Merrill Lynch & Co., the biggest securities firm by capital, agreed to pay $80 million to settle a Securities and Exchange Commission investigation into two transactions with bankrupt energy trader Enron Corp.
The payment, the first by a securities firm to settle Enron-related investigations, will end the SEC inquiry into Merrill’s $7 million investment in three barges moored off the Nigerian coast. The settlement, in which Merrill didn’t admit or deny wrongdoing, also ends the SEC inquiry into several energy trades Merrill made with Enron in 1999.
”The SEC is saying Merrill was a willing participant in Enron’s scheme to mislead the investing public,” said Chris Bebel, a former SEC attorney and federal prosecutor now with Shepherd Smith & Bebel in Houston. ”This is a very substantial fine for an act that was nonrecurring. This sets the bar quite high for the other firms that were more involved with Enron.”
In the case of the Nigerian barges, Andrew Fastow, Enron’s former chief financial officer, was accused of pressuring Merrill to buy the barges so Enron could record $12 million in earnings. Enron financed the rest of the $28 million purchase with a loan to Merrill, according to a criminal complaint filed against Fastow.
At the time of the transaction, a Merrill investment banker, Jim Brown, voiced concern about the transactions and wrote that the bank might suffer ”reputational risk i.e. aid/abet Enron income stmt manipulation,” according to notes released at Senate hearings on the transaction in July.
”The SEC was arguing that it was a sham transaction, that risk of loss was never effectively transferred to Merrill as a result of the sale,” Bebel said. ”Merrill did this in order to endear itself to Enron executives so it might increase its prospects of investment banking business in the future.”
Merrill spokesman Mark Herr said the firm settled because ”we’re putting this behind us.”
In October, Merrill spokesman Tim Cobb said the company’s investment in the barges was ”fully at risk” and that the company ”did not receive any guarantee that Enron or any other entity would purchase our investment.”
Merrill ”never knowingly assisted Enron in falsifying its financial results,” Cobb said at the time.