In a billion-dollar lawsuit against Merrill Lynch & Co. Inc., Allegheny Energy Inc. claims the investment company misled the Hagerstown-based electric utility into buying an energy-trading business that engaged in sham trades with Enron Corp.
The transactions with Enron in 1999 helped Merrill Lynch falsely inflate revenue and trading volume at the trading business, Global Energy Markets, which it sold to Allegheny for more than $490 million, according to the suit filed Wednesday.
Allegheny asked the New York State Supreme Court to rescind the contract, with ownership of the trading unit reverting to Merrill Lynch. It also asked for punitive and compensatory damages of more than $1 billion, not including attorney fees and other court costs.
Allegheny filed its suit a day after Merrill Lynch sued Allegheny in federal court in New York for failing to buy out Merrill Lynch's remaining 2 percent equity stake in the trading unit, which is worth about $115 million. Under a sales agreement, Merrill Lynch says, Allegheny was obligated to buy out those shares if the trading unit did not achieve a set level of generating capacity within 18 months of the sale.
"It's baseless and without merit," Mark Herr, a Merrill Lynch spokesman, said yesterday of Allegheny's lawsuit. "The allegations are unfounded and untrue. Allegheny filed this lawsuit because it refuses to live up to a promise it made to us to buy Merrill Lynch out of a stake the company has in the trading unit.
"This is a simple contract issue. To invoke Enron is to invoke the reddest of the red herrings."
When Allegheny purchased Global Energy, later renamed Allegheny Energy Global Markets, in March last year, the transaction was supposed to help the electric utility become one of the top 10 power marketers in the nation. Since then, the weak economy, Enron's collapse and falling wholesale power prices have hurt energy-trading businesses everywhere.
News of energy-trading improprieties have also hurt companies such as Allegheny.
In its lawsuit, Allegheny charged that Merrill Lynch "engaged in a series of 'wash' or 'round trip' energy trades with Enron and these trades ... artificially inflated revenues, trading volumes and growth rates." Merrill Lynch then misrepresented and concealed that information to "fob off its energy trading business to Allegheny Energy for far more than it was worth," the lawsuit said.
Merrill Lynch also misrepresented and concealed concerns about the qualifications of the president of the trading unit, Daniel Gordon, who "was identified as a key employee in the agreement," according to Allegheny's lawsuit.
Gordon was fired by Allegheny this month on grounds that he violated the company's conflict-of-interest policies. Allegheny said it discovered that Gordon had caused the energy company to enter into contracts with other entities controlled by him or in which he had an interest.
"The transaction between Merrill Lynch and Allegheny Energy was tainted by what took place between Merrill Lynch and Enron, a relationship that is now the reported focus of criminal and civil authorities," said Allegheny's counsel, Stanley S. Arkin. "We will get to the truth of how this relationship affected the business that Allegheny bought.
"Using its Enron trades, Merrill Lynch painted a false portrait of its energy-trading business and its ongoing prospects, and has saddled Allegheny Energy with tarnished goods. Merrill Lynch's own complaint is nothing more than an attempt to divert focus from the real issues," Arkin said.
Shares of Allegheny closed at $13.07, up 68 cents. Merrill Lynch rose 43 cents to $34.41.