Merrill allows monitoring to avoid charges

HOUSTON — HOUSTON - Merrill Lynch & Co. Inc., in an agreement with prosecutors that let it avoid criminal charges over its role in the Enron debacle, promised yesterday not to engage in business deals - even legal ones - that help companies mislead investors about their financial condition. The Wall Street firm also agreed to allow the government to monitor portions of its business for the next 18 months.

The settlement involved deals late in 1999 that let Enron increase its reported profits when its business was falling short of Wall Street's expectations. Merrill acknowledged that the government had obtained evidence that some of its employees may have committed crimes in the transactions, and it accepted responsibility for those employees' actions.


Prosecutors - whose decision last year to prosecute Enron's accountants, Arthur Andersen, effectively drove that firm out of business - said that they hoped the Merrill settlement would be seen by other companies as a model for appropriate behavior in the financial world.

Legal experts said the deal could serve as a strong deterrent to abuses in Wall Street's marketing of the complex deals known as structured finance that critics say can obscure companies' true financial condition.


The Merrill settlement, under what is known as a deferred prosecution agreement, is a result of extensive negotiations that began last summer with a meeting between federal prosecutors and E. Stanley O'Neal, Merrill's chairman and chief executive.

Information provided by prosecutors helped convince O'Neal that Merrill's operations needed shaking up, people close to the firm said, and within days he began ousting a number of the firm's senior officers.

Like many of its Wall Street peers, Merrill has seen its reputation battered by scandals over the past two years, from the Enron affair to disclosures of abuses involving stock analysts and the distribution of shares in hot new companies. But prosecutors yesterday praised the firm.

"The whole idea is to be the gold standard that other financial institutions will follow," said Andrew Weissmann, a federal prosecutor on the case. Merrill's approach to the settlement, he added, "demonstrates that its current leadership is committed to being a responsible citizen and ensuring that the illegal activities that occurred will not be repeated."

The resolution in the corporate case came as three former senior Merrill executives were indicted on charges of conspiracy for their roles in one of the transactions, the purported sale by Enron Corp. to Merrill of an interest in power barges moored off the coast of Nigeria.

Each of those executives - Daniel H. Bayly, the former head of global investment banking; James A. Brown, the former head of Merrill's strategic asset lease and finance group; and Robert S. Furst, who was in charge of managing Merrill's relationship with Enron - pleaded innocent at an arraignment yesterday in U.S. District Court here. They were each released on a $100,000 bond, secured with $50,000 in cash.

At issue in the barge deal is whether Merrill genuinely purchased an interest in the assets, or whether the transaction was a sham designed to allow Enron to book bogus profits.

According to the indictment, Enron was trying desperately late in 1999 to sell a stake in the barges. When no deal emerged by December, Andrew S. Fastow, who at the time was the company's chief financial officer, and others approached Merrill about becoming the buyer.


But the indictment says that the sale to Merrill was nothing of the kind. While Merrill agreed to pay $28 million for the barges, 75 percent of that money was provided by Enron itself. And in a secret side-deal, the indictment says, Enron executives pledged that Merrill would receive back its investment plus an agreed-upon profit within six months.

The result, the indictment says, was that Merrill never had any risk in the deal, and so never actually purchased anything; Enron, meanwhile, booked $12 million in bogus profits.

Under the terms of its settlement, Merrill is required to establish a "special and structured products committee," which will be responsible for reviewing all of the firm's complicated structured finance transactions with any third party.