Sightings from The Catbird Seat

~ o ~

February 21, 2003

Merrill Lynch ready to pay
$80 million in Enron case

Dow Jones Newswires

NEW YORK – Without admitting or denying wrongdoing, Merrill Lynch & Co. has reached an agreement in principle with the Securities and Exchange Commission to resolve the agency’s investigation into two transactions it made with Enron Corp. in 1999.

The brokerage firm said yesterday that it would pay $80 million in payouts, penalties and interest under the settlement.

Merrill Lynch would record the cost in its 2002 fourth-quarter financial results and would consent to an injunction barring the company from violations of federal securities laws. The SEC still must approve the agreement.

Merrill Lynch said the settlement would conclude the SEC’s investigation into the company’s Enron-related matters…

One item that has received scrutiny from congressional investigators was the 1999 sale of a Nigerian barge operation by Enron to Merrill Lynch. Lawmakers suggested that the deal may have been designed to wrongly inflate Enron’s profits.

In a congressional hearing in July, it was disclosed that Merrill agreed to the questionable deal even after a senior Merrill banker warned top executives that the sale appeared to be an improper ploy to boost profits.

In September, Merrill Lynch fired Thomas W. Davis, on of two vice chairmen, for his refusal to testify in an investigation by the Justice Department and the SEC. The firm also fired investment banker Schuyler Tilney, who headed its Houston energy group and worked closely with Enron.

Davis and Tilney were among nearly 100 Merrill executives who invested a total of more than $16 million of their own money in a partnership Merrill sold for Enron, The Wall Street Journal reported in September.

At the time, Merrill Lynch said it didn’t find any wrongdoing by any of its employees in their dealings with Enron….


August 13, 2002

Orange County bans
business with Merrill

By Thor Valdmanis, USA TODAY

NEW YORK — Still smarting in the aftermath of the biggest municipal bankruptcy reorganization in the nation’s history, Orange County voted on Tuesday to effectively ban doing business with Merrill Lynch.

The affluent California county’s Board of Supervisors, citing memories of Merrill’s role in its 1994 collapse, voted unanimously to prevent Merrill from handling any of its $4 billion in investment funds or advising on other transactions without a public hearing and board approval.

Legal scholars said it was the first time in memory a jurisdiction the size of Orange County singled out a leading public company for such harsh treatment.

“Merrill Lynch has got to clean up its act,” says supervisor Todd Spitzer, who pushed for the unprecedented measure. “It continues to carry out all sorts of shenanigans, whether it be related to Enron or Martha Stewart. I don’t want them doing business here.”

While stressing the move would have no financial impact, senior Merrill executives concede that it comes at an awkward time as the nation’s largest brokerage firm struggles to maintain investor confidence despite a series of damaging scandals.

Both federal and state investigators have launched probes into Merrill’s role in a series of questionable energy deals with Enron. They are also examining Merrill’s actions in the ImClone inside-trading scandal involving Stewart.

In May, the Wall Street firm agreed to pay $100 million to settle charges that its research analysts hyped Internet stocks, triggering dozens of class-action lawsuits from investors.

The public relations mess has helped cut Merrill’s market value by a third this year, while the rest of the industry, also tainted by scandal, is off 25%.

“Orange County’s decision certainly suggests that the wounds run deep,” says Columbia University corporate law professor John Coffee.

Merrill had hoped to mend fences four years after paying $400 million to settle allegations over investments that led to the Orange County bankruptcy filing. Risky investments by former county treasurer Robert Citron produced $1.7 billion in losses, prompting the county’s bankruptcy filing.

Orange County still carries $930 million in debt that costs an estimated $93 million a year in principle and interest payments. “We’ll be carrying the scars left by Merrill for another 30 years,” Spitzer says.

But Harvard Business School finance professor Samuel Hayes says the county runs the risk of further impairing its balance sheet by lashing out at Merrill.

“That kind of pique can be expensive if it denies Orange County the best counsel on its investments,” Hayes says. “(Merrill) may have been tarnished by the events of the last few months. But Merrill remains a reputable firm with a lot of market savvy.”

Orange County Treasurer John Moorlach, in a memorandum to the board, said he favored letting Merrill Lynch bid for county investments because it would help save money on some purchases.

“The Orange County board’s decision relates directly to the bankruptcy,” Merrill spokesman Bill Halldin says. “We are interested in doing business with the county sometime in the future.”

For more, GO TO > > > The Bankruptcy Buzzards of Orange County


August 8, 2002

Ex-officials call Enron’s
Merrill deal phony

The New York Times

HOUSTON – Desperate to meet a year-end profit target, Enron Corp. struck a sham energy deal with Merrill Lynch that let Enron book a $60 million profit in December 1999, according to former Enron executives involved in the transaction.

The executives said that the energy deal, a complex set of gas and power trades, was intended to inflate Enron’s profits and drive up its stock price. Enron and Merrill Lynch, they said, agreed that the deal would be canceled after Enron booked the profits; it later was.

