Merrill Lynch swapped analyst critical of Enron

Replacement soon raised stock rating, files show


WASHINGTON - In the summer of 1998, when it was eager to win more investment banking business from Enron, Merrill Lynch replaced a research analyst who had angered Enron executives by rating the company's stock "neutral" with an analyst who soon upgraded the rating, according to congressional investigators.

The move by Merrill Lynch came after two top Merrill executives wrote a memo that April to the firm's president, Herbert Allison, saying Merrill had lost a lucrative stock underwriting deal because Enron executives had a "visceral" dislike of the research analyst, John Olson, and what he told investors about Enron stock, according to documents obtained by investigators for a Senate panel looking into the relationship between Enron and its banks. Merrill vigorously disputes that there was any link in its rating on Enron and its desire to win more business from Enron.

In the memo, Rick Gordon, head of Merrill's energy practice, and Schuyler Tilney, another top investment banker, noted that "our research relationship with Enron has been strained for a long period of time." Olson, they said, "has not been a real supporter of the company, even though it is the largest, most successful company in the industry." They also said that Enron viewed his research as "flawed" and that Olson - who left for another firm in August 1998 - "often makes snide and potentially embarrassing remarks about the company in meetings with analysts while in the presence" of Enron's top two executives, Jeffrey K. Skilling and Kenneth L. Lay. They also pointed out that all of the investment banks that had won a portion of the underwriting deal from Enron had "buy" ratings on Enron stock.

A few months later, after the new analyst took over, Tilney wrote Allison to say that Enron's anger with Merrill's research had "dissipated" and that "to that end," Merrill had since won Enron business that would generate at least $45 million in fees, the documents said.

The exchanges between Merrill executives, captured in internal Merrill documents and e-mail messages that have been subpoenaed by the Senate permanent subcommittee on investigations, highlight the debate over one of the most contentious issues on Wall Street: To what degree do banks adjust their ratings on publicly traded companies to try to win investment-banking business.

To investigators with the Senate panel, which is holding a hearing today examining Merrill Lynch's relationship with Enron, the episode suggests that Merrill executives hoped to raise the rating on Enron stock to obtain more business from the company.

Donato J. Eassey, the analyst who upgraded Enron shares in late 1998, to "accumulate," angrily dismissed the suggestion that he did so to help Merrill win business, adding that his decision was based on careful research.

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