U.S. District Judge Harold Baer, Jr. in Manhattan has agreed with Allegheny Energy that its counterclaims against Merrill Lynch should be heard by the court, particularly the charges regarding whether Allegheny was misled when it purchased Global Energy Markets (GEM) from Merrill in 2001 for $490 million and a 2% equity interest in the trading unit.
Allegheny said the trading business may have been involved in wash and sham trading with Enron Corp., and its revenues, trading volumes and growth rates may have been artificially inflated in order to capture a higher purchase price. “These Merrill Lynch/Enron trades were misrepresented and/or concealed from Allegheny Energy and allowed Merrill Lynch to fob off its energy trading business…for far more than it was worth,” the Hagerstown, MD-based utility company told the court.
The company also charged that Merrill Lynch misrepresented and/or concealed certain concerns about executive Daniel Gordon’s qualifications. Gordon was head of the trading unit but was fired in July 2002 by Allegheny after the discovery of his involvement in certain transactions that violated the company’s conflict of interest policies. Gordon has since been accused by Canadian authorities of using a false trade to steal $43 million from Merrill Lynch and then laundering the money.
While Baer didn’t rule on the merits of Allegheny’s charges, he said the charges were serious enough to warrant a closer look, particularly those regarding what influence the knowledge of sham trades with Enron might have had on Allegheny’s decision to buy the company. However, Baer did accept Merrill Lynch’s motion to dismiss Allegheny’s claim that the entire 2001 deal should be rescinded.
Merrill Lynch had initially filed a lawsuit against Allegheny charging that it did not follow through on part of the purchase transaction. Allegheny had promised to buy out Merrill Lynch’s 2% interest 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 Lynch wanted to liquidate its interest. Allegheny refused.
After Merrill Lynch filed its lawsuit, Allegheny filed its counterclaims, charging that Merrill Lynch made false and misleading representations about the trading operation “with the intent of inducing Allegheny to purchase GEM for more than $490 million, thus providing Merrill Lynch with significant profits.” Merrill Lynch believes there is no basis for the claims.
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