By allowing the company to meet its internal profit targets, the power deal unleashed the payment of millions of dollars in bonuses and restricted stock to high-ranking executives, including Kenneth L. Lay, then the chief executive, and Jeffrey K. Skilling, then Enron’s president, former executives said.

“This was absolutely a sham transaction, and it was an 11th hour deal,” said one former Enron executive who was briefed on the deal. “We did this deal to get 1999 earnings.”…

Merrill Lynch officials said there was nothing improper about the power deal and no prearrangement to cancel it…


April 9, 2002

Merrill Lynch Told
to Reform Practices

Company is accused of deceiving clients for its own benefit

Associated Press

NEW YORK – Merrill Lynch & Co., Inc., one of the nation’s largest investment firms, was ordered yesterday to reform its business practices after being accused of giving advice that hurt clients but enriched the company.

New York Attorney General Eliot Spitzer said he got a court order after a 10-month investigation showed that Merrill Lynch’s employees lied to clients and recommended stocks that they knew were probably bad investments.

“This was a shocking betrayal of trust by one of Wall Street’s most trusted names,” Spitzer said.

“This case must be a catalyst for reform throughout the entire industry.”

Merrill Lynch said in a statement that there is “no basis for the allegations made today by the New York attorney general.”

“His conclusions are just plain wrong,” the statement said. “We believe these allegations are baseless, and we will defend ourselves vigorously.”

Spitzer said he did not know how much money customers lost as a result of the 112-year-old firm’s alleged practices, but he said he believes the clients “number in the hundreds of thousands, if not millions.”

Merrill Lynch’s Web site says it has 900 offices in 43 countries and controls more than $1.5 trillion in customer assets. It says it manages the assets of 3 percent of American households.

Merrill Lynch pushed certain companies’ stock, even after it got poor ratings from its own research analysts, because the firm wanted to keep the companies’ lucrative contracts for investment banking services, Spitzer said.

Spitzer said investigators obtained many memos and e-mails that showed that analysts, whose research was supposed to be independent and objective, were in effect acting as salesmen for client companies.

They were doing so because the pay for analysts was based in large part on their contributions to bringing in investment banking business, the attorney general said. He said this was contrary to Merrill Lynch’s own written policy.

Merrill Lynch said in its statement by spokesman Timothy Cobb, that it was “confident that a fair review of the facts will show that Merrill Lynch has conducted its research with independence and integrity.”...


April 11, 2002

Wall Street’s ‘Big Lie’

The Washington Post

ONE OF the Enron scandal’s many tentacles is wrapped around stock analysts, who recommended buying the firm’s shares until shortly before it went bust.

Anybody familiar with the internal workings of big investment banks could guess the cause of this mad boosterism: Stock analysts tend toward optimism because they get paid more that way. Though their formal job is to advise investors on which shares to buy, analysts also advise companies selling shares — and those companies will be more inclined to hire them if they’ve boosted their stocks. Analysts at big banks stand to get half or more of their compensation from advising sellers rather than buyers.

Naturally, they want to keep that.

Naturally, they rate most stocks “buy” or “accumulate” and almost none “sell.”

The full extent of Wall Street’s corruption is newly apparent in this week’s extraordinary revelations about Merrill Lynch. Eliot Spitzer, the New York state attorney general, has publicized e-mail messages that circulated among Merrill’s stock analysts, suggesting that the analysts privately doubted the stocks they publicly recommended to clients.

Stocks that Merrill rated as “buys” were described internally as “a piece of junk” and “a piece of crap.”

One analyst, Kirsten Campbell, wrote to a colleague that the pressure to bring in investment-banking fees was distorting stock ratings. “We are losing people money, and I don’t like it,” she said. “The whole idea that we are independent from banking is a big lie.”

The big lie is further suggested by Mr. Spitzer’s evidence on the compensation of Henry Blodget, Merrill’s star Internet analyst. In the fall of 2000, Merrill asked its analysts what they had done to help with investment banking deals. Mr. Blodget and his group replied that they had been involved in 52 deals that generated $115 million in fees.

The fact that the firm even solicited this information suggests that the “Chinese wall” separating analysts from banking is porous. The fact that Mr. Blodget’s compensation subsequently jumped from $3 million in 1999 to $12 million in 2001 underlines the huge incentive that analysts have to deceive investors.

Stock exchange regulators and lawmakers have proposed some remedies to this problem, such as a ban on direct payments to analysts from their supposedly separate banking colleagues and limits on recommending stocks that banking colleagues are selling. But investors need to ask themselves tough questions. Given that Wall Street analysts are housed in the same firms that tout new share offerings, they are always likely to be conflicted.

Why pay for their services? Why not seek advice instead from research firms with no investment banking links?


April 24, 2002

Research probe could cost
Merrill $2 billion-analyst

NEW YORK, April 24 (Reuters) – Merrill Lynch & Co. Inc. (MER), under fire for allegedly biased stock research, could wind up with a tab of $2 billion in a worst-case scenario outcome of a regulatory investigation, a Prudential Securities analyst said on Wednesday.

“We estimate that the (New York) State Attorney General investigation could ultimately cost Merrill Lynch as much as $2 billion,” analyst Dave Trone said in a research note. “A caveat is that our estimates for three of the four consequences are ‘worst case’.”

