Skeptical senators accused Merrill Lynch & Co. on Tuesday of abandoning its moral, if not legal, responsibility to investors by helping Enron hide its financial problems despite a host of ethical questions.
"Merrill Lynch was fully aware of what Enron was trying to do," said Sen. Carl Levin, D-Mich., chairman of the investigative subcommittee of the Senate Governmental Affairs Committee.
"In the end, the prospect of more lucrative business from Enron trumped those at Merrill who urged caution," said Sen. Susan Collins of Maine, the panel's top Republican.
The firm's two executives, Schuyler Tilney and Robert Furst, invoked their Fifth Amendment right not to testify, but Merrill Lynch testified in writing that its transactions with Enron were "appropriate and proper based on what we knew at the time."
Merrill Lynch repeatedly tried to distance itself from the failed energy giant, saying it "dealt with Enron at arms' length," and the transactions in question were approved without any knowledge of Enron's intent to use them to inflate its earnings.
At issue was whether Merrill Lynch did Enron the favor of buying an energy-producing barge service in Nigeria -- with Enron promising the service would be bought in six months -- knowing that the energy giant was going to claim the transaction as a sale to boost its earnings statements. Technically, senators said, the transaction was a loan, not a sale, and Merrill Lynch knew it.
"One of the breakdowns in the system is that great companies like Merrill Lynch didn't blow the whistle," said Sen. Joseph Lieberman, D-Conn. "You ended up aiding and abetting the improper, and perhaps illegal, behavior or the executives at Enron."
Manipulated earnings statements led to the energy company's collapse and caused millions of investors to lose money. Thousands of current and former Enron employees lost the bulk of their retirement accounts.
The Justice Department is probing the firm's relationship with the now-bankrupt Enron.
In the submitted testimony, Merrill Lynch said it "relied on Enron's accountants' opinions, its board approvals, its lawyers' opinions, its audit committee oversight, and other governance processes, and felt justified at the time in believing Enron's financial representations."
G. Kelly Martin, senior vice president of international private client division, read the company's statement and told the panel that since he was not involved in any of the transactions in question, he could only speak in general terms about the firm's investment practices.
He said he couldn't explain several internal documents submitted to the committee, including one handwritten note at the bottom of a Dec. 12, 1999 facsimile written by its recipient, Merrill Lynch's senior finance chief James Brown, which reads: "reputational risk i.e. aid/abet Enron income stmt manipulation."
Martin said he assumed the issue was discussed by Merrill Lynch executives as they considered the Enron deal.
He acknowledged that Merrill Lynch's decision to participate in the deal was propelled by a desire to cement its relationship with Enron. But the brokerage was only interested in it if Enron could promise it would be bought out in six months, internal memos showed.
Senators also pointed out that Merrill Lynch's analysts were pressured to make positive recommendations for Enron stock at a time when the brokerage was seeking lucrative investment banking business from Enron.
Martin said links between analysts and investment bankers were "not atypical."
Merrill Lynch agreed in May to pay a $100 million fine and to separate its analysts from its lucrative investment-banking business to avoid future conflicts of interest.