The Securities and Exchange Commission filed civil charges against Merrill Lynch and four former Merrill executives Monday, accusing them of aiding and abetting the fraudulent schemes that Enron used to artificially inflate its earnings in 1999.
Without admitting or denying the charges, Merrill Lynch agreed to a settlement with the SEC that called for $80 million in fines. The four former Merrill executives two of whom were fired last year after refusing to cooperate with investigators are expected to contest the civil charges.
The SEC charges are significant because they shed new light on the involvement Merrill Lynch had with Enron’s management of earnings. In a complaint filed in Federal District Court in Houston, SEC lawyers Kevin Loftus and Alex Lipman detail a series of conversations, e-mails and interoffice memos among Merrill Lynch executives and Enron executives that suggest both sides knew the transactions they entered into in December 1999 were designed solely to allow Enron to claim increased earnings for the year.
The two transactions described in the complaint were:
Merrill Lynch’s $7 million investment in an Enron subsidiary that would sell electricity to Nigeria from a small fleet of offshore barges. The investment allowed Enron to book $12 million in earnings for the quarter that closed in December 1999.
The SEC complaint says Merrill Lynch knew its $7 million was a ”handshake” loan disguised as an investment.
Merrill also entered into a series of complicated call options with Enron in December 1999 that had no impact on Enron’s core business but allowed the energy company to book almost $60 million in phantom earnings.
The SEC complaint alleges that the idea for the call options came from the CEO of Enron North America. Though it doesn’t name him, Cliff Baxter held the title at that time. Baxter committed suicide in January 2002, after the first revelations of fraudulent activity at Enron.
The four former Merrill executives charged by the SEC are: Thomas Davis, 49, who was fired in September and was vice chairman of private equity and research; Dan Bayly, 55, who was chairman of investment banking at Merrill until retiring last fall; Schuyler Tilney, 47, who was global head of Merrill’s energy and power division before being fired in September; and Robert Furst, 41, who managed the Enron relationship for Merrill and resigned in 2001.
Tilney’s lawyer, Robert Trout of Trout & Richards, says his client did not engage in any wrongdoing. Furst’s lawyer, Ira Lee Sorkin, says his client did not violate any securities laws.
Lawyers for Bayly and Davis did not return phone calls seeking comment.
The charges mark the first time in the Enron investigation that the SEC has moved before the Justice Department. ”We have proved that we are serious about rooting out everything we can to bring everyone responsible to justice,” said Linda Thomsen, deputy director of the SEC’s enforcement division.