Enron Takes a Chunk Out of Merrill

The firm agrees with the SEC to pay an $80 million fine over questionable energy deals

As settlements with the Securities & Exchange Commission go, it was a stunner. On Feb. 20, Merrill Lynch & Co. (MER ) agreed to pay a hefty $80 million fine to resolve an SEC investigation into its Enron dealings. The amount, if approved by the commissioners, would be a record for the agency. It includes disgorged fees, penalties, and interest, and is just $20 million shy of the $100 million that Merrill paid last April to settle a separate case with New York Attorney General Eliot Spitzer over misleading analyst reports.

Merrill soon will pay out another $100 million as part of the global settlement that it and a dozen other Wall Street firms recently struck with the SEC and Spitzer to settle allegations that analysts wrote overly rosy research reports to win investment banking deals.


  As Merrill is discovering, running afoul of the securities regulators can get expensive. Just four years ago, it paid a mere $2 million to end an SEC investigation into its role in the Orange County (Calif.) bankruptcy. The Enron price tag could go even higher if the Justice Dept., which has been investigating some of the same deals that are the subject of the Feb. 20 SEC settlement, brings charges, or if private civil litigation succeeds.

Under the terms of the SEC settlement over Enron, Merrill would neither admit nor deny wrongdoing if the commission approves it (so far only the SEC staff has signed on) but would agree not to violate securities laws in the future. The firm would take a charge against its 2002 fourth-quarter results. A spokeswoman for the SEC declined to comment further,and a Justice spokesman couldn't be reached for comment. "We entered into the agreement to put this matter behind us," says Merrill spokesman Bill Halldin. Last summer, the firm filed an SEC statement saying the Justice Dept. had told Merrill it wasn't the subject of a Justice probe.

The transactions in the Enron case netted Merrill only a few million dollars in fees, but they dragged the prestigious outfit into dangerous waters. One deal involved a $7 million investment in Enron-owned electricity-producing barges anchored off the Nigerian coast. In late 1999, Merrill bought three barges from Enron, but the Senate Permanent Subcommittee on Investigations questioned whether the sale was a sham (see BW, 9/16/02, "Merrill Lynch: See No Evil"). Enron had guaranteed that it would find a buyer for the barges in six months, and it assured Merrill that its investment return would be 22.5%.


  Accounting rules prevent recognition of revenue from an asset sale if the seller is obligated to buy the property back in the future. By temporarily taking possession of the barges, though, Merrill enabled Enron to book a $12 million profit. A Merrill investment banker involved at the time questioned whether Merrill was helping Enron manipulate its income statement.

The second transaction in the SEC settlement involved $8 million in energy trades that were forward contracts for electricity delivery. In that deal, Merrill agreed to take part in a complex series of trades over four years, but SEC officials questioned whether any risk really was transferred to Merrill because Enron had agreed to cancel the arrangements a few months later. In the end, these deals are likely to be far less profitable than Merrill ever could have imagined.

By Paula Dwyer in Washington and Emily Thornton in New York

Edited by Douglas Harbrecht