HOUSTON – Three former Merrill Lynch (search) executives were charged with conspiracy Wednesday for allegedly helping Enron Corp. (search) inflate earnings with a loan disguised as a sale of Nigerian barges.
Daniel Bayly, Robert Furst and James Brown became the first Wall Street bankers to be hit with criminal charges in the scandal that brought down the energy company.
The criminal charges do not involve Merrill Lynch & Co. Inc. (MER), which reached a side agreement that would allow the brokerage to avoid any corporate culpability if it implements "a series of sweeping reforms" to improve the integrity of its transactions with clients and third parties.
The three men were charged with conspiracy to commit fraud and falsifying books and records. Brown also was charged with obstruction and lying to a grand jury investigating the scandal.
All three pleaded innocent during a court appearance Wednesday afternoon and each was freed on $100,000 bond each and ordered to surrender his passport. A tentative Nov. 10 trial date was set.
Prosecutors allege that in 1999, Enron, with Merrill's knowledge, booked a short-term $7 million investment from the brokerage as a $12 million profit from the sale of Nigerian barges. The profit was used to make Enron appear to have met earnings targets.
Then-Enron treasurer Jeff McMahon approached Merrill with the sham deal, prosecutors said.
The barge transaction is among the many schemes former Enron finance chief Andrew Fastow (search), named in the indictment Wednesday as a co-conspirator, is alleged to have masterminded. Fastow is awaiting trial in April on charges of fraud, money laundering and insider trading.
Bayly, former global head and chairman of investment banking, retired from Merrill last year. Furst, former managing director in investment banking, quit in 2001. Brown, former senior finance chief, retired earlier this year.
In Washington, meanwhile, the Justice Department announced Merrill Lynch accepted responsibility for its employees' conduct and plans to implement reforms. An independent auditor and outside monitor will oversee Merrill Lynch's compliance with these changes, officials said.
"The American public is entitled to a full accounting of the circumstances behind Enron's collapse, and the department is committed to prosecuting those who lie or mislead in order to obstruct our investigation," said Assistant Attorney General Christopher Wray, head of the Justice Department's criminal division.
Wray said the government has entered into similar agreements in the past with companies seeking for avoid criminal charges.
Wray told reporters that Merrill Lynch can avoid any corporate culpability if it lives up to the agreement over the next 18 months. Wray said the deal could be a model for future prosecutions of corporate wrongdoing.
"There's a right way and a wrong way to respond when the government comes knocking at your door. Merrill Lynch responded the right way," Wray said. "I do think that what happened here to Merrill should be instructive to other companies who find themselves in a criminal investigation."
Merrill Lynch spokesman Mark Herr said the New York-based company had no comment on the indictments, but said the new internal policies "will help ensure that these kinds of transactions do not occur in the future."
"We have cooperated fully with this investigation and will continue to do so," Herr said.
Merrill Lynch in March settled a civil complaint with the Securities and Exchange Commission partially over the same Nigerian barge deal and agreed to pay $80 million into a fund to benefit Enron fraud victims.
The three defendants indicted Wednesday face a maximum sentence of five years in prison on the conspiracy charge. Brown also faces maximum sentences of five years on the perjury count and 10 years for obstruction.
"We're going to defend these charges in court," Ira Lee Sorkin, Furst's attorney, said. "There is nothing Rob Furst did in any way that was not abetted and approved by senior officials at Merrill Lynch."
Bayly's lawyers, Richard Schaeffer and Andrew Lawler, released a statement saying the evidence would back his innocent plea. "He has been wrongly and unfairly indicted for crimes he did not commit," they said.
Brown's lawyer, Lawrence Zweifach, declined comment.