Daniel Gordon, former chief energy trader for Merrill Lynch & Co., is being investigated on suspicion of embezzling $43 million from the world's largest securities firm in 2000 by disguising the theft as an energy trade, according to a letter written by a U.S. Justice Department prosecutor and interviews with Canadian law enforcement officials.
Merrill Lynch, based in New York, hasn't disclosed the loss in public filings. Gordon sent the money in 2000 to a Caribbean-incorporated shell company he controlled, according to the Justice Department letter. Merrill, the largest securities firm by capital, said in a civil court filing July 14 that it recognized the possibility of "the alleged fraud."
The embezzlement would be the largest employee theft from a financial institution in modern times, said John Coffee, Adolf A. Berle professor of law at Columbia Law School in New York, where he directs the Center on Corporate Governance. Frank Partnoy, a securities law professor at the University of San Diego School of Law, said the case suggests Merrill's oversight and control of its executives was inadequate.
"We're alleging Dan Gordon defrauded Merrill Lynch of $43 million" and laundered the money with the help of a Canadian offshore-banking consultant, said Gregg Lepp, a Canadian prosecutor in Edmonton, Alberta, in a telephone interview. Gordon, also under investigation by federal prosecutors in New York, hasn't been formally charged with any wrongdoing.
"The usual credit-check and due-diligence procedures in place at Merrill Lynch were not followed with respect to" Gordon's transactions, Assistant U.S. Attorney Jane Levine in New York wrote in a letter to Canadian law enforcement officials, citing interviews with witnesses in Merrill's credit department and written internal communications.
Partnoy, the San Diego law professor and author of Infectious Greed, said the episode should concern the company's investors. "This is highly material information about how Merrill Lynch is run and how their controls and credit checks are able to detect theft or fraud," he said. "It's evidence of a potentially wider control problem. In my opinion, because of the nature of the transactions, the $43 million loss should have been disclosed."
Gordon, now chairman of Daticon Inc., a legal-document storage company in Norwich, Conn., didn't return three phone messages to Daticon and his mobile phone requesting an interview.
Gordon's attorney, Alan Levine, managing partner of Kronish Lieb Weiner & Hellman LLP in New York, declined to comment. Levine also didn't respond to two faxes detailing the allegations against Gordon.
Merrill Lynch was unaware of the alleged theft until October, two years after Gordon allegedly took the money, Merrill spokesman Bill Halldin said yesterday. He said that in all the time Gordon was at Merrill, the firm was unaware of any wrongdoing by Gordon. "We're cooperating fully with the appropriate law enforcement officials on this matter," he said.
Gordon's energy-trading unit was under the supervision of Kelly Martin, senior vice president and head of global debt markets at Merrill, Halldin said. Martin resigned in December and is chief executive of Elan Corp., Ireland's largest drug maker.
Martin reported to Thomas Davis, then head of Merrill's investment banking and capital markets business, Halldin said. Davis was fired in September for refusing to testify to the Securities and Exchange Commission and U.S. Justice Department about Merrill's transactions with Enron Corp. in 1999, Halldin said.
Asked what Merrill Chairman and Chief Executive Officer Stanley O'Neal has done to tighten internal controls, Halldin said, "We're continually improving our internal controls and compliance procedures."
The breakdown in internal controls is the third incident reported in the past year in which Merrill apparently has failed to adequately supervise its employees.
Merrill agreed to pay $80 million in March to settle SEC charges that it helped Enron Corp. commit accounting fraud. In April, Merrill agreed to pay $200 million to settle accusations by state and federal regulators that the firm allowed conflicts of interest by its research analysts.
Merrill sold its energy-trading unit to Allegheny Energy Inc., a Hagerstown-based utility, in January 2001, and Gordon became Allegheny's chief energy trader.
The utility fired Gordon in September for violating company conflict-of-interest rules, spokeswoman Cynthia Shoop said. She declined to say what the conflicts were.