Federal prosecutors are expected to charge three former Merrill Lynch & Co. executives with fraud for allegedly helping Enron Corp. inflate its earnings with a loan the energy trader disguised as a sale, according to people familiar with the case.
Daniel Bayly, Robert Furst and a third, unidentified former executive, planned to surrender to the FBI Wednesday in Houston and then appear in federal court, the sources told The Associated Press Tuesday on condition of anonymity.
The three face fraud charges from a scheme in which Enron, with Merrill’s knowledge, wrongly booked a short-term investment from the brokerage firm as profit from the sale of Nigerian barges. The income was then used to make Enron appear to have met earnings targets.
Bayly and Furst are among four facing similar allegations in a civil complaint filed in March by the Securities and Exchange Commission. The third defendant is not charged by the SEC, which also named Merrill Lynch.
Bayly, former global head and chairman of investment banking, retired from Merrill last year. Furst, former managing director in investment banking, quit in 2001. Their lawyers either declined comment Tuesday or didn’t return calls for comment.
The criminal charges do not involve Merrill Lynch, which settled the SEC civil complaint for $80 million in March.
The Houston Chronicle reported the indictments Tuesday.
The barge transaction is among numerous schemes former Enron finance chief Andrew Fastow is alleged to have masterminded to promote Enron’s illusion of financial success. He has pleaded innocent to nearly 100 charges including fraud, money laundering and insider trading and is scheduled for trial April 20.
In December 1999, then-treasurer Jeff McMahon approached Merrill about buying an interest in the barges so Enron could book $12 million in profit after efforts to sell them to Tokyo-based Marubeni Corp. had failed.
Merrill agreed to pay $7 million of the $28 million purchase price Enron put up the rest with verbal assurances that the investment would be bought out within six months.
LJM2, one of several Fastow-run partnerships that did deals with Enron, bought Merrill’s interest for $7.5 million in June 2000.
Internal Merrill e-mails and documents noted in the most recent report by Neal Batson, appointed by the U.S. Bankruptcy Court to investigate Enron’s 2001 collapse, show Furst knew Enron needed the deal to match earnings targets. In one memo he said he supported the deal because Enron was an important client and Merrill’s participation could differentiate the firm from other banks with whom the energy company did business.
The examiner’s report also said, citing testimony from other Merrill executives, that Bayly squelched concerns of others by calling Fastow to confirm the buyback promise before instructing the third executive to close the deal.
Merrill was LJM2’s sole financial adviser. Batson’s report also said Furst personally invested $200,000 in LJM2.