HOUSTON – Unwritten assurances from Enron Corp. (search) to keep trying to sell Merrill Lynch & Co.'s (MER) $7 million interest in three power-generating barges wasn't a "legal impediment" to making that investment, an in-house lawyer for the brokerage testified Monday.
The lawyer, Kathy Zrike, was among the first witnesses for the defense, which opened Monday in the fourth week of the fraud and conspiracy trial of for former Merrill executives and two former midlevel Enron executives.
Zrike testified that several Merrill executives, including defendants Daniel Bayly (search), Robert Furst (search) and James A. Brown (search), discussed the proposed deal in a meeting in Bayly's conference room three days before Christmas 1999.
She said they knew Enron had promised to keep trying to find a buyer for Merrill's interest after the energy company booked a $12 million pretax profit in the fourth quarter of 1999.
Zrike said the group also discussed whether the deal was "a sham" or "fraudulent," but Merrill's proposed status as a temporary purchaser whose interest would be bought by a third party was no reason to block the harried year-end deal.
Zrike didn't say what prosecutors contend: the sale was a sham because Enron assured the energy company would buy back the barge interest if another buyer failed to turn up and Merrill wouldn't lose any money because the brokerage would get $7.5 million back within six months. In June 2000 LJM2, a partnership created and controlled by former Enron finance chief Andrew Fastow (search) — who the government says assured Bayly of a buyout or buyback — bought the barges for that amount.
The defendants contend Enron was never obligated to buy back or find a buyer for Merrill's barge interest.
Zrike also said Furst and Schulyer Tilney, another former Merrill executive who hasn't been charged with any crimes, described Enron as a "platinum client," and supported the deal as a way to beef up the brokerage's relationship with the energy company, then a lucrative client courted by Wall Street.
Before Zrike testified, Bayly's lawyer, Richard Schaeffer, told U.S. District Judge Ewing Werlein that Thomas Davis — Bayly's former boss who was executive vice president of Merrill's Corporate and Institutional Client Group at the time of the barge deal — would invoke his Fifth Amendment right against self-incrimination if summoned to testify.
Davis and Tilney — a former Enron relationship manager for Merrill who has been described in earlier testimony as a personal friend of Fastow — were fired in September 2002 when they refused to testify before the Securities and Exchange Commission (search).
They, along with Bayly, Merrill's former head of investment banking, and Furst, also a former Enron relationship manager, are named in a pending SEC complaint alleging civil charges of aiding and abetting securities fraud by, in part, helping push through the barge deal. Davis is accused of approving the deal.
In addition to Bayly, Furst and Brown, the defendants in the barge trial are former Merrill executive William Fuhs (search), former Enron finance executive Dan Boyle (search) and former in-house Enron accountant Sheila Kahanek (search).