A jury convicted a former Enron Corp. executive and four ex-Merrill Lynch & Co. officials yesterday in the first criminal prosecution arising from the accounting fraud that led to the energy trader's collapse.
The six-week trial in Houston federal court stemmed from Enron's 1999 sale to Merrill of a $7 million stake in three energy-generating barges. Prosecutors said that the deal was a disguised loan because Enron promised to pay Merrill back and that the energy trader committed fraud when it booked the loan as a $12 million profit so it could meet earnings estimates.
The trial was "a milestone in bringing both an Enron executive and Merrill Lynch executives who aided and abetted the fraud at Enron to justice," Assistant U.S. Attorney General Christopher A. Wray said in a statement.
The verdicts in the case, the first chance prosecutors had to try out evidence and strategies that may be used in later Enron prosecutions, are a vote of confidence for the government's presentation of what it described as a microcosm of the larger Enron frauds. The jury deliberated for four days.
On March 1, jury selection begins in the Enron Broadband conspiracy trial, which will be followed by the fraud prosecutions of ex-Enron chief executives Jeffrey K. Skilling and Kenneth L. Lay.
Prosecutors said Merrill executives helped Enron "cook its books" when in December 1999 the investment bank paid $7 million for a stake in the three energy-generating barges moored off the Nigerian coast. Enron secretly promised to buy back Merrill's investment, with interest, six months after the sale, prosecutors claimed, making the deal a loan under accounting rules and Enron's subsequent booking of a profit fraudulent.
Enron used the profit to meet earnings estimates, while Merrill agreed to the deal to curry favor with Enron and gain investment-banking business, prosecutors said.
Convicted of one count of conspiracy and two counts of wire fraud were former Merrill investment banking chief Daniel Bayly, 57; former Enron finance executive Daniel O. Boyle, 48; former Merrill strategic financial group chief James A. Brown, 52; former Merrill managing director Robert S. Furst, 43; and former Merrill vice president William R. Fuhs, 36.
Brown was also convicted of two counts of making false statements, and Boyle was convicted of one count of making a false statement.
Former Enron accounting executive Sheila K. Kahanek, 38, was acquitted of all charges.
The conspiracy and wire fraud counts each carry a maximum sentence of five years in prison. The false statement counts each carry a potential 10-year prison sentence.
U.S. District Judge Ewing Werlein Jr. scheduled a hearing for this morning at which four witnesses, one for the prosecution and three for the defendants, will testify before the jury about the size of the financial loss caused by the fraud.
Under federal sentencing guidelines, which are in question pending a U.S. Supreme Court review, the amount of losses helps determine the severity of the sentences in financial fraud cases. The defendants are scheduled to be sentenced separately in March, beginning March 4 with Bayly.
"The jury got to see who I was when I took the stand," Kahanek said after being acquitted. "They got to see in my eyes and in my heart and see everything I have gone through."
Furst's lawyer Ira Lee Sorkin and Bayly's lawyer Richard J. Schaeffer said they plan to appeal based on what Sorkin described as "hearsay issues, e-mail issues and a chilling effect of naming so many people as unindicted co-conspirators and preventing them from talking to us."
Brown's lawyer Lawrence J. Zweifach, Boyle's lawyer William G. Rosch III and Fuhs's lawyer David Spears declined to comment.