Three former Merrill Lynch financial executives involved in a scheme to help Enron Corp. create sham profits in 1999 surrendered to the FBI in Houston on Wednesday. The Department of Justice (DOJ) alleges that the three violated criminal law, aided and abetted Enron’s violation of criminal law and knowingly caused others to make false statements to a grand jury, the U.S. Congress, the Securities and Exchange Commission (SEC) and the Enron bankruptcy examiner.

The three were involved in a Nigerian barge deal with Enron in 1999. Daniel Bayly, global head of Merrill Lynch’s investment banking division from 1999 until 2001, when he retired, is charged with conspiracy to commit wire fraud and falsifying books and records. Robert Furst, former managing director who was the Enron relationship manager in 1999 and 2000, before resigning in 2001, is charged with conspiracy. James A. Brown, a former investment banker involved in the barge transaction, was charged with conspiracy, obstruction of justice and perjury. Brown is accused of lying to the special grand jury that is investigating Enron.

According to prosecutors, then-Enron Treasurer Jeffrey McMahon approached Merrill Lynch about creating an off-balance sheet partnership to operate electricity generators anchored off the coast of Nigeria. Prosecutors alleged the transaction was set up to help Enron show a profit on its books in 1999.

To ensure the deal would occur, prosecutors allege former Enron CFO Andrew Fastow promised that Enron would repurchase the barges from Merrill Lynch at a profit within six months. Enron sold an interest in the barges to Merrill Lynch for $28 million, which enabled the bankrupt trader to book a $12 million profit for 1999. In the indictment, there is text of an e-mail by Merrill Lynch’s Brown, which indicates Fastow phoned defendant Bayly and lawyers and “promised to pay us back no matter what.”

Earlier this year, the SEC filed civil charges against four former Merrill Lynch executives, in part over the same Nigerian barge transaction. Civil charges also were filed against Merrill Lynch, but the firm settled for $80 million in February. That money was slated for a fund to benefit the victims of Enron’s fraud.

The DOJ said it would forgo prosecuting Merrill Lynch, but in return, the firm agreed to adopt companywide reforms and accept government monitoring for 18 months. According to the deal struck with prosecutors, Merrill Lynch must ban problematic transactions of the past, obtain unanimous agreement of a compliance committee for the types of transactions that Enron and Merrill Lynch conducted, report to outside auditors and allow a prosecutor-appointed monitor to ensure all requirements are met. If the firm violates any provisions of the agreement, the government could prosecute.

Enron Task Force prosecutor Andrew Weissman said he hopes the reforms will become the “gold standard” for financial institutions, adding that “this agreement turns the financial institution Merrill Lynch into a watchdog for its clients, not just a lap dog, or even worse, a conspirator.”

Task Force Director Leslie Caldwell, speaking from Washington, DC, compared Merrill Lynch’s case to that of Enron’s former auditor Arthur Andersen LLP, which was convicted last year of obstruction of justice. “Unlike Arthur Andersen before them, Merrill Lynch is to be commended for their responsible handling of this matter,” she said. “They have done just what a company should do under such circumstances.”

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