A former Merrill Lynch & Co . executive and another current executive invoked their Fifth Amendment right to avoid self-incrimination in testimony before a Senate panel Tuesday.
Former Merrill Lynch Managing Director Robert Furst and current Managing Director Schuyler Tilney each cited an investigation by the Justice Department as a reason for refusing to answer questions from the Senate Governmental Affairs Committee’s permanent subcommittee on investigations. The panel is holding a hearing on the role Merrill Lynch might have played in Enron Corp.’s ( ENRNQ) financial collapse.
Messrs. Furst and Tilney both said they have fully cooperated with the subcommittee’s investigation of a series of financial transactions with Enron.
Mr. Furst was a Dallas -based Merrill Lynch official who helped arrange the securities firm’s $28 million financing of Enron’s power venture in Nigeria . The subcommittee has found evidence that it says suggests the financing helped hide Enron’s debt.
Mr. Tilney is Merrill Lynch’s Houston -based managing director for global energy and power. He was placed on administrative leave last week.
Senate investigators plan to present evidence of a link between the brokerage firm’s equity research and stock underwriting for Enron.
In a statement summarizing the testimony, the brokerage firm said it dealt with Enron at “arms-length” and made business decisions based on information then available.
“At no time did we engage in transactions that we thought were improper,” Merrill Lynch said in the statement.
Controversy surrounds Enron’s sale of several Nigerian barges to Merrill Lynch in December 1999 , which Senate investigators say helped Enron hide losses and mislead investors.
Ebarge LLC, a Merrill Lynch entity, bought shares of a company that entitled Ebarge to part of the cash flows from the sale of energy that generators on three barges would produce. Merrill Lynch’s investment exposure in the transaction was $7 million.
“Merrill Lynch agreed to the transaction largely to build our relationship with Enron, and believed that it was likely, though not certain, that a third party unaffiliated with Enron would soon purchase Merrill Lynch’s shares in the company,” Merrill Lynch said in its statement.
Merrill Lynch also claimed that it doesn’t know, even now, whether Enron used proper accounting. The firm said it wasn’t advising Enron on the appropriate accounting treatment and relied on the opinions of Enron’s accountants, board, lawyers and audit committee.
“We … felt justified at the time in believing Enron’s financial representations,” Merrill Lynch said.
Enron filed for bankruptcy-court protection on Dec. 2 amid an accounting scandal. Enron’s auditor at the time, Arthur Andersen LLP, was found guilty of obstruction of justice in June.
Ultimately LJM2, formed by former Enron Chief Financial Officer Andrew Fastow to make privately negotiated investments in energy and communications related businesses or assets, purchased the shares Merrill Lynch held in the barges transaction.
Merrill Lynch, which acted as the private placement agent for LJM2 between September 1999 and April 2000 , said it received assurances that Enron’s board and senior management considered Mr. Fastow’s role as the managing member of LJM2’s general partner. Merrill Lynch said the board implemented several internal controls to protect the company’s interests, such as requiring the chief accounting officer to review each transaction.
Investors contributed about $265 million of the $390 million raised for LJM2, for which Merrill Lynch received a little more than $3 million in fees from the placement. The brokerage house invested $5 million in and committed to lend up to $10 million — out of a total commitment by all lenders of $120 million — to LJM2, and 96 Merrill Lynch employees invested about $16.6 million in LJM2 through an investment fund.
The firm maintained that it isn’t unusual for placement agents to invest in private partnerships for which they are acting and in this partnership other major investment banking houses made similar or larger investments.
Merrill Lynch said that overall, Enron wasn’t a large client in terms of fees or a significant contributor to earnings. Although Merrill Lynch participated in debt and equity offerings for Enron between 1997 and 2001, Enron-related investment banking fees were $8.2 million.
During the same period, the brokerage’s average annual investment banking fees were $3.5 billion, so Enron made up two-tenths of 1% of the total average annual fees.
Merrill Lynch also said that from time to time it participated in credit lines for Enron but claimed to have only a minimal role. In the lines in which it participated, the brokerage said, the commitments represented less than 3%.
Merrill Lynch also said it never was the lead lender in any loan syndicate and never participated in any of the prepay transactions the Senate subcommittee has examined.
Between 1997 and 2001, Enron retained advisers to assist it on 43 completed strategic transactions but retained Merrill Lynch on only one such deal. The total fee on that assignment was $1 million, the brokerage said.
The Senate also is questioning Enron’s role in the replacement in 1998 of one Merrill Lynch research analyst who was critical of the energy firm with another analyst with a more positive view. The Wall Street Journal reported that this partially led to the brokerage receiving better investment-banking assignments that could total as much as $50 million.
In its statement, Merrill Lynch acknowledged then-President Herb Allison received a notice that Enron wasn’t going to invite the firm to participate in an underwriting because of disappointment with research coverage. Mr. Allison called Enron executives to get them to reconsider their decision, and Merrill Lynch participated as a co -manager in the transaction.
The brokerage firm didn’t elaborate on the details of that phone call in the release.
John Olson, the Merrill Lynch analyst who downgraded Enron to neutral in mid- 1997, maintained that view until leaving in August 1998 , reportedly under pressure. Mr. Olson’s replacement, Donato Eassey, upgraded the stock three months later.
Merrill Lynch has denied that Enron pressure compromised analyst objectivity and said it eliminated Mr. Olson’s job in a consolidation. Merrill Lynch also noted that its analyst was one of the first to downgrade Enron in 2001.
Merrill Lynch stopped rating Enron shares several weeks before the bankruptcy filing.
The Senate also plans to ask Merrill Lynch about Zephyrus, an Enron-related entity. Merrill Lynch said it agreed to commit up to $40 million of a five-year, $482 million senior secured loan and currently is owed $22.5 million. The commitment received approval according to regular company policy, the brokerage said.