The Second Circuit Court of Appeals has reversed an earlier lower court decision that had favored Merrill Lynch & Co. Inc. in its dispute with Allegheny Energy Inc. over the 2001 sale of Merrill’s energy commodities trading unit to Allegheny, remanding the case back to the district court for reconsideration.
“We are very pleased with today’s [Friday’s] ruling, which reinstates our claims against Merrill Lynch for fraud and breach of warranty,” said Allegheny Chairman Paul J. Evanson. “We look forward to pursuing our case against Merrill Lynch in a new trial.”
The lower court judgment had ordered Allegheny to pay Merrill Lynch $115 million for the investment firm’s remaining 2% interest in the Global Energy Marketing (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 Daily GPI, July 20, 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.
Greensburg, PA-based Allegheny purchased the energy commodities trading unit from Merrill in January of 2001. In December 2001 came the Enron bankruptcy, which started a house of cards collapse in the merchant energy trading business.
Merrill Lynch had 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.
After Merrill Lynch filed its lawsuit, Allegheny filed its counterclaims, charging that Merrill may have artificially inflated the trading unit’s revenues, trading volumes and growth rates. In another legal action, 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 Daily GPI, Oct. 17, 2005).
Friday’s federal appeals court ruling by Judge Richard Cardamone:
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