New York State Attorney General Eliot Spitzer earlier this month accused Merrill of tailoring its research to woo investment banking business, after he dug up e-mails passed around by former star analyst Henry Blodget’s Internet group, showing that analysts privately disparaged stocks they publicly touted.

Merrill agreed to disclose potential conflicts of interest on its stock reports, but it is still negotiating with Spitzer on the size of a possible settlement payment and changes it will make in the operation of its research department.

Following New York’s lead, other investigative bodies became involved in the Wall Street research probe on Tuesday.

Securities regulators from several states said they formed a multi-state task force to investigate Wall Street firms for possible securities law violations in issuing misleading stock research. Spitzer is co-chair of the national task force, along with the New Jersey and California state attorneys general.

Merrill has enlisted former New York City Mayor Rudy Giuliani, who initially gained public attention through his investigations of securities traders and racketeering, to help deal with Spitzer’s charges.

Merrill Lynch has hired Giuliani Partners to advise on all aspects of a resolution,” a Merrill spokesman said. “The issues presented in this matter are complex and require a complex understanding of the market system.”

Spitzer has also subpoenaed most of Wall Street’s biggest firms, including Morgan Stanley (MWD) and reportedly Goldman Sachs Group Inc. (GS) and Credit Suisse First Boston, which have declined to comment on the matter.


There are four potential consequences of Spitzer’s 10-month probe, Trone said. These include a nationwide financial settlement, which, he said, could cost as much as $1 billion. The Changes to Merrill’s research procedures, which Trone said could cost $30 million, and $500 million in lost profits from client defections are two other consequences in addition to the settlement costs.

Civil lawsuits that result from the regulatory findings could cost $420 million, Trone said, calculating there is a 1 percent chance Merrill would lose such a case and multiplying that percentage by Merrill’s total market value.

“We believe Merrill has virtually no chance of losing to plaintiff suits in court,” Trone said. It will be too hard for plaintiffs to prove they relied solely on Merrill’s research to make the investment decisions that lost them money, he said.

A total of $2 billion is steep, but Trone noted that Merrill lost $4.4 billion in market value in the 10 trading days after April 8, when Spitzer announced the charges.

Despite the potential costs, Trone maintains his market rating of buy on Merrill shares.

“We believe the overall risk-reward ratio is quite favorable, and this current problem may well serve as another great buying opportunity,” Trone said.

Merrill shares were off $1.23 cents, or 2.6 percent, at $45.91 in morning trading on the New York Stock Exchange.

© 2002 Reuters

For more on Prudential Securities, and why they may be maintaining their “BUY” rating, GO TO: A Nest on Shaky Ground

For more on Goldman Sachs, GO TO > > > Dirty Gold in Goldman Sachs?

For more on Morgan Stanley, GO TO > > > Nests Along Wall Street


January 9, 2002

Merrill Lynch Sheds 9,000 Jobs

Brokerage House Plans To Cut Costs By $1.4B A Year

(CBS MarketWatch) Merrill Lynch, the nation’s largest brokerage house, said it has eliminated 9,000 jobs. The company also announced a fourth quarter pre-tax charge of $2.2 billion.

Merrill said the total includes some fresh layoffs, but mostly job cuts made throughout the year. On Nov. 16 for example, Merrill said about 2,900 of its almost 66,000 workers had accepted a voluntary buyout package.

As the financial giant continues to feel the bite of the recession, it’s moving to produce annual cost savings of $1.4 billion. A Merrill spokesman said more jobs cuts may take place in the first quarter, but “most of them are behind us.”

Merrill said it is eyeballing fourth quarter earnings of 48 to 50 cents per share, excluding the charge. That’s in line with the current forecast for earnings of 48 cents per share in a survey of analysts by Thomson Financial/First Cal

The financial services specialist said it plans to channel the cost savings into its bottom line. A portion will be reinvested in “priority growth initiatives.”

CEO David Komansky said the cost cutting moves come after a “detailed review of all our businesses over the past three months, and our current market outlook.”

Merrill will spend $500 million of the total $2.2 billion charge to close offices around the globe, plus $300 million on technology, including write-downs of tech assets. About $200 million of the charge comes from “business rationalization costs.”

Merrill said fourth quarter net revenue will drop 8 percent below third-quarter levels amid lower debt trading revenue and reduced investment banking activity.

The brokerage giant also cited business disruption in the aftermath of the Sept. 11 terrorist attack. The company has moved back into its headquarters at World Financial Center in downtown Manhattan.

©MMII, CBS Worldwide Inc. All Rights Reserved.


May 31, 2000

Ex-Merrill Lynch Executive Pleads Guilty

Defrauded Clients Out of $5.5M Through Risky Trading

BOSTON (AP) — A former vice president of Merrill Lynch who bilked clients out of more than $5.5 million has been sentenced to two years in prison without parole and ordered to repay the money.

Donald J. Martineau, 56, of Tewksbury, Mass., who also served as senior financial consultant for Merrill Lynch in Boston, pleaded guilty to five counts of wire fraud and one count of mail fraud in February.

