Merrill Lynch & Co. served as a "friend of Enron" when the energy company needed someone to buy interest in some power-producing barges in late 1999 so it could claim a profit critical to meeting earnings targets, a former Enron executive testified Tuesday.
The executive, Fred Lawrence, described Enron's fervent efforts to make a deal involving the barges, moored off the coast of Nigeria. The floating electricity plants were an unattractive investment because they were to supply the Nigerian government, which was unstable and "notorious for not paying their bills," Lawrence said. The deal Enron eventually made with Merrill Lynch is the focus of the trial, in which four former Merrill executives and two former midlevel Enron executives are accused of conspiracy and fraud.
Lawrence said other companies solicited by Enron for the December 1999 deal _ Tokyo-based Marubeni and United Kingdom-based Commonwealth Development Corp. _ wanted a guaranteed 25 percent return if they put up $7-million. That was because Enron's haste to get the deal done by year's end didn't leave them time for due diligence, he said.
Such a guarantee would make the transaction technically a loan, and thus bar Enron from booking a $12-million pretax profit. So Sheila Kahanek, a former inhouse Enron accountant and one of the defendants, rejected the arrangement, Lawrence said.
Lawrence said another Enron development executive working on the barge deal, Sean Long, then told him not to worry _ that a deal could be worked out by year's end "with a friend of Enron."
Lawrence said Merrill was that friend and did the deal, but his group's work wasn't done. In January 2000, he was among executives seeking a buyer for Merrill's interest "because there was a commitment to take out Merrill Lynch's interest within six months of the date the deal closed."
That alleged buyout promise is the crux of the charges against the six defendants. The government contends they conspired to push through a loan as a sale so Enron could book earnings. Merrill, in return, might get more of the energy company's investment banking business.
The defendants, who have pleaded innocent, contend that there was no understanding that Enron would find a buyer for Merrill's interest or buy back that interest, and higher-ups in both companies signed off on the deal.
The defendants, in addition to Kahanek, are: Daniel Bayly, former chairman of investment banking for Merrill Lynch; Robert Furst, former Enron relationship manager for Merrill Lynch; James Brown, former head of Merrill Lynch's asset lease and finance group; William Fuhs, former Merrill Lynch vice president who answered to Brown; and Dan Boyle, a former Enron finance executive on former Enron finance chief Andrew Fastow's staff.