Profit-rigging alleged in sale to Allegheny

Merrill Lynch executives conspired with Gordon, prosecutors say

Energy trading unit unloaded

Ex-chief energy trader pleads guilty to role, will assist task force

December 20, 2003|By BLOOMBERG NEWS

NEW YORK - Merrill Lynch & Co. Inc. managing directors conspired with then-chief energy trader Daniel Gordon to inflate earnings at the firm's energy trading unit before its $490 million sale to Allegheny Energy Inc., federal prosecutors alleged yesterday.

The Justice Department alleged in papers filed in federal court in New York that the conspirators falsified records to make Merrill's Global Energy Markets unit more attractive. The federal prosecutors didn't identify the executives.

Hagerstown-based Allegheny sued Merrill last year, alleging that the world's biggest securities firm overstated the performance of Global Energy Markets and hid the unit's sham trades with Enron Corp. Gordon pleaded guilty to wire fraud, money laundering and conspiracy to falsify records as part of charges that he embezzled $43 million in 2000 from Merrill. Gordon, 27, agreed to cooperate with prosecutors and aid the Justice Department's Enron task force.

"The decision was made by my superiors to make the division look more profitable by altering certain of the data," Gordon told U.S. District Judge Gerard Lynch.

Michael Kulstad, a spokesman for interim U.S. Attorney David Kelley, said the investigation "is continuing."

Merrill spokesman Bill Halldin said the firm was "victimized by Mr. Gordon's deception" and that it has "put a number of procedures in place to prevent this type of fraud in the future."

"This is the first we have heard of Mr. Gordon's allegations regarding the sale of the energy business so we can't comment on it other than to say he has stolen from our firm in the past and lied to people about it," Halldin said.

The court papers said executives removed expenses that Merrill's finance department had allocated to the energy unit in 1999, then "arbitrarily" increased its 1999 revenue by millions of dollars and improperly recognized about $40 million in revenue for 2000.

"In order to make the GEM division more attractive to Allegheny, Gordon and co-conspirators not named as defendants herein agreed to falsify GEM's financial information," the prosecutors alleged.

The allegations bolstered Allegheny's case against Merrill, said Stanley Arkin, a lawyer representing Allegheny in its lawsuit. "This is an additional powerful piece of evidence that we were defrauded," he said.

Merrill sued Allegheny in September 2002, alleging that $115 million of the purchase price remained unpaid. Allegheny then sued Merrill, claiming the firm made fraudulent representations about the energy unit's revenue and Gordon's qualifications.

Last month, a federal judge said a majority of Allegheny's counterclaims against the investment bank could go forward. U.S. District Judge Harold Baer Jr. in Manhattan also refused to strike Allegheny's effort to seek punitive damages in the case.

Gordon's plea "makes it easier for Allegheny to pursue its case," said Barry Abramson, a utilities analyst at Gabelli Asset Management in Rye, N.Y., which owned 3.7 million Allegheny shares as of Sept. 30. "It paints a bad picture of the company and bad activities at the company before it was sold to Allegheny."

Gordon prepared an internal memo justifying the release of $40 million in reserves for 2000 and recognizing it as income, federal prosecutors alleged. The transaction at issue involved obligations that Merrill had assumed in a $500 million energy deal with Williams Energy Marketing Trading Co.

Gordon and co-conspirators "wanted to recognize income in order to artificially inflate GEM's financials in the eyes of prospective purchasers," the prosecutors alleged. Gordon and his co-conspirators knew the arguments they made in their memo "were bogus," they wrote.

Allegheny agreed to buy the energy unit, and at the closing Allegheny officials raised questions about inconsistencies in the division's financials. "Gordon and his co-conspirators offered false and misleading explanations for the discrepancies," prosecutors said.

Gordon, 27, faces as long as 55 years in prison and a fine of as much as twice the amount he stole, Assistant U.S. Attorney Jane Levine said yesterday.

In August 2000, Gordon incorporated two offshore companies without telling Merrill Lynch, and set up a phony energy trade with one of the companies, Falcon Energy Holdings SA.

Gordon, whose home is in Lyme, Conn., persuaded Merrill to wire $43 million to Falcon's Swiss bank account, supposedly in return for power Merrill could sell in California from July 1, 2003, through Dec. 31, 2012, Levine wrote.

Merrill was unaware of the alleged theft until October 2002, two years after it wired the $43 million to the Swiss account.

Separately, Gordon settled a Securities and Exchange Commission suit by agreeing to be barred from ever serving as an officer or director of a public company.

The SEC's suit filed in U.S. District Court in Houston accused Gordon of securities violations in three transactions, including aiding and abetting Enron in its accounting fraud and working with "others" to falsify earnings at Merrill's energy unit.

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