Allegheny loses fraud suit, owes Merrill Lynch $115 million

Case arose over 2001 sale of energy unit to utility

July 19, 2005|By BLOOMBERG NEWS

NEW YORK - Merrill Lynch & Co. Inc. didn't defraud Allegheny Energy Inc. four years ago when the financial services giant sold its energy-trading unit to the utility, and Merrill is owed $115 million from the transaction, a federal judge ruled yesterday.

U.S. District Judge Harold Baer Jr. said in a written opinion that Merrill, the world's No. 2 securities firm by market value, didn't inflate revenue at its Global Energy Markets before selling the unit to Allegheny in 2001.

"Allegheny collects nothing on its claims," Baer said. "The only injury Allegheny has proven with reliable certainty" is "the loss of face."

Allegheny's civil suit had sought to recover $490 million it paid, plus interest. Merrill won the first round in the case in April, when Baer ruled that Allegheny owed the bank the $115 million, plus interest, and said Merrill would only get the money if Allegheny lost its case at trial or is awarded no damages.

The trial ended in June. Baer, who heard the case without a jury, issued his written opinion yesterday.

"The evidence shows that Merrill Lynch opened its books and records and accorded Allegheny four months of due diligence," Baer said in the 14-page ruling. The judge said Allegheny should have "pursued its due diligence with a little more pizazz."

Merrill sued Allegheny in 2002 over $115 million the bank claimed it was still owed. Allegheny countersued, alleging that Merrill had misrepresented the unit's revenue.

Allegheny, then based in Hagerstown, Md., said Merrill wanted to dump Global Energy because it was run by a manager who lied about its finances.

The manager, Daniel L. Gordon, helped build Merrill's energy business and later headed the unit after Allegheny bought it. Gordon pleaded guilty in 2003 to fraud, money laundering and conspiracy to falsify records as part of charges that he embezzled $43 million in 2000 from Merrill and is to be sentenced next month.

He cooperated with a federal investigation of Merrill Lynch, which ended without any additional charges, and with the Justice Department's task force looking into Enron Corp.

At the time he was charged, Merrill said the firm had been "victimized by Mr. Gordon's deception" and that it had put procedures in place to prevent such fraud in the future. The company also said Gordon had "stolen from our firm in the past and lied to people about it."

Allegheny spokesman Fred Solomon didn't have an immediate comment on Baer's ruling yesterday.

Merrill said in a statement yesterday that, "As we have said from the outset, this [Allegheny] lawsuit never should have been brought. We are pleased with the court's decision that Allegheny has to honor its contractual obligations."

Allegheny, which sells power in five states including Maryland, paid $490 million in cash for Merrill's Global Energy Markets unit in 2001 and gave Merrill a 2 percent stake in its power-generating business. In his ruling yesterday, Baer ordered Merrill to return its interest to Allegheny, which now is based in Greensburg, Pa.

Merrill shares fell 94 cents to close at $56.67, while Allegheny's fell 52 cents to $25.88.

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