(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Charges Brokerage Firm with Aiding, Abetting Enron Accounting Fraud

The SEC charged Merrill Lynch & Co. Inc. and four of its former senior executives with aiding and abetting Enron Corp.'s securities fraud. The Commission's complaint, filed in U.S. District Court for the Southern District of Texas, alleged that Merrill Lynch and its former executives aided and abetted Enron Corp.'s earnings manipulation by engaging in two fraudulent year-end transactions in 1999. Specifically, the SEC charged that Enron used these transactions to add approximately $60 million to its fourth quarter of 1999 income, improving net income by 33 percent.

Simultaneously with the filing of this action, the SEC agreed to accept Merrill Lynch's offer to settle this matter. Merrill Lynch, without admitting or denying the allegations in the complaint, agreed to pay $80 million dollars in disgorgement, penalties and interest and has agreed to the entry of a permanent antifraud injunction prohibiting future violations of the federal securities laws. The Commission stated that it intends to have these funds paid into a court account pursuant to the "fair fund" provisions of Section 308(a) of the Sarbanes-Oxley Act for ultimate distribution to victims of the fraud. The four former Merrill Lynch executives are contesting the matter.

SEC Chairman William H. Donaldson said, " this action is a message to all who would help a reporting company commit fraud, that we will bring the full weight of our enforcement arsenal against you, as our commitment to protect investors demands nothing less." Added Enforcement Director Stephen M. Cutler," even if you don't have direct responsibility for a company's financial statements, you cannot turn a blind eye when you have reason to know that what you are doing will help make those statements false and misleading, and at the end of 1999, Merrill Lynch and the executives we are suing today did exactly that. "

As alleged in the Commission's complaint, the first transaction was an asset-parking arrangement described by the SEC as "at best, a bridge loan" because the risks and rewards of ownership of the interest in the assets, Nigerian barges, did not pass to Merrill Lynch. As further alleged in the complaint, Merrill Lynch and the named executives knew that Enron would record $28 million in revenue and $12 million in pre-tax income in connection with this transaction. The SEC claimed that Merrill Lynch and the named executives entered into this transaction solely to accommodate Enron, despite express concerns that Merrill Lynch could appear to be aiding and abetting Enron's earnings manipulation.

In the second transaction, according to the SEC, Merrill Lynch and Enron entered into two energy options, one physical and one financial. The complaint charged that Merrill Lynch knew the transaction had the purpose and effect of inflating Enron's income by approximately $50 million, while Merrill Lynch believed that the two trades were essentially a wash.

In agreeing to accept the firm's settlement offer, the Commission considered certain affirmative conduct by Merrill Lynch. The firm terminated two of the individuals after they refused to testify before the staff. In addition, Merrill Lynch brought the energy trade transaction to the staff's attention at a time when it believed the staff was unaware of its existence. The Commission also acknowledged the assistance provided by the staff of the Federal Energy Regulatory Commission and the continuing coordination among the Division of Enforcement, the Justice Department Enron Task Force and the Federal Bureau of Investigation in the Enron investigation.