A federal grand jury indicted the three former Merrill bankers — Robert Furst, Daniel Bayly and James Brown — with conspiracy to commit wire fraud and to falsify financial books and records of business transactions. Brown faces two additional counts of obstruction of justice and committing perjury before a grand jury investigating the Enron accounting scandal.
The three executives, accompanied by their lawyers, surrendered at the Houston office of the Federal Bureau of Investigation Wednesday morning and were taken by car to federal court.
The criminal charges stem from a 1999 business deal in which Enron, with Merrill’s knowledge, allegedly recorded a short-term loan from Merrill Lynch as a bogus $12 million profit from the sale of the three Nigerian barges. Prosecutors charge Enron then used the loan to inflate its financial statements and deceive investors into thinking the company had achieved its earnings targets.
Prosecutors say in the indictment that the three former executives agreed to buy the Nigerian barges only because Merrill Lynch “knew the ‘purchase’ was not real.” The Merrill Lynch officials had a verbal agreement with Enron that the Houston-based energy trading company would pay back Merrill’s loan with 22 percent interest within six months, and then repurchase the barges or sell them to a third party, according to the indictment.
If convicted of conspiracy, all three could be sentenced to prison for a maximum of five years. Brown also faces up to an additional five years in prison on the perjury count and a maximum of 10 years for the obstruction charge.
Furst, former managing director in investment banking and Merrill Lynch’s relationship manager with Enron, left the Wall Street brokerage firm in 2001. Bayly, former global head and chairman of investment banking, retired from Merrill last year. Lawyers for all three men were not available for comment, wire sources reported Wednesday.
Prosecutors say the barge transaction typified one of numerous deals cooked up by former Enron finance chief Andrew Fastow as part of a broader fraudulent scheme to inflate Enron’s earnings reports and deceive investors into thinking the energy trading firm was more successful than it actually was. Fastow, who has pleaded not guilty to some 109 charges, is scheduled to stand trial on April 20.
Enron needed to rid itself of the three barges — which carried generators to produce electricity but were not operational — but by December 1999 had not found a buyer. Finally, in June 2000, LJM2 — one of Fastow’s partnerships that conducted business deals with Enron — purchased Merrill’s interest for $7.5 million.
The criminal indictment Wednesday did not name Merrill Lynch & Co. Inc., which has maintained it acted properly in the barge transaction. But, the Wall Street investment titan paid $80 million in March to settle a civil complaint filed by the Securities and Exchange Commission regarding similar charges on the barge deal and another transaction with Enron.
Meanwhile, Justice Department officials in Washington announced Merrill Lynch on Wednesday accepted responsibility for its employees’ alleged misconduct and agreed to implement “a series of sweeping reforms” to improve the propriety of future transactions between its clients and third parties. An independent auditor and external monitor will oversee Merrill Lynch’s compliance with these reforms, Justice Department officials said.
“The American public is entitled to a full accounting of the circumstances behind Enron’s collapse, and the department is committed to prosecuting those who lie or mislead in order to obstruct our investigation,” Assistant Attorney General Christopher Wray, head of the Justice Department’s criminal division, said at a press conference in Washington on Wednesday.
Merrill Lynch, with private client assets of roughly $1.1 trillion and an annual income of over $2.5 billion, stands among the largest investment banks and financial management companies in the world.