Harvey Pitt, chairman of the Securities and Exchange Commission (SEC), told London’s BBC radio in an interview Thursday that he expects “this week and the following weeks” to see “more high-profile indictments of people who abused their public trust.”
His remarks followed news reports that federal investigators are looking at a series of natural gas and power trades between Enron Corp. and Merrill Lynch & Co. in 1999, which were later canceled, but not before boosting Enron’s profit by $60 million.
Speaking on the BBC “Today Programme,” Pitt said that a “number of high-profile officials will find themselves in the spotlight for potential criminal sanctions like jail time.” He refused to name individuals or companies, and would not give a firm timetable on when sanctions would be announced. “We’re not going to see 25 or 30 this week,” he said. “But eventually, everyone who is responsible for the misconduct, the cheating of investors that we’ve seen has to be held accountable. That’s the only way we will convince people that if you do hard crimes you do hard time.”
Enron is not, of course, the only high-profile company being investigated by the SEC, the Federal Bureau of Investigation (FBI) and others. However, as the first company to fall into bankruptcy, which subsequently revealed fraudulent business practices, Enron’s former executives and their legal teams may be anticipating indictments. The only executive so far who has been charged is ex-Enron executive Michael J. Kopper, who was charged in August for violating the anti-fraud provisions of the federal securities laws (see Daily GPI, Aug. 22). Kopper, who was one of former CFO Andrew Fastow’s subordinates, has been cooperating with the investigation.
Pitt’s remarks came a day after the New York Times reported that federal investigators are looking into a transaction between Enron and Merrill Lynch in December 1999, which boosted Enron’s year-end profit $60 million. By booking a $60 million profit, recorded in its first quarter earnings, Enron was able to meet Wall Street analysts’ earnings projections to the penny: 31 cents a share on Jan. 18, 2000. Meeting the projections also led to hefty bonuses for Enron executives. Enron’s stock jumped about 27% in five days following its earnings announcement, and meanwhile, Merrill Lynch was paid $8 million for the transaction.
In recent months, the SEC, FBI and several Congressional committees have been reviewing Enron’s earnings statements and balance sheets over a period of time in the late 1990s through 2001. Also, this past summer, a Senate panel held hearings specifically about Merrill Lynch’s dealings with Enron.
Merrill Lynch stated that its Enron transactions have been completely appropriate. Although it said that company policy prevented it from commenting about the latest allegations, an SEC filing in August reported that the company had received requests for information about its Enron transactions from the Department of Justice and other federal agencies. However, the filing noted that the Justice Department had said the investment firm was not the subject of a formal investigation.
According to the Times, after Enron and Merrill Lynch completed the energy transactions, they later agreed to cancel them after Enron had booked the profit. The transaction was cancelled in early 2000, according to the newspaper. However, Merrill Lynch executives apparently were concerned enough about the deal to request ex-Enron COO Richard A. Causey send a formal letter that Enron did not rely on Merrill Lynch for its accounting advice. After Merrill Lynch received Causey’s letter, the transaction was closed on Dec. 30, 1999.
The latest allegations against Merrill Lynch are not the first. Federal investigators apparently want more information on why it replaced well-known analyst John E. Olson, who had been covering Enron for Merrill Lynch. After he voice public criticism of the energy merchant in 1998, Olson was replaced, leading investigators to wonder whether there actually was a “Chinese wall” between Enron and analysts covering the company. Once Olson was replaced in his Enron coverage, Merrill Lynch received more of Enron’s business. Olson, who has more than 30 years of experience covering all segments of the oil, natural gas and power markets, was named chief investment officer of Sanders Morris Harris in Houston earlier this month. Olson also will head the firm’s Investment Policy Committee, and he continues to cover select energy companies.
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