U.S. District Judge Douglas P. Woodlock on Tuesday ordered Martineau to repay $5,521,045. Martineau’s prison term will be followed by three years of supervised release. He has already agreed to be barred for life from work as a stockbroker.

Martineau could have been sentenced to five years in prison and a $250,000 fine for each conviction.

Brothers-in-law were victims

From November 1989 to August 1998, federal prosecutors said, Martineau defrauded clients, including two brothers-in-law.

Prosecutors said Martineau convinced clients to invest funds through him, diverted the money, then lost nearly all of it through risky trading of stocks and options. Merrill Lynch fired Martineau in August 1998.

Merrill Lynch has said the transactions were never disclosed to the company and did not appear in the company’s accounts.

In January, the Securities and Exchange Commission announced the filing of civil fraud charges against Martineau.


January 7, 2000

Merrill Lynch Probes
$40 Million Theft

Former Employee Suspected in Transfer of Funds

By Carol Huang,

NEW YORK — Merrill Lynch is investigating a $40 million theft it believes was committed by a former employee stealing from one of its elite, private banking clients by using the name of a dead person.

Merrill Lynch identified the former employee today as Ashraf Raffa, a 12-year veteran who worked as a financial consultant in its private banking division. The company said Raffa was arrested in Egypt Dec. 9 and remains in custody in connection with the theft.

The company also said it has been investigating the incident since this fall and has fully reimbursed its client, Arab International Bank (AIB).

“Merrill Lynch has paid its client for losses incurred as a result of an apparent misappropriation of securities by one former employee. … We are pursuing both criminal and civil cases against the individual with a view to recovering these securities,” the company said in a statement.

Allegedly made six money transfers

Merrill, a global banking powerhouse which claims $1.5 trillion in client accounts worldwide, believes Raffa used the name of a deceased AIB employee to transfer $40 million in securities out of AIB’s account into a Swiss bank account through six transactions between 1996 and 1998.

A source familiar with the situation said Raffa introduced AIB to Merrill Lynch as a client and managed the AIB account. “My understanding is that he brought the account to Merrill Lynch,” he said.

A Merrill Lynch spokesman said he did not know how much was left in the account but said the assets, which were deposited into a UBS AG bank branch in Geneva, “had been frozen.”

UBS declined to reveal the name of the account where the deposits were made, citing Swiss banking secrecy laws. “We are aware of the case, and we will certainly cooperate with the authorities,” said Ted Meyer, a spokesman for UBS in New York.

Merrill declined to provide the name of the deceased AIB employee whose name was used, nor would it say whether other employees at either AIB or Merrill had been fired or censured in connection with the theft.

Robbed client issues statement

AIB, which the Arab.Net describes as the 36th-largest bank in Egypt, issued a statement saying it was satisfied with Merrill Lynch’s response. Further attempts to reach company officials were hampered by the end of the Ramadan holiday, a religious celebration among Muslims.

Britain’s Financial Services Authority, an industry-funded regulatory agency that oversees all financial activity including fraud, said it was notified about the case, but declined to comment on the investigation.

Merrill, recognized by its trademark bull, has $130 billion in client assets in its International Private Client Group, which caters to clients with a high net worth. The account for AIB was opened to provide private client services, including investments in equity and fixed income products.

Company believes suspect acted alone

The firm tried to downplay reports of an internal investigation into the adequacy of its account oversight and supervision.

“We have full confidence in our controls. Unfortunately, in this case there was a clear abuse of trust by an employee who went to great lengths to conceal his activities. The fact that his misconduct was discovered shows that it’s not possible to get away with such activity,” a company statement said.

Robert Corrigan, a spokesman for the company’s London office, said Merrill Lynch officials “believe very strongly [Raffa] acted alone.” He said the company expected to pursue Raffa’s case in Egypt.

He said a large part of the investigation is being led by the company’s legal division, which will determine how to pursue the case and recover the stolen securities.

Linklaters, an international law firm based in London, also is advising the company, he said.


October 21, 1999

Top Politicians Linked To
Pension Fund Deals

State Treasurer Denise Nappier shone the light Wednesday on seldom-seen machinations that have put millions into the pockets of well-connected “finders” in state pension investment deals— and some of the state’s best-known politicians were caught in the glare….

Paul Silvester has told the authorities, in a secret statement still under court seal, that former state Senate leader William DiBella introduced him to Joseph Grano, an old DiBella friend from Hartford’s South End who is president of Paine Webber.

After Silvester agreed to invest $200 million with Paine Webber last year, DiBella told Silvester that the company had refused to pay him a fee.

When Grano asked Silvester if there was another way to help DiBella, Silvester said, Silvester turned to Frederic V. Malek, the chairman of Thayer Capital Partners, which received a $75 million state investment commitment last October.

Malek allegedly told Silvester that Thayer used Merrill Lynch as an exclusive placement agent, and that the only possibility to compensate DiBella would be if Merrill Lynch would forgo some of its fee.

