Magazine

Merrill Has to Face the Music


It's time for Merrill Lynch & Co.'s (MER) CEO David H. Komansky and President E. Stanley O'Neal to step forward and pledge to clean up the firm's conflicts of interest, which are so much in evidence in its dealings with Enron Corp. It is unseemly for the top leaders of one of the world's most prestigious financial institutions to stonewall on what congressional investigations are showing to be clear problems that urgently need solutions.

The conflict between the research and investment banking sides of Merrill were on display in Washington with revelations that its lead investment banker for Enron put pressure on the analyst covering Enron to improve his ratings of the company. In the end, that analyst left, another took his place, ratings of Enron went up, and so did Enron's investment banking business with Merrill. It didn't hurt that Schuyler Tilney, the Merrill investment banker, went on vacations with Enron's chief financial officer, Andrew S. Fastow, and counted him as a friend. Worse, Tilney's wife was a senior member of the Enron executive team at the time. Former CEO Kenneth Lay sent whistle-blower Sherron Watkins to Elizabeth Tilney when Watkins tried to get Lay to go public about conflicts of interest in off-balance-sheet partnerships that concealed Enron's losses.

Watkins did not know at the time that Tilney was married to the man responsible for setting up one of the biggest partnerships--LJM2. Tilney and 95 other Merrill executives invested $16 million of their own money in LJM2. Why? Because Fastow, Enron's CFO, was going to invest in it and run it. He could ensure a high return because he would be, in effect, negotiating with himself in his dual roles. Enron's own board of directors voted to exempt him from conflict-of-interest bylaws. Merrill saw this as a virtue and said in its prospectus: "A. Fastow's dual role creates advantages for the fund and Enron." Many institutional investors declined to buy into LJM2 because of Fastow's conflict of interest. Others, including Citigroup and J.P. Morgan Chase & Co., saw no problem. Shame on them, too.

Merrill has already apologized for conflicts of interest in its dot-com financing in response to an investigation by New York Attorney General Eliot Spitzer. It's time to come clean on all its operations. There's a real problem here.


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