November 4, 2004
Jury Convicts 5 Involved in Enron Deal With Merrill
The first criminal trial stemming from the financial dealings at the Enron Corporation ended yesterday when a federal jury in Houston found that five defendants, including four former executives of Merrill Lynch, had conspired to help Enron report bogus profits.
But the jury split in its finding on the two former Enron executives charged in the case, convicting one former midlevel financier while acquitting a former accountant.
The verdict was an important lift to the government's efforts to prosecute wrongdoing at Enron in the years before its collapse into bankruptcy protection in December 2001. Indeed, the case - centered on a single transaction involving what the government argued was a bogus sale of an interest in barges by Enron to Merrill - involved similar theories and charges brought in virtually every Enron indictment to date.
Some of the convicted defendants were once Wall Street luminaries, including Daniel Bayly, the former head of global investment banking at Merrill, and James A. Brown, the former head of the firm's project and lease finance group. The other former Merrill executives convicted yesterday include Robert S. Furst, a banker in the Houston office responsible for managing the Enron relationship, and William Fuhs, a banker who did some work on the barge deal.
Dan Boyle, a former executive in Enron's finance division who is a virtual unknown to the public, was also convicted. Sheila Kahanek, the accountant who was acquitted, had worked on the barge deal, with prosecutors contending she had ordered another executive to destroy evidence about the transaction.
Despite the small size of the transaction, which brought in $12 million in profit to Enron, legal experts said that the verdict had broad significance in the wake of years of corporate scandals.
"What this does is, for other cases that are out there, is make defendants see that juries are not very sympathetic with white-collar criminals," said John J. Fahy, a former federal prosecutor in New Jersey. "It's a good message to businesses that they have to stay on the up and up."
The verdict came after 21 hours of deliberations and a six-week trial. But the case is not over. Today, the six-man, six-woman jury along with the convicted defendants, their lawyers and the prosecutors must return to hear evidence about the amount of the financial damage caused by the fraud.
Case law governing the sentencing is in dispute, and prosecutors may need such a finding from the jury for a sentence to be upheld.
The barge transaction took place in late December 1999, when Enron was struggling to meet Wall Street's profit projections. When no buyer emerged, Merrill agreed to invest $7 million in an entity that made the purchase, in exchange for what the government said was a secret oral commitment from Enron to repurchase the barges in six months. Such a deal would guarantee Merrill against loss, meaning that Enron still retained the risk of ownership and could not report the money from the deal as revenue.
Despite the potential complexity of the facts, prosecutors from the Enron Task Force presented a tight, almost streamlined recitation of the evidence, focusing on the terms of the purported commitment and Merrill's subsequent sale of the barge interest to an investment fund controlled by Enron's former chief financial officer, Andrew S. Fastow. Mr. Fastow has already pleaded guilty to several crimes relating to his tenure at Enron.
The lawyers for the defendants, some of whom had never worked together before, appeared at times to struggle with the unwieldiness of their situation. Six defendants often meant six cross-examinations of each witness, with advances achieved by one defense lawyer sometimes surrendered in further questioning by another.
Indeed, some of the strongest arguments about the impropriety of a commitment by Enron to buy back the barge investment from Merrill came from the defense. Ms. Kahanek, the sole defendant to be acquitted, testified that she had warned Enron executives many times that the company could not properly provide Merrill with a guaranteed profit or a commitment to repurchase the barges.
While the jury accepted that there was not enough evidence to conclude that Ms. Kahanek was involved in the illegalities, her statements as well as those of other defendants seemed to underscore that a crime may have taken place, and the jury's job was solely to conclude who had committed it.
In other instances, defense lawyers argued that their clients believed that the transaction involved real risk to Merrill, which would allow Enron to treat the deal as a sale. They pointed out that they consulted lawyers on the deal, although prosecutors argued that terms of the side deal were kept hidden.
The documentary evidence was particularly damaging, with multiple e-mail messages and other records introduced by the government showing that Merrill thought it would be taken out of the transaction by June 30, 2000, at a preset profit.
While the defendants argued that they never thought Enron would repurchase the barges, some of the former Merrill executives prepared a demand letter seeking payment. That document was one of the more damaging pieces of evidence introduced at the trial.
Beyond the documents, some of the most damaging evidence came from a former mid-level Merrill analyst named Tina Trinkle, who testified that she had participated in a conference call with several of the defendants, and heard that Enron had said it would buy back the barge investment if no other purchaser could be found.
Ms. Trinkle identified Mr. Bayly, Mr. Furst and Mr. Brown as participating in the call, and quoted one of the men as saying that the repurchase agreement could not be put into writing because then Enron would be able to obtain the accounting treatment it wanted.
The testimony, which prosecutors argued in their closing had not been refuted, suggested that at least some defendants knew that the treatment of the deal would be invalidated by Arthur Andersen, Enron's accountants, if the firm learned of any oral side agreement to protect Merrill's investment.