactions, Enron would have missed analysts' expectations by 6 cents per share.

"There are times when missing by a penny is huge," said Charles Hill, director of research at Thomson First Call, which compiles analysts' estimates. "This would have creamed the stock."

As a result of the favorable earnings, the newspaper said dozens of Enron executives collected millions of dollars in bonuses and stock. In addition, the report said after the company announced its earnings, Enron's stock price rose 27 percent by the end of that week. And in the two weeks after the announcement, 20 Enron executives and directors sold dlrs 82.6 million in stock, the newspaper said.

The transactions involved gas and power contracts over four years. In April 2000, Enron agreed to pay Merrill Lynch dlrs 8 million to cancel the deal.

The report said the deal was headed by J. Clifford Baxter, chairman and chief executive of Enron North America, and involved Schuyler M. Tilney, an investment banker at Merrill Lynch.

Baxter committed suicide earlier this year. Tilney last week invoked his constitutional right against self-incrimination and refused to testify before a congressional investigative panel.

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