Enron-Merrill Lynch Financial Condition. Congressional investigators are examining now-bankrupt Enron Corp.’s ties with Merrill Lynch & Co., saying the nation’s biggest brokerage firm knowingly participated in deals that Enron used to mask its true financial condition.
The Justice Department is investigating one of the transactions in question, in which Enron sold an interest in barges in Nigeria to an offshore company established by Merrill Lynch, according to the brokerage and Senate sources. At issue is whether the transaction allowed Enron to artificially inflate its profits, the sources said Monday, speaking on condition of anonymity.
One Merrill Lynch official who was asked to testify at a Senate hearing on Tuesday is invoking his Fifth Amendment privilege and refusing to answer questions, his attorney has notified the investigative panel of the Senate Governmental Affairs Committee.
At the same time, an official of banking giant Citigroup Inc. told the subcommittee in a sworn affidavit that it does not directly or indirectly own another offshore company used in complex financial transactions in which Citigroup made loans to Enron that investigators say helped boost Enron’s cash flow to match its profit growth on paper.
Citigroup did pay some fees for the offshore company, Delta Energy Corp., to cover administrative costs but does not own or control it, Barbara Yastine, chief financial officer of the Citigroup’s corporate and investment bank, said in an affidavit.
Citigroup chairman and chief executive officer Sanford Weill said in a separate affidavit that he has “no personal knowledge of any of the transactions.”
Similarly, the chief executive officer of J.P. Morgan Chase & Co., William Harrison, told the subcommittee in a letter that an offshore company it used in transactions with Enron “is a legally independent entity” not controlled by the Wall Street investment firm.
Enron’s financial condition
“We would not knowingly participate in any transaction for Enron or any other client where we believed our client was not accounting for that transaction properly,” Harrison wrote. “Along with countless others, we were misled about” Enron’s financial condition.
The three barges in Nigeria are used to generate electricity. Enron asked Merrill Lynch in December 1999 to invest $7 million in them so that Enron’s African division could record a $12 million gain on the transaction and meet its earnings target, according to the subcommittee investigators. Enron gave Merrill Lynch a guarantee that it would arrange the resale of the brokerage firm’s interest in the barges at a profit within six months, by June 30, 2000, the investigators said.
“It appears that Merrill Lynch, like other financial institutions, knowingly participated in deals that were used to make Enron’s financial position appear more robust than it actually was,” subcommittee chairman Sen. Carl Levin, D-Mich., said in a statement. “Merrill’s desire to make money from Enron and stay in Enron’s good graces apparently superseded professional responsibilities and reputational and financial concerns.”
Merrill Lynch spokesman William Halldin said the brokerage firm “believes its dealings with Enron … were appropriate and proper based on what we knew at the time. At no time did we engage in transactions that we thought were improper.”
“There was real risk for Merrill Lynch in this transaction,” Halldin said. “There was no guarantee and we think the evidence supports that conclusion.”
On Friday, Merrill Lynch said it had placed on administrative leave Schuyler Tilney, a managing director of the firm’s energy investment operation in Houston, after he decided not to testify at Tuesday’s hearing. Tilney, who oversaw Merrill Lynch’s corporate finance operations related to Enron, made the decision on the advice of his lawyer after learning of the Justice Department investigation, the brokerage firm said Friday.
Merrill Lynch said it has been told that it is not a target or subject of the investigation, and said it is cooperating fully.
Robert Furst, a former managing director of Merrill Lynch in Dallas, will testify voluntarily, his attorney Ira Sorkin said Monday. The firm said on Friday that Furst had decided to assert his constitutional privilege and refuse to testify.
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