In its disclosure to Nappier this week, Thayer reported that it did, in fact, agree to pay a $374,500 fee to a firm called North Cove Ventures, which Nappier’s office identified as “William DiBella” when it released its compilation of the disclosures…

Thayer also paid a $1.1 million placement fee to Merrill Lynch, according to the disclosure…

For more, GO TO > > > A Connecticut Yankee in King Kamehameha’s Court


May 4, 1999

Turkish coffee is good.
But not that good.

Cheated in Istanbul, snubbed by Visa

The Iranian

In every major tourist city around the world, there are numerous traps waiting for the innocent tourists to fall into. That is partly the cost of world travel. However, when major financial institutions such as Merrill Lynch and Visa International, knowingly participate in the fraud, the issue is a cause for alarm.

I have been a loyal customer of Merrill Lynch Cash Management Account for the past 20 years. I have never contested a single visa charge. But on March 1, 1999, I was defrauded of about $4000 for the price of a beer and a cup of coffee in Istanbul. I had no choice but to contest this outrage.

After two months of haggling with Merrill Lynch over the visa charges, despite previous assurances, Merrill Lynch and Visa International have refused to challenge the international fraud in which they are participating with the deceitful and extortionist establishments involved in this case.

I arrived in Istanbul on the late evening of February 28. Because of jet lag, I could not sleep. I decided to take a stroll in front of my hotel, the Marmara, in the early hours of March 1. A smiling young man by the alleged name of Hassan Kivan, who introduced himself as a tourist guide, befriended me and asked to have a drink with him at a nearby bar. With his broken English, he seemed earnest and sincere.

He took me to two places that night at which I had a beer and a cup of coffee for which I paid in cash. However, the managers claimed that the cash is not enough and asked for a credit card. Assuming that I could always put a stop payment on it, I gave them my Merrill Lynch Visa card. They soon came back with a small slip that I could not read in the dark and, under duress, had to sign. I left Hassan completely exhausted and dejected. But I asked him to write his name and phone number on the back of one of the visa charges.

The next morning when I woke up, I wanted to know how much the two establishments have charged me. Since Turkish Lira is a highly inflated currency and the rate of exchange is about 360,000 TL to one U. S. dollar, I was thoroughly confused as to how much I was paying. Besides, the salons were dark and the men threatening. To my astonishment, I discovered that the first establishment had charged $1803 for a beer, and the second one had charged $1995 for a cup of coffee.

I immediately called up Mr. Phillip Knorr, my Merrill Lynch executive accountant in Honolulu, to let him know of the fraud and to request a stop payment on the visa charges. He was sympathetic, told me stories of his own bad experiences in Istanbul, and assured me that the case would be easily resolved. He also asked me to report the incident to the Visa Dispute Section of Merrill Lynch and request a STOP PAYMENT. The memo was faxed on March 1, the same day, with a copy to Mr. Knorr.

I also took the memo to the hotel managers and my tourist guide, Mr. Katsumi Makishi of Magister Tours, Istanbul. The hotel managers, Mr. Cem Gundes and Ms. Sima Molho, expressed sympathy and told me that this is a frequent occurrence in Istanbul. They also sent me along with a hotel staff member to the nearest police department.

From the careless attitude of the police, however, I soon realized that there is no use in a police complaint. The police are perhaps working hands in glove with the network of tourist traps. Mr. Makishi suggested taking me to another police station where his organization had some influence. We spent half a day waiting for the officer in charge. When he arrived, all he did was to stamp my report without recording the complaint.

Discouraged by the police indifference, on March 4, I wrote a letter to the Turkish Minister of Tourism, Mr. Ahmed Tan, and requested investigation. To this day, I have not received a reply.

I also pursued the matter by long-distance phone calls to the Visa Dispute Section of Merrill Lynch.

Ms. Merrie Michaels of that office told me that I should wait until the charges are cleared. She also explained that sometimes, the fraudulent merchants decide not to submit the charges out of the fear of being prosecuted. Upon return to home in Honolulu on or about March 12, I called up Mr. Knorr again to see what has happened. He again assured me that similar cases have been easily resolved. However, he also urged me to call up the Visa Dispute Section directly because “they would listen better to a customer.”

In my conversation with Ms. Sherry Alston at the Visa Dispute Section, however, I was told that since I had signed the visa charges on my debit card, there is nothing they can do for me. I brought back the bad news to Mr. Knorr who by now was ignoring my phone calls. On or about April 5, however, Mr. Scott Furukawa of the Merrill Lynch office in Honolulu called me up and asked to be updated on the case. He was courteous and sympathetic while repeating several times that he would have been equally outraged under the circumstances. He promised to call back in a few days to let me know of the results of his negotiations with the Visa Dispute Section.

On April 8, Mr. Furukawa called me up to say regretfully that his efforts on my behalf have failed. We ended the conversation by my telling him that Merrill Lynch and Visa Corporation were knowingly participating in an international fraud without attempting to severe their ties with the deceitful merchants. I informed him that I would therefore withdraw my account and publicize the case.

