This one’s for you, Wall Street. And for Main Street, too. It’s a chance for federal prosecutors targeting Enron Corp. to show that investment bankers allegedly in cahoots with a crooked company can be held accountable. And it’s a chance to prove that criminal cases stemming from Enron can be made simple enough for a jury of everyday people.
Nearly three years after the Houston energy company collapsed in a massive accounting scandal, jury selection began Monday in the first criminal trial to involve former Enron executives. These are small fish compared to one-time Enron honchos Kenneth Lay and Jeffrey Skilling, who are awaiting a separate trial. The transaction at issue is relatively small too. But it was classic Enron, and the case represents a big test in the legal effort to reform corporate America.
Five years ago, Merrill Lynch cut a deal that made Enron’s earnings look healthier than they really were, prosecutors allege.
The deal involved three barges holding electrical power generators that were moored off the coast of Nigeria. Enron was trying with little success to penetrate the African nation’s power monopoly. At the same time, Enron’s many other far-flung deals weren’t working well, either.
The company was in danger of missing its 1999 earnings forecast. So it turned to Merrill, which supposedly agreed to buy the floating power plants for $28 million. Enron booked $12 million in profits on the sale as the year ended, just in time to make its numbers.
But that was no sale. According to prosecutors and Enron bankruptcy filings, Merrill bought those barges only with the secret understanding that Enron would buy them back after a few months. Merrill would receive fees of $775,000.
In the real world, that’s a short-term loan. Under basic accounting rules, Enron should have booked an increase in debt, not earnings. Of course, hiding debt and booking phony profits was routine at the Houston high-flier.
The defendants, four from Merrill and two from Enron, have pleaded not guilty to fraud and related charges. Merrill settled a civil regulatory matter concerning Enron without admitting or denying guilt. It paid just $80 million, less than banks such as Citigroup and J.P. Morgan that participated in many more deals.
Despite its relative simplicity, the barge case could prove tough for the feds. It’s always a challenge to win convictions against bankers, lawyers, accountants and others responsible for fraud with their corporate clients. Apart from the obstruction of justice case against Andersen two years ago, this might be the only Enron criminal trial spotlighting those folks. For the many escaping scot-free after doing the dirty work on behalf of Enron, this one’s for you too.
