Global Policy Forum

By Richard A. Oppel, Jr.

Using internal documents, e-mail messages and even a videotape as evidence, lawmakers on a Senate panel argued today that Merrill Lynch, one of the nation's largest and most respected brokerage firms, repeatedly cut corners and compromised its business practices to win more investment-banking fees from Enron.

In one deal, in which Merrill acquired an interest in a Nigerian barge operation that allowed Enron to book a last-minute $12 million profit for 1999, a senior Merrill executive worried that the firm might "aid/abet" the manipulation of Enron's income statement, documents obtained by the Senate Permanent Subcommittee on Investigations show. Merrill said the executive's concerns were resolved. Committee investigators also said that a Merrill analyst, John Olson, was ousted from the firm in 1998 because Merrill was upset that his skeptical coverage of Enron was costing the firm millions of dollars in investment-banking revenue. A Merrill official testified today that it was common for companies to take research coverage into account in awarding investment-banking business, but he said Mr. Olson's departure was "not in any way connected" to his Enron research.

"Merrill Lynch helped Enron artificially and deceptively create revenue," Senator Carl Levin, the Michigan Democrat who is chairman of the panel, said today. "Enron couldn't have engaged in the deceptions it did without help from a major financial institution," he said. "Merrill Lynch assisted Enron in cooking its books."

Defending Merrill at the four-hour hearing today, G. Kelly Martin, the president of Merrill's international private client division, testified that the firm "strongly believes that our limited dealings with Enron were appropriate and proper based on what we knew at the time."

"At no time did we engage in transactions that we thought were improper," he added.

Two investment bankers who had played a role at Merrill in the deals that were scrutinized today, Schuyler Tilney and Robert Furst, both appeared today but declined to testify, invoking their Fifth Amendment right against self-incrimination and citing a pending Justice Department inquiry into one Merrill transaction with Enron. Mr. Tilney has been placed on paid leave by Merrill, where he is head of the firm's energy investment-banking practice; Mr. Furst left Merrill last year.

This afternoon, Merrill's two top executives, David H. Komansky, its chairman and chief executive, and Stanley O'Neal, its president, issued a statement that sought to reassure employees about Merrill's conduct while also mildly criticizing the Senate panel. "The tenor of the subcommittee hearing reflected a disturbing skepticism and mistrust — not only of Merrill Lynch and our motives — but also of financial institutions and the business community generally," their statement said.

"As Merrill Lynch employees, all of us play an important role in restoring the confidence and trust of our clients, government officials and the public," they continued. "The misdeeds of some companies or individuals must not be allowed to cast a shadow on the fundamental integrity of our global capital markets system."

But lawmakers on the panel highlighted several episodes that they said showed Merrill's willingness to abandon judgment and impartiality to curry favor with Enron, including Mr. Olson's ouster and the Nigerian barge deal.

Lawmakers also questioned Merrill's role in raising close to $400 million for LJM2, one of the secretive partnerships controlled by Enron's former chief financial officer, Andrew S. Fastow, which played a central role in Enron's collapse. Mr. Martin responded that Enron's former chief executive, Jeffrey K. Skilling, had assured Merrill that the Fastow dealings were appropriate.

Mr. Olson left Merrill in August 1998 after an earlier complaint by two Merrill bankers that his coverage of Enron risked costing Merrill investment banking business. The analyst who replaced Mr. Olson soon awarded Enron a higher rating, and on Jan. 15, 1999, Mr. Tilney sent an e-mail message to Merrill's president at the time, Herbert Allison, stating that Enron's "animosity" over Merrill's research had "dissipated," and "to that end" the company had awarded the firm business that should bring in at least $45 million in fees.

Merrill officials say Mr. Olson left because of a consolidation in the research department, not because of his Enron coverage, although Mr. Levin said today, "That's not our understanding." Senator Richard Durbin, Democrat of Illinois, said the episode showed that Merrill "scrambled hat in hand to win back the love and affection of Enron."

Mr. Levin also cited call sheets from April 1998 showing that Mr. Olson had called institutional investors to discuss buying a portion of an Enron stock offering. "What is he doing peddling stock if there's a Chinese wall?" Mr. Levin asked. "There's not even a wall."

Mr. Olson, in an interview, said that Mr. Levin's "peddling" remarks were a "legitimate interpretation, unfortunately" of what he did, saying analysts are often involved in helping to market underwritings. But "with my particular history with Enron, there wasn't anybody out there imagining I was going to warmly endorse this."

Citing terms of his severance agreement with Merrill, Mr. Olson also declined to discuss whether Enron's complaints led to his ouster. But he said Merrill's explanation of a consolidation was "entirely news to me."

"That was never part of any discussion," he added.

Lawmakers on the Senate panel think that the barge deal was in fact a scheme to allow Enron to increase its 1999 earnings because Enron always intended to buy back Merrill's investment at a profit — or arrange for someone else to do so — thus invalidating the accounting that Enron used to book a gain.

Testimony today showed that Jim Brown, a senior Merrill executive, wrote on one document pertaining to the deal that he was concerned about "reputational risk i.e. aid/abet Enron income stmt manipulation."

Merrill officials said that the note about the income statement reflected the sort of concerns they would hope executives "in a review capacity" would occasionally raise and that Mr. Brown ultimately became "comfortable" with the deal. They also pointed out that the notes indicated that Mr. Brown was also concerned about the deal because there was no repurchase obligation from Enron — which Merrill officials said supported their contention that Enron never guaranteed to have Merrill bought out.

But that assertion was undercut by another document the committee produced that stated that Dan Bayly, Merrill's investment banking chief, was to "have a conference call with senior management of Enron confirming this commitment to guaranty the ML takeout within six months."

A Merrill official said that the firm believed that Enron would help find another buyer to acquire the interest in the barges but that the language in the document was a "mischaracterization of our expectations."

Lawmakers also said that Merrill, with all the nonpublic knowledge about Enron that the various deals brought them, should have been able to warn investors about Enron's looming problems.

"None of us connected the dots," Mr. Martin told the panel. "Clearly, in hindsight, it would have been great to put the whole puzzle together and blow the whistle."

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