A few days letter, I received the followed letter from Mr. Furukawa:

“In reference to our telephone conversation today (March 8, 1999), Merrill Lynch will not be able to reimburse you for the March 2, 1999 visa charges in the amounts of $1,995.05 and $1,803.27 you made while visiting Istanbul. While we sympathize with your claim of being victimized by the local establishments in Istanbul, you, nevertheless, signed your name to these transactions.”

There are lessons to be learned from this experience. First, undoubtedly, Merrill Lynch and Visa Corporation profit from international tourist business. That is legitimate. However, when they knowingly refuse to break off their relations with deceitful and extortionist establishments, they are actively participating in international fraudulent schemes.

Second, credit card payments are convenient, particularly when travelling abroad, but they open you up to a whole variety of fraudulent operations. This includes adding a few digits in front or back of your actual charges.

Third, travelers must be extra-careful in their dealings with strangers. My case clearly demonstrates this.

If it happened to me, it can happen to you.


From The Cheating of America, by Charles Lewis and Bill Allison:


In late 1987 or early 1988, Macauley Taylor, who oversaw the Structured Derivative Financing Group at Merrill Lynch, began arranging installment sales of foreign currency for cash or LIBOR notes for Merrill’s corporate clients. (LIBOR stands for London Interbank Offering Rate; the notes are a financial instrument traded internationally to offset the effects of interest rate changes.)

Multinational companies that do business in dozens of countries will, naturally enough, earn money in dozens of different currencies–German marks, British Pounds, or Japanese yen. They also borrow in all these currencies, all of which have their own interest rates. Since the values of these currencies and the interest rates charged by the central banks that manage them all fluctuate, multinationals hedge their bets by exchanging some of that foreign currency for international bonds.

One of the things that Taylor noticed while arranging such hedges is that the transactions also provided a tax benefit for the corporations using them.

In 1988, Taylor hired James R. Fields, who had worked for the IRS from 1984 to 1986 as an attorney adviser and later as a principal technical assistant to then chief counsel Fred T. Goldberg Jr.

Taylor wanted Fields to work with his Structured Derivative Financing Group because of his tax expertise; the two of them were the architects of the tax shelter that Merrill Lynch would earn millions selling. Taylor had the initial idea; Fields fleshed out the concept, and together they came up with a scheme in which a corporation would form a partnership with a foreign entity in an offshore location.

The foreign entity–called “the tax neutral” partner since it would owe no U.S. income taxes on any profits it made–would drop out of the partnership after a certain amount of time, appearing to receive the lion’s share of the income that the partnership produced. The corporation, conversely, would appear to be left holding the bag–with only the costs, or the losses, of the partnership on its books.

Taylor and Fields drew up a schematic with various boxes representing the partners; they played around with the figures to fine-tune the deal. In 1989, they were ready to go, and began looking for companies that had large capital gains they might want to offset. Fields proved to have more talents than devising tax shelters; he was also adept at selling the scheme.

“I would say this is about an investment partnership where you combine with a sophisticated partner,” Fields testified in Tax Court on Feb 14, 1996, recalling the sales pitch he made to potential clients. “The nature of the buying and selling transactions that that partnership can do as part of its investment activities can produce a significant tax advantage.” Fields went on to describe the specific IRS regulations that the partnership would take advantage of to produce the huge loss…

In 1988 and 1989, Taylor and Fields and others from Merrill Lynch sold the shelter to one company after another. E.S.P. Das, the firm’s managing director or investment banking, who had relationships with many of the companies, approached them initially. He broached the subject of the shelter with top managers at Dun & Bradstreet Corporation, the 160-year-old provider of global business and financial information services, and with Schering-Plough, AlliedSignal, Brunswick Corporation, American Home Products Corporation, and Borden, Incorporated.

Robert Luciano, Schering-Plough’s chairman and chief executive officer, made his company an early participant. He served as a director on Merrill’s board; his son Richard worked for Merrill Lynch in Das’s investment banking department. The elder Luciano, an attorney who had specialized in taxes, also served on AlliedSignal’s board of directors. He was so enthusiastic about the shelter, he recommended it to that company as well.

Judith P. Zelisko, an attorney and the assistant vice president, director of taxes, for Brunswick Corporation, attended a Merrill Lynch sales pitch on Dec 8, 1989. At the time, Brunswick was in the process of selling its 36% stake in Nireco Corp, a Japanese company that makes precision instruments. “Set forth below is a bullet point summary of a transaction proposed by Merrill Lynch to Brunswick Corporation,” she wrote in a Jan. 26, 1990, memo to her superiors, the controller and the vice president of finance, “to generate sufficient capital losses to offset the capital gain which will be generated on the sale of the Nireco shares. The specific dollar amounts can be adjusted to increase or decrease the capital loss required.” . . .

In all, the profits that Merrill offered to shelter from tax are staggering.

In 1990, American Home Products sold off its household and depilatory divisions for a pre-tax profit of $1 billion. The same year, Schering sold its Maybelline cosmetics business and a pair of European cosmetic companies for a pre-tax profit of $220 million.

