Merrill Lynch Grilled in Senate

WASHINGTON —  A Senate panel investigating corporate misdeeds took aim at the nation’s biggest brokerage firm Tuesday, questioning top executives of Merrill Lynch & Co. about whether they helped Enron Corp. camouflage its financial trouble.

Senators accused Merrill Lynch of misleading investors by striking financial arrangements with Enron that helped the failed energy trader hide its massive debt from investors. They also questioned why Merrill changed analysts after one issued a report unfavorable to Enron.

“Making money by assisting a company like Enron to engage in misleading accounting or by discouraging analysts to provide honest ratings ... rewards the wrong companies for the wrong reasons and produces the situation we are in today with a crisis of investor confidence,” said Sen. Carl Levin (D-Mich.), chairman of the permanent subcommittee on investigations.

“In the end, the prospect of more lucrative business from Enron trumped those at Merrill who urged caution,” said subcommittee member Susan Collins, a Maine Republican.

The dressing-down of Merrill Lynch came after the panel summoned three current and former executives of the investment firm to testify about what role it may have played in the collapse of Enron.

Robert Furst, a former Merrill Lynch managing director, and Schuyler Tilney, a managing director on administrative leave, both invoked their 5th Amendment right against self-incrimination. Both cited the Justice Department’s continuing investigation.

A third Merrill Lynch executive, Senior Vice President G. Kelly Martin, defended the company, saying that “our limited dealings with Enron were appropriate and proper based on what we knew at the time.”

But subcommittee Chairman Levin characterized Martin’s claims as “simply unbelievable.” He added that the panel would consider legislation to curb future abuses and vowed to pass the subcommittee’s findings to the Securities and Exchange Commission and the Justice Department.

Tuesday’s hearing focused largely on Enron’s 1999 bid to get Merrill Lynch to invest $7 million in several barges in Nigeria that were used to generate electricity. The deal helped Enron complete a major sale so that the energy company could record a $12-million gain on the transaction and meet its earnings target for the year.

In exchange, senators say, Enron gave Merrill Lynch a guarantee that it would arrange the resale of the brokerage firm’s interest in the barges and pay the investment firm a 15% profit by June 30, 2000.

At issue was whether Merrill Lynch engaged in the complex deal knowing that Enron would claim the transaction as a sale to improve its earnings.

Merrill Lynch assumed no operational control over the barge company and did not pay any of the administrative costs associated with running the barges, according to subcommittee documents. The panel also produced an internal Merrill Lynch report that described the barge deal as “most unusual.”

“Merrill Lynch assisted Enron in cooking its books by pretending to purchase an existing Enron asset when it was really engaged in a loan,” Levin said, adding that Merrill did this partly to gain future banking business from Enron.

Merrill Lynch had previously agreed in June to pay New York state $100 million in penalties and reform its research practices after an investigation by state Atty. Gen. Eliot Spitzer. Justice Department officials are probing Merrill Lynch’s relationship with Enron and took the unusual step of sitting in on Tuesday’s hearings. They declined to comment.

In addition to the barge deal, panel members also asked Martin why a Merrill Lynch investment analyst was removed after issuing a cautionary investment rating on Enron. They also scrutinized Merrill’s decision to participate in an Enron loan syndication arranged by J.P. Morgan Chase & Co. bankers and questioned Merrill’s role in raising funds for LJM2, an off-the-books partnership headed by Andrew S. Fastow, then Enron’s chief financial officer.

Martin, who acknowledged that Merrill Lynch’s decision to participate in the barge deal was fueled by a desire to forge a closer relationship with Enron, said he assumed all deals were vetted by Merrill Lynch executives.

But he acknowledged that, in hindsight, some of the transactions seemed ill-advised.

“Had we known at the time what we know today,” Martin said, “we would not have conducted business with Enron.”