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Ex-Merrill exec refuses to testify about barge deal

By KRISTEN HAYS
The Associated Press

Thomas Davis, former Merrill Lynch executive

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HOUSTON — A former top Merrill Lynch executive invoked his Fifth Amendment right against self-incrimination and declined to testify yesterday in a trial concerning the brokerage's purchase of three barges from Enron at the end of 1999.

Thomas Davis, former executive vice president of Merrill's Corporate and Institutional Client Group, was summoned to testify as the defense began presenting witnesses in the fourth week of the fraud-and-conspiracy trial of four former Merrill executives and two former midlevel Enron executives.

The case centers on Merrill's $7 million purchase of Enron's interest in three power-generating barges moored off the coast of Nigeria in late December 1999. Enron booked a $12 million pretax profit critical to meeting earnings targets.

Prosecutors allege the deal was a sham because Enron orally promised to sell Merrill's interest to another buyer or to buy it back for $7.5 million in six months. LJM2, a partnership created and controlled by former Enron finance chief Andrew Fastow, bought the barges for that amount in June 2000.

The defendants contend Enron was never obligated to ensure a buyout.

Kathy Zrike, an in-house Merrill lawyer, testified yesterday that Davis approved the deal. Davis declined to testify as expected by lawyers representing defendant Daniel Bayly, Merrill's former head of investment banking who answered to Davis at the time.

Davis is named in a pending Securities and Exchange Commission (SEC) complaint alleging civil charges of aiding and abetting securities fraud by, in part, helping push through the barge deal. Also named in that complaint are Bayly, Merrill defendant Robert Furst and Furst's former boss, Schuyler Tilney.

Neither Davis nor Tilney has been charged with any crimes. Both were fired by Merrill two years ago after they refused to testify before the SEC.

Zrike testified that Davis told her, Bayly and other executives in a meeting three days before Christmas 1999 that he didn't like last-minute deals, but he approved the transaction as "a favor" to the energy company.
 
She said she discussed unwritten assurances that Enron would keep trying to sell Merrill's interest with Bayly, Furst and Merrill defendant James A. Brown before she and Bayly discussed it with Davis.

Zrike said they discussed whether the deal was "a sham" or "fraudulent," but Merrill's proposed status as a temporary purchaser whose interest would be bought by a third party was no reason to block the year-end deal.

Noting she couldn't find any reason from a legal perspective not to go forward, however, she referred to Enron's eventual sale of the interest to another party as "the real sale" while Merrill was its temporary owner.

Enron's efforts to sell the barges to other buyers by year-end — allowing the company to book the profit — had failed. Zrike said Furst and Tilney described Enron as a "platinum client" and supported the deal as a way to beef up the brokerage's relationship with the energy company, then a lucrative client courted by Wall Street.

She said that upon approving the deal, Davis instructed Bayly to talk to a "senior person" at Enron to ensure the energy company would continue seeking other buyers.

"Dan's response was, 'I will do that,' " Zrike said.

Prosecutors contend that the next day, Fastow told Bayly in a conference call that Enron would find a buyer for or buy back the barges in six months. Zrike said she didn't participate in that call.