A criminal trial scheduled to start Monday involving former Enron Corp. executives may shine a rare and potentially harsh spotlight on the inner workings of the investment banking business on Wall Street.
The trial’s focus is a single alleged sham transaction involving Merrill Lynch & Co. that closed almost two years before the one-time energy giant collapsed into bankruptcy.
“It’s significant because this calls into question Wall Street practices in dealing with corporate America,” said Philip Hilder, a former federal prosecutor who represents several Enron-related clients in Houston. “The ramifications of this are broader than Enron, certainly.”
The six defendants — four former Merrill Lynch executives and two former midlevel Enron executives — are charged with conspiracy and fraud. They are accused of helping push through a sale of several electricity-producing Nigerian barges to the brokerage in late December 1999 that allowed Enron to book about $12 million in pretax earnings.
Prosecutors say they knew the sale wasn’t legitimate because Enron secretly promised to buy back the barges, ensuring that Merrill couldn’t lose money on the transaction.
The defendants, who have pleaded innocent, are: Daniel Bayly, former chairman of investment banking for Merrill; Robert S. Furst, the former Enron relationship manager for Merrill; James A. Brown, former head of Merrill’s asset lease and finance group; William Fuhs, former Merrill vice president who answered to Brown; Dan Boyle, a former finance executive on former Enron finance chief Andrew Fastow’s staff; and Sheila Kahanek, a former in-house Enron accountant.
The deal isn’t among the alleged financial machinations that pushed Enron into bankruptcy in December 2001, leaving thousands out of work. But prosecutors say it’s one of many accounting schemes Enron used to polish a facade of success.
Merrill Lynch avoided prosecution a year ago by acknowledging that some employees may have broken the law. The company cooperated with the government and implemented reforms to prohibit dubious deals. Six months earlier, Merrill Lynch paid the Securities and Exchange Commission $80 million to settle civil allegations involving the barge deal without admitting or denying wrongdoing.
Spotlight on 1999 pitch
A 2003 report by Neal Batson, the main examiner in Enron’s bankruptcy, said that in December 1999 then-Enron treasurer Jeff McMahon pitched the deal to Merrill Lynch’s Furst, who allegedly supported it in hopes of getting more business from the energy company, once a lucrative client courted by Wall Street investment banks.
Merrill Lynch’s Brown initially questioned whether Enron could book the deal as a sale.
“Well, I raised the matter, you know, if Enron ever in the future fell apart from a credit — just like a credit meltdown or something, and we had been involved in this transaction, in light of the fact that I had these accounting concerns about the transaction, would that somehow create reputational risk for us? Would we have our names in the press?” Brown told Batson’s investigators, according to the report.
Merrill Lynch’s Bayly supposedly squelched those concerns by getting assurance from Fastow of Enron’s plan to buy back the barges. Then Brown directed Fuhs to work with Boyle to close the deal, the indictment alleges.
As for Kahanek’s role, the indictment contends she “severely reprimanded” an Enron colleague for “creating a written document,” noting the oral buyback agreement and ordered it destroyed.
The indictment cites an e-mail Brown sent to colleagues about three months after the barge deal that said he would support an “unsecured deal” if Merrill had “total verbal assurances” from a CEO or CFO.
“We had a similar precedent with Enron last year, and we had Fastow get on the phone with Bayly and lawyers and promise to pay us back no matter what. Deal was approved and all went well,” Brown’s e-mail said.
Conspicuous by absence
One of several partnerships Fastow created to help Enron hide debt and inflate profits bought the barges in June 2000. But Fastow, who in January became the government’s most high-profile cooperating witness when he pleaded guilty to two counts of conspiracy, isn’t on the government’s list of more than 30 witnesses prosecutors intend to call to testify. Neither is McMahon, who hasn’t been charged with any crimes.
Prosecutors revealed in June — days before the trial originally was to begin — that Fastow had told federal investigators he wasn’t explicit about the buyback and didn’t use the words “guarantee” or “promise” when talking about the barge deal. He also told investigators he didn’t remember if Boyle participated.
The government has told defense attorneys that Fastow will be available to them if they want to summon him to the witness stand, but the defense teams haven’t decided whether they’ll accept that offer.
The trial, which begins with jury selection Monday, is expected to take up to two months.