Securities and Exchange Commission
Litigation Release No. 18515 / December 19, 2003
SEC Charges Daniel L. Gordon With
Aiding and Abetting Enron Accounting Fraud and
Falsifying Books and Records of Merrill Lynch
Securities and Exchange Commission v. Daniel L. Gordon, Case No. H-03-5772 (S.D. Tx.)
The Securities and Exchange Commission today charged Daniel L. Gordon, former head of Merrill Lynch's Global Energy Markets Group, with securities violations in connection with his role in three separate illegal transactions. The Commission's complaint, filed in U.S. District Court in Houston, alleges that Gordon aided and abetted Enron Corp.'s financial fraud by engaging in a risk-free energy trade that was designed to overstate Enron's reported 1999 income. The Commission's complaint also alleges that Gordon falsified the books and records and circumvented the internal controls of Merrill Lynch in connection with two other transactions. In one transaction, Gordon, through an offshore entity he controlled, created and sold a bogus electricity call option to Merrill Lynch and pocketed the $43 million option premium. In the other transaction, Gordon and others allegedly falsified the earnings figures for his Merrill Lynch energy business in an effort to secure a high sales price for the business. Gordon's business was later sold to Allegheny Energy, Inc. based, allegedly, on the false earnings figures.
Simultaneous with the filing of this action, the Commission has agreed to accept Gordon's offer to settle this matter. Gordon has agreed, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining him from future violations of Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) and of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder. Gordon has also consented to be barred from serving as an officer or director of a public company under Section 21(d)(2) of the Exchange Act.
The Commission's complaint alleges that, in late December 1999, Gordon and others at Merrill Lynch entered into an energy transaction with Enron that they knew had the purpose and effect of inflating Enron's income by approximately $50 million. The transaction involved two off-setting electricity call options - one physical and one financial. As alleged, Gordon knew and explained to others at Merrill Lynch that the two options were "back to back" and "delta-neutral," or, essentially, a wash. Nevertheless, Gordon and others demanded a multi-million dollar fee for entering into the transaction because Enron was determined to complete the transaction by year-end 1999. Enron ultimately agreed to pay Merrill Lynch a $17 million fee to close the transaction. In 2000, Enron approached Gordon and others seeking to unwind the transaction before trading under the off-setting energy options was scheduled to begin. As alleged in the complaint, Gordon learned that Enron had contemplated unwinding the transaction before the transaction had even closed. The deal was unwound in June 2000 after Merrill Lynch agreed to reduce its fee to $8.5 million to terminate the transaction. The complaint alleges that Gordon aided and abetted Enron's violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws in connection with this transaction. This transaction forms the basis, in part, for the Commission's action against Merrill Lynch and two of its executives filed on March 17, 2003. [See Litigation Release 18038]
In addition to aiding and abetting Enron fraud, the Commission alleges that Gordon also engaged in violative conduct in two other transactions. First, the Commission alleges in its complaint that, in 2000, Gordon became aware that Merrill Lynch sought certain insurance to hedge obligations Merrill Lynch had assumed under a long-term energy contract. As further alleged, Gordon identified a company that was purportedly willing and able to provide that insurance. In fact, as alleged, the company was an offshore entity that Gordon controlled and had created for purposes of providing the insurance. Gordon purported to negotiate with that entity to obtain the necessary insurance, in exchange for a payment by Merrill Lynch of $43 million. Merrill Lynch agreed and paid the $43 million fee, which, as alleged, Gordon transferred to accounts under his control and for his benefit. In connection with this conduct, the complaint alleges that Gordon knowingly falsified or caused to be falsified Merrill Lynch's books and records and knowingly circumvented Merrill Lynch's internal controls.
In the final transaction, the Commission alleges that Gordon and others falsified the earnings figures for Merrill Lynch's Global Energy Markets (GEM) business for purposes of making the business more attractive to prospective purchasers. As alleged, Gordon and others inflated GEM's earnings by creating a false justification for releasing approximately $40 million in reserves and recognizing it as income in 2000. The complaint also alleges that Gordon was aware that others at Merrill Lynch had also improved GEM's financials by removing expenses and arbitrarily increasing the business' 1999 revenue. Gordon and others provided the falsified financial information for GEM to Allegheny Energy, Inc., which ultimately purchased the business. In connection with this conduct, the complaint alleges that Gordon knowingly falsified or caused to be falsified Merrill Lynch's books and records and knowingly circumvented Merrill Lynch's internal controls.
As noted above, Gordon has agreed to file a consent and final judgment settling the Commission's action against him. In the consent, Gordon, without admitting or denying the allegations in the complaint, has agreed to the entry of a permanent antifraud injunction prohibiting him from future violations of certain provisions of the federal securities laws. Under the settlement, Gordon also will be barred permanently from serving as an officer or director of any public company. In addition, Gordon has agreed to cooperate in the Commission's ongoing investigation.
Also today, the U.S. Attorney's Office for the Southern District of New York filed criminal charges against Gordon for his role in the sale of the bogus electricity call option and the falsification of books and records relating to GEM. Gordon has agreed to plead guilty to these charges, pursuant to which he will forfeit the proceeds of his unlawful conduct.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the U.S. Department of Justice Enron Task Force in this matter. The Commission also notes the continuing coordination among the Division of Enforcement, the Enron Task Force and the Federal Bureau of Investigation in the Enron investigation.
The Commission's investigation is continuing.
For additional information, see:
- SEC v. Michael J. Kopper - Litigation Release 17692 (Aug. 21, 2002)
- SEC v. Andrew S. Fastow - Litigation Release 17762 (Oct. 2, 2002)
- SEC v. Kevin A. Howard and Michael W. Krautz - Litigation Release 18030 (March 12, 2003)
- SEC v. Merrill Lynch & Co. Inc., Daniel H. Bayly, Thomas W. Davis, Robert S. Furst and Schuyler M. Tilney - Litigation Release 18038 (March 17, 2003)
- SEC v. Kevin A. Howard, Michael W. Krautz, Kenneth D. Rice, Joseph Hirko, Kevin P. Hannon, Rex T. Shelby and F. Scott Yeager - Litigation Release 18122 (May 1, 2003) (Amended Complaint)
- SEC v. J.P. Morgan Chase - Litigation Release 18252 (July 28, 2003)
- In the Matter of Citigroup, Inc. - Exchange Act Release 48230 (July 28, 2003)
- SEC v. Ben F. Glisan, Jr. - Litigation Release 18335 (Sept. 10, 2003)
- SEC v. Wesley H. Colwell - Litigation Release 18403 (Oct. 9, 2003)
- SEC v. David W. Delainey - Litigation Release 18435 (Oct. 30, 2003)
SEC Complaint in this matter