Four former high-ranking Merrill Lynch bankers were on Monday charged with helping Enron commit securities fraud, marking the first time that US regulators have brought charges against individual bankers for assisting the failed energy company.
The Securities and Exchange Commission said on Monday that Thomas Davis, a former Merrill vice chairman, Daniel Bayly, former chairman of investment banking, Schuyler Tilney, former head of energy investment banking, and Robert Furst, a former energy banker, all “aided and abetted” Enron’s earnings manipulation by engaging in two fraudulent transactions in late 1999.
The civil complaint came as the SEC settled similar charges against the bank for $80m. Merrill, which neither admitted nor denied guilt, was partly spared in the deal because it cooperated with investigators. The firm brought certain sham transactions to light that invetigators had been unaware of, and also fired Mr Davis and Mr Tilney last year.
The SEC’s charges reflect US regulators’ increasing focus on the Wall Street firms’ participation in Enron’s various financial and accounting scandals. The failed energy company’s heavy reliance on financial engineering made it one of the richest sources of fees for Wall Street firms in the mid-1990s.
The SEC is currently in settlement talks with Citigroup, the largest US financial services group, over loans it extended to Enron that were disguised as commodities trades in order to lower its stated debt levels. JP Morgan, the second largest US bank, is under investigation for engineering similar transactions.
The transactions at the heart of the Merrill investigation were undertaken in late 1999. One involved the bank’s purchase of two electricity-producing Nigerain barges. The deal helped Enron record $12m in pre-tax income just before the end of the quarter.
The SEC said that Merrill undertook the deal knowing that the energy company would later arrange to buy out its interest at a guaranteed premium. “In substance, this transaction was at best a bridge loan,” the SEC said.
The second transaction involved options trades that regulators said amounted to “wash” trades. Their true purpose, according to the govermnet, was to increase Enron’s reported income by $50m. Casting further doubt on the transaction, Merrill demanded a fee that amounted to $17m to participate in the deal.
Mr Davis and Mr Tilney were both dismissed by Merrill last year for refusing to cooperate with the government’s investigation. Mr Bayly also left the firm last year as Merrill was called to testify before Congress about its involvement with Enron. They could not immediately be reached for comment. The four are understood to be resisting the charges.
Merrill said that the agreement concluded the SEC’s investigation of its activities with regard to Enron. It has recorded the $80m payment as part of its fourth quarter financial results.