Allegheny Energy, Inc. said last week it has signed an agreement with Merrill Lynch & Co. Inc., bringing to a close the long-running legal battles the two have fought since Allegheny’s purchase of Merrill’s Global Energy Market (GEM) energy commodities trading unit in 2001.

Under the settlement agreement, Merrill will convey its minority equity interest in Allegheny Energy Supply Co. LLC to Allegheny, Allegheny will make a cash payment of $50 million to Merrill — less than half the amount ordered by a court in 2005 — and all litigation and claims associated with the case will be dismissed, the company said.

The announcement came nearly five months after the Second Circuit Court of Appeals reversed an earlier lower court decision that had favored Merrill, remanding the case back to the district court for reconsideration (see NGI, Sept. 10, 2007).

The lower court judgment had ordered Allegheny to pay Merrill $115 million for the investment firm’s remaining 2% interest in the GEM operation and dismissed Allegheny’s charges of fraud in Merrill’s sale of the trading unit to Allegheny for $490 million, plus the 2% equity stake (see NGI, July 25, 2005). Allegheny claimed Merrill had made false and misleading representations about the property prior to the sale. Allegheny also said GEM may have been involved with sham trading with Enron Corp.

When Allegheny aquired GEM from Merrill in early 2001, it expected that the deal would help make it a top tier national energy marketing and trading merchant. Allegheny had been on an 18-month generator-spending spree, including deals with Enron North America (see NGI, Nov. 20, 2000), UGI Development (see NGI, Sept. 18, 2000) and UtiliCorp United’s West Virginia Power Division (see NGI, Sept. 13, 1999). But by the end of 2001 the Enron bankruptcy had started a house of cards collapse in the merchant energy trading business.

Merrill initially filed a lawsuit in 2003 against Allegheny, charging that it did not follow through on part of the purchase transaction. Allegheny had promised to buy out Merrill’s 2% stake in the trading unit for $115 million if the business failed to acquire a set level of generating capacity within 18 months. The trading unit did not achieve that level, and Merrill wanted to liquidate its interest. Allegheny refused and filed counterclaims, charging that Merrill may have artificially inflated the trading unit’s revenues, trading volumes and growth rates.

In 2005 Daniel Gordon, who formerly headed GEM for Merrill and then for Allegheny, was sentenced to three and a half years in prison for embezzling $43 million from the investment banker. Gordon had pleaded guilty to wire fraud, money laundering and conspiracy for falsifying books and records (see NGI, Oct. 17, 2005).

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