In 1988, Dun & Bradstreet sold its Official Airline Guides subsidiary for a pre-tax profit of $752 million. Two years later, it sold three other subsidiaries for a pre-tax gain of approximately $84 million.

In May 1988, Brunswick sold its filtration technology business for $42 million pre-tax gain. Two years later, it sold two more divisions for an $84 million pre-tax gain.

In Oct, 1989, Paramount sold Associates First Capital Corp, its consumer and commercial finance business, for a gain of approximately $1.2 billion.

Those pre-tax profits amount to $3.4 billion; taxes on them would have totaled as much as $1.1 billion.

The shelter that Taylor and Fields had devised would keep all that money away from the federal treasury and in corporate treasuries instead.

Zelisko, Brunswick’s director of taxes, noted the price for turning the trick: “Merrill Lynch’s fee is 5-10 percent of the tax savings. Assuming a capital loss of $82 million, the tax savings would be around $28 million and a 10% fee on such savings results in a fee of $2.8 million. This 10% fee is negotiable.”

“Five percent of $1.1 billion is the tidy sum of $55 million. And, as the Treasury Department made clear in its report on corporate shelters, all of that money comes out of the pockets of other taxpayers, like you, who have to pay more because corporations pay less….

For the Colgate shelter, Fields turned to Mark A. Kuller, at the time a partner in the Washington office of King & Spaulding. The two had served together at the Internal Revenue Service in the chief counsel’s office. Kuller ended up writing four separate opinion letters, concluding in each, after detailed recitations of prior precedents and congressional intent in writing tax law, while the shelter might be successfully challenged by the IRS, in his opinion it would probably survive such scrutiny.

With the favorable legal opinion in hand, all that remained to do was to find the foreign partner. In the summer of 1989, Taylor contacted Johannes Willern den Baas, a financial engineer with Algemene Bank Nederland N.V., a Dutch bank that at the time had $85 billion in assets, with roughly 29,000 employees in some 950 offices in 43 countries….

The Dutch banker, eager to develop relationships with some of America’s wealthiest corporations, agreed to participate. So he referred Taylor to Peter de Beer, a trust officer and the head of the legal department of one of the bank’s many subsidiaries, ABN Trust Co., Curacao N.V., located in the Netherlands Antilles, an established tax haven.

De Beer’s four-lawyer staff helped corporate clients set up and manage Netherlands Antilles companies to participate in offshore transactions. … “My understanding was that the partnership would enter into transactions that would take part in the gain or the loss,” he said. “So by having us being the majority partner at the start, we would take the majority of the gain, while in a later stage one of the other partners would take the loss.” . . .

ABN became the foreign partner of choice for Merrill Lynch; in late 1989, a plethora of offshore partnerships sprung up between subsidiaries of ABN and the corporations who’d bought into Merrill Lynch’s shelter.

There was ACM Partnership, formed with Colgate, Nietuw Willemstad Partnership with Dun & Bradstreet, Kralendijk Partnership with Schering-Plough, Saba Partnership with Brunswick, Maarten Investerings Partnership with Paramount, and ASA Investerings Partnership with AlliedSignal, to name a few. All were formed from late September 1989 to late June 1990.

Taylor was a busy man. He attended many of the offshore partnership meetings to update his clients on the progress of the transactions Merrill made on their behalf. For Colgate, he made six trips to the Netherlands Antilles and Bermuda in a 10-month period between Oct 1989 and Aug 1990. . . .

Beyond he beaches, tennis courts, and golf courses, there was a more important reason that the partnership meetings for the various shelters Merrill arranged were held offshore. “We wanted to keep the transaction out of the United States as much as possible,” de Beer, ABN’s man in Curacao, explained. “It was our preference also not to discuss or do anything with regard to this deal in the United States.

De Beer spoke from experience: “Well, working in Curacao for a number of years, we did a lot of transactions with United States corporations, and we know how sensitive that can be, and that’s to avoid any risk in that respect. Better safe than sorry.”

The risk was taxation. “Tax risk, yeah. To avoid any risk there, to have all meetings and filings and all the documentation outside the United States.” . . .

Of course, Taylor’s life wasn’t all just travel for meetings in exotic Caribbean locales to avoid tax risks. He oversaw a series of mind-numbingly complex transactions involving the foreign partnerships. Taylor and the members of his Structured Derivative Financing Group at Merrill Lynch purchased–and then sold–the financial instruments for the offshore partnerships. He was the point man who interacted with Merrill’s brokers to arrange all the sales, which took place in the span of a year.

The amounts of money invested were staggering – Kralendijk, the Schering-Plough shelter, purchased $1 billion of private placement notes on Jan 18, 19, and 25, 1990, all of which it sold, on March 12 and 16, 1990. On Feb 28, 1990, Saba Partnership, AlliedSignal’s shelter, purchased $850 million in floating-rate private placement certificates of deposit on Apr 25, 1990; on May 17 and 24, 1990, it dumped the CDs. When Merrill was unable to find a buyer for the private placements for the Nieuw Willemstad partnership, Dun & Bradstreet’s shelter, the brokerage firm issued the LIBOR note itself and paid $42.5 million in cash. Taylor was involved in each transaction.

