Former Merrill Lynch Execs Sentenced

views updated

Former Merrill Lynch Execs Sentenced

Newspaper article

By: Kristen Hays

Date: April 22, 2005

Source: Hays, Kristen. "Former Merrill Lynch Execs Sentenced." Washington Post, April 22, 2005, 〈〉 (accessed February 10, 2006).

About the Author: Kristen Hays is a writer with the Associated Press. The Associated Press, founded in New York in 1848 to facilitate the collection of international news for publication by a consortium of several New York newspapers, is today a global news gathering and reporting organization.


As the United States entered the twenty-first century, the American public witnessed first hand the boom and bust cycle of what was now called "the new economy." Traditional industrial and commercial giants, such as General Motors, were giving way to a different, more responsive, and internationally focused type of enterprise. No company better reflected this nimble, entrepreneurial face of American business than did Enron.

Based in Houston, Texas, Enron had grown from its traditional and prosperous roots in the southwestern U.S. energy sector to become a worldwide commodities trading giant, notably with respect to energy futures. Through the late 1990s, Enron boomed in what seemed to be a limitless growth curve. By January 2001, Enron stock value exceeded $82 per share. Enron employees were collectively the largest owners of available company stock, and, for most Enron personnel, their Enron shares represented the essence of their individual retirement savings plans. In support of the dramatic surge in Enron stock value, the company had published a series of corporate valuations, which by early 2001 proclaimed Enron to be worth over $70 billion.

Enron, the glamorous, seemingly solid gold Colossus of American business, was in fact constructed from paper. A trail of falsified earnings reports, bogus filings made with the Securities Exchange Commission (SEC), and sham transactions—often made with the complicity of Enron's Big Five accounting firm, Arthur Anderson, or through powerful bankers Merrill Lynch—had created a false Enron. Enron declared bankruptcy in December 2001, the largest such filing in American history. This triggered a series of criminal investigations, SEC reviews, and class action civil suits directed at the Enron executives who had personally profited by many millions of dollars from these transactions.

The purported sale of Nigerian power barges to Merrill Lynch in 1999, for which James Brown and Daniel Bayly were prosecuted, was a classic Enron scheme. Brown and Bayly did not orchestrate the phony sale, which created a book value profit of $50 million for Enron. Their sin was willful blindness, as both men knew how the Enron executives would characterize the barge transaction on the Enron books. Brown and Bayly agreed to treat what they knew was a Merrill Lynch loan to Enron as a sale and corresponding fraud. These sophisticated bankers also knew that Enron would ultimately use these false barge profits to assist in boosting the publicly stated value of Enron. In a real sense, Brown and Bayly were stooges to Enron's scheming; by permitting a sham deal to proceed, they signed off and made a powerful client happy.

Prior to the sentencing of Brown and Bayly in May, 2005, Merrill Lynch paid the SEC $80 million in civil penalties arising from the Nigerian barge transactions.


[Text Not Available]

[Text Not Available]


No prosecution, however far reaching, could ever rebuild Enron. The jailing of every Enron executive who was complicit in any one of the hundreds of multi-million-dollar manipulations so blithely executed by the company prior to its spectacular collapse in late 2001 would not adequately compensate the thousands of Enron employees whose life savings were significantly diminished or lost forever.

High profile corporate prosecutions are conducted for a number of broadly stated public goals. The sentencing of those involved, especially those on the secondary corporate tier, such as Merrill Lynch bankers James Brown and Daniel Bayly, engages the application of a number of powerful, and often contradictory legal principles.

"Let the punishment fit the crime," proclaimed Gilbert and Sullivan's Mikado in 1885. For many citizens, this credo is at the heart of how the criminal sentencing process should be conducted. While Merrill Lynch itself did not profit from the willful complicity of its executives, Brown and Bayly became its public face for the role played by a powerful bank in a massive public stock fraud.

Another relevant legal principle maintains that one cannot do indirectly what one cannot do directly. Brown and Bayly, through their positions at Merrill Lynch, were clearly secondary prosecutorial targets; a key Enron player, Andrew Fastow, the financial guru who directed most of the manipulations of Enron data that were at the very heart of the frauds, could not receive a sentence greater than ten years in prison. Where a reasonably informed member of the public might take serious exception to that limitation, given the scope of the criminal conduct of Enron executives, Judge Werlein's ruling regarding the concept of a legal"benchmark" reflects a modest triumph of judicial fair play over the understandable desire on the part of the prosecution to make an example of anyone involved in this landmark case.

Both of the Merrill Lynch defendants was demonstrably humiliated and disgraced through the criminal process. Both lost their employment and are unlikely to return to employment in the financial sector. Both paid $840,000 in personal financial penalties and were held up to exposure and shame for their wrongdoing by the world media. Are these extra-legal consequences more important than the imposition of the traditional prison sentences of the criminal courts?

This issue has been examined, albeit obliquely, in a number of well publicized American trials involving the actions of private citizens who manipulated corporate organizations for spectacular personal gain. In 2005, the founder of media giant Adelphia Communications, eighty-year-old John Rigas, received a sentence of fifteen years in prison for a lengthy series of fraudulent transactions that effectively looted the communications giant. The prospect of Rigas dying in prison did not trouble his sentencing judge.

Traditional Anglo-American legal theory concerning sentencing is rooted in the proposition that every offender must be assessed on their own merits. It is plain that the Merrill Lynch cases and the larger Enron web are an indication from the American courts that the creation of a public example through denunciatory sentences is the primary sentencing objective.



Sterling, Theodore F. The Enron Scandal. New York: Nova Science Publishing, 2002.


Schorr, Daniel. "The Real Enron Scandal." Christian Science Monitor (January 18, 2002).

Web sites

Time. "Behind the Enron Scandal." 〈〉 (accessed March 8, 2006).