Bogus sale alleged as first Enron criminal trial begins

Case centers on deal involving Nigerian barges


HOUSTON - The first criminal trial involving former Enron Corp. executives and an Enron financial transaction began in federal court here yesterday, with the prosecution arguing that the six defendants helped the one-time energy giant illegally increase its income through a bogus asset sale.

But in their opening statements, defense lawyers contended that their clients - four former executives with Merrill Lynch & Co. and two former Enron executives - were bit players who knew of no illegalities in the transaction, which entailed a sale to Merrill Lynch of an indirect stake in some electricity-generating barges in Nigeria.

The Nigerian barge deal in 1999 played no role in Enron's collapse, and indeed brought in only $12 million in profit. But it has become a microcosm for the Enron scandal, a single transaction in which the government contends that rules were flouted to allow the company to meet Wall Street's projections for its earnings.

In the end, Merrill Lynch put up $7 million for its stake in the barge deal, but only after receiving an oral commitment from Enron that Merrill would be able to sell its stake at a profit in six months.

The government contends that the commitment was a guarantee to Merrill Lynch against loss, which under the accounting rules would mean no sale took place.

"This was really no more than a loan to help Enron out of a jam at the end of 1999," John Hemann, an assistant U.S. attorney, told the jury yesterday in his opening statement, contending that Merrill Lynch could not lose money with its investment in the barges "whether they sank or blew up or were taken over by pirates."

The reality, Hemann said, was that the transaction involved "a sale that was not a sale at all."

The trial allows the government to test evidence it will ultimately use against more senior Enron officials, including former top executives Kenneth Lay and Jeffrey Skilling.

Lay and Skilling are charged with directing the fraud that forced Enron to file the second- largest bankruptcy in U.S. history and to fire more than 5,000 workers. Skilling, who pleaded not guilty, "pushed through" the barge transaction, according to his indictment. Lay, who also has denied wrongdoing, is accused of assuming control of the fraud after Skilling quit.

Yesterday, Hemann reviewed an array of documents and anticipated testimony which, he told the jury, demonstrated that Merrill Lynch thought Enron had committed itself to buying back the investment if no other buyer could be found.

Indeed, he said, Ben F. Glisan Jr., a former Enron treasurer who has pleaded guilty to fraud and is a government witness, tried to persuade a Merrill Lynch executive to give Enron more time before forcing a repurchase, but that effort was turned aside.

The defendants, who have pleaded innocent, are: Daniel Bayly, former chairman of investment banking for Merrill Lynch; Robert S. Furst, the former Enron relationship manager for Merrill Lynch, who answered to Bayly; James A. Brown, former head of Merrill Lynch's asset lease and finance group; William Fuhs, former Merrill Lynch vice president who answered to Brown; Dan Boyle, a former finance executive on Fastow's staff; and Sheila Kahanek, a former in-house Enron accountant who participated in deals involving sales of international assets.

Defense lawyers said that their clients believed Merrill Lynch's investment in the Nigerian barges was at risk. The commitment from Enron, they said, was merely that the company would make its best efforts to find a third party to buy the stake from Merrill Lynch by June 2000. The brokerage firm, they said, was providing nothing more than what is known as "bridge equity," which is a short-term investment held until a buyer with a long-term interest in the asset could be found.

"There was no secret; there was no handshake; there was no guarantee," said Ira Lee Sorkin, a lawyer for Furst. "Whatever the Enron people believed was different than what was known to Merrill."

The defense lawyers stressed that their clients had sought advice from lawyers and accountants to review the terms of the deal, and each time were assured that it was legal. They contended that rather than defrauding Enron investors it benefited them by allowing the company to transform part of a valuable asset into cash.

"Enron achieved its business goals and made a lot of money," from the Nigerian barges, said Thomas A. Hagemann, a lawyer for Bayly, arguing that the deal involved "real barges, real energy, real money."

Repeatedly, the lawyers returned to the theme that their clients believed that the investment was at risk, which would mean they were justified in considering the deal a true sale. Lawrence Zweifach, a lawyer for Brown, said his client "wholeheartedly believed Merrill's investment was at risk."

A similar argument was made by David Spears, a lawyer for Fuhs. "At all times," Spears said, "he believed there was real risk."

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