In the end, the offshore partnerships and hedged transactions, all worked perfectly. Neither market fluctuations in interest rates nor falling or rising values of foreign currencies had any effect of the performance of the partnerships. ABN earned profits, and, on paper, the American corporations all ended up with losses. It was too good to be true. So good, in fact, that the IRS began to challenge every Merrill Lynch shelter it discovered.

On March 12, 1993, the IRS denied the losses that Colgate, Merrill’s corporate client in the deal, had claimed to offset its capital gain. On April 13, 1995, the IRS denied the losses Borden claimed. On Sept 27, 1996, the IRS denied the losses AlliedSignal claimed. One by one, as the Service discovered on audit that corporations had made use of Merrill’s shelter, it denied the tax losses.

But the companies themselves weren’t ready to surrender their paper losses without a fight. Colgate’s case, ACM Partnership, Southampton-Hamilton Company, Tax Matters Partner v. Commissioner of Internal Revenue (aka US taxpayers), was the first to go to trial, on Feb 12, 1996, nearly seven years after Merrill Lynch first approached Colgate with its shelter proposal….

Thirty witnesses testified, and some 1,200 documents were entered into evidence, ranging from the original charts that Taylor and Fields had drawn up when planning the shelter to the minutes of the final meeting of the partnership.

In its final brief in the case, ACM’s lawyers argued that “The ACM transactions had practical economic effects apart from the creation of tax benefits. … Each transaction engaged in by ACM had a reasonable prospect for profit or loss. Each transaction had economic substance.” They cited Colgate’s desire to reduce its debt as the legitimate business purpose for the company’s participation in ACM.

In the end, however, it was all for naught. On Mar 5, 1997, Tax Court Judge David Laro ruled that the ACM partnership had engaged in a sham transaction.

“We do not suggest that a taxpayer refrain from using the tax laws to the taxpayer’s advantage,” he wrote in his opinion. “In this case, however, the taxpayer desired to take advantage of a loss that was not economically inherent in the object of the sale, but which the taxpayer created artificially through the manipulation and abuse of the tax laws. A taxpayer is not entitled to recognize a phantom loss from a transaction that lacks economic substance.”

Colgate would have to pay its taxes on its capital gains after all….

~ ~ ~

On Aug 20, 1998, Tax Court Judge Maurice B. Foley ruled that AlliedSignal and ABN were not partners at all, but a debtor and creditor, and that AlliedSignal was not entitled to any of the losses that its shelter, ASA Investerings, had generated. That ruling was upheld on appeal; U.S. Circuit Judge Stephen F. Williams wrote that “AlliedSignal’s interest in any potential gain from the partnership’s investments was in its view at all times dwarfed by its interest in the tax benefit.”

On Oct 27, 1999, Tax Court Judge Arthur L. Nims III ruled against Brunswick and the Saba Partnership. “At the end of the day, Brunswick’s involvement in the [contingent installment] transactions, with their attendant intricate investments in the [private placement notes], CDs, LIBOR notes, money market accouonts, hedges, swaps, etc., all carefully masterminded by Merrill Lynch, did not meaningfully change Brunswick’s economic position, and it therefore lacked the requisite economic substance necessary to validate Brunswick’s targeted capital losses.”

~ ~ ~

The shelters he sold collapsed, but Macauley Taylor didn’t. He’s still at Merrill Lynch, arranging complex derivative transactions for corporate clients, solving their various accounting, financial, and tax problems.

James Fields left Merrill in 1992; he went to work for the Treasury Department as deputy tax legislative counsel in the Office of Tax Policy….

While working for the Office of Tax Policy, Fields wrote a number of letters on tax policy that were made public, on topics ranging from the marriage penalty to Section 936 of the Internal Revenue Code, which gives U.S. corporations a tax break if they locate factories in Puerto Rico.

Fields also wrote about transition rules (often called “rifle shots,” because they’re aimed at giving preferential treatment to a single taxpayer), the taxation of international shipping, and the rules on foreign income earned by U.S. corporations. He left Treasury in Sept 1993, around the time that the IRS began investigating the various players in the Merrill Lynch shelter, and went on to be a vice president at Citibank.

As the various Merrill Lynch partnerships wended their way through Tax Court and appellate courts, Congress and the Treasury Department grappled with the issue of corporate shelters. Bill Bradley, the former senator from New Jersey, made shutting them down the centerpiece of his tax reforms when he sought the Democratic nomination for president in 2000.

Periodically, Treasury makes headlines announcing new initiatives to crack down on them. Congress has considered legislation that would force corporations to reveal on their tax returns any shelter they had participated in. Considering the lengths to which corporations go to secure legal opinions that the tax avoidance strategies they engage in are not tax avoidance strategies at all, that seems to be an impractical approach to the problem.

Kenneth J. Kies, the former chief of staff of the Joint Committee on Taxation – Congress’s in-house policy think tank of tax matters – has testified several times before the Senate Finance Committee and the House Ways and Means Committee arguing that there is no corporate tax shelter problem. Kies is now a managing partner in PricewaterhouseCoopers’