U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21523 / May 11, 2010
Accounting and Auditing Enforcement Release No. 3133 / May 11, 2010
Securities and Exchange Commission v. Robert S. Furst, et al., Civil Action No. H-03-0946 (S.D. Tex.)
SEC SETTLES WITH FORMER MERRILL LYNCH EXECUTIVE FOR AIDING AND ABETTING ENRON FRAUD
The Securities and Exchange Commission (Commission) announced today that, on May 10, 2010, the U.S. District Court in Houston entered a final judgment in the Commission’s civil action against Robert S. Furst (Furst), former senior investment banker at Merrill Lynch & Co., Inc. (Merrill Lynch) in charge of the Enron Corp. banking relationship.
On March 17, 2003, the Commission charged Furst and three other former executives of Merrill Lynch with aiding and abetting Enron Corp.’s earnings manipulation. That action remains stayed against two of Furst’s co-defendants. On January 6, 2010, the Commission announced that it settled all of its charges against Furst’s other co-defendant, Daniel H. Bayly, former global head of investment banking at Merrill Lynch. On March 17, 2003, the Commission also sued and simultaneously settled all of its Enron aiding-and-abetting charges against Merrill Lynch, which was enjoined from violating the federal securities laws and paid $80 million in financial sanctions for distribution to injured investors through the Commission’s Enron Fair Fund.
Without admitting or denying the allegations in the Commission’s complaint, Furst has now been permanently enjoined from violating the antifraud provisions, as well as from aiding and abetting violations of the periodic reporting, books-and-records, and internal controls provisions; barred from serving as an officer or director of a public company for five years; and ordered to pay $300,001 in disgorgement and civil money penalties for deposit into the Commission’s Enron Fair Fund.
As alleged in the Commission’s complaint, Furst substantially assisted Enron in two sham transactions during late 1999. The first transaction was an asset-parking arrangement, whereby on December 29, 1999, Enron entered into a sham “sale” of its interest in certain Nigerian barges so as to fraudulently record over $12 million in income. The “sale” was a sham since the risk and rewards of ownership in the barges never passed to Merrill Lynch because Enron’s then Chief Financial Officer, Andrew Fastow, guaranteed Merrill Lynch that it would not lose money and that it would be taken out of the deal within six months. The complaint alleged that Furst was aware of the nature of the barge transaction and was responsible internally at Merrill Lynch to have the transaction completed. Furst also helped enable this sham “sale” of Enron’s interest in the Nigerian barges so as to maintain favorable relations with Enron.
In the second transaction, also closed on December 29, 1999, Enron agreed to pay Merrill Lynch a $17 million fee to enter into a virtually offsetting energy trade. The complaint alleged that Furst knew, among other things, that the transaction was essentially risk free to Merrill Lynch and had the purpose and effect of inflating Enron’s reported income by approximately $50 million in 1999, and that such earnings were necessary for Enron to meet earnings and award bonuses to senior management. Furst also knew that Enron was contemplating unwinding the energy trade transaction after obtaining its earnings benefit. After the transaction was completed and Enron reported its inflated earnings, Enron and Merrill Lynch unwound the transaction on June 30, 2000, and Enron received $8.5 million, half of its original fee. By participating in the barge and energy trade transactions — which resulted in Enron’s recognition of over $60 million in income for the fourth quarter of 1999 — Furst aided and abetted Enron’s violations of the federal securities laws.
For more information, see Litigation Release No. 18038 (March 17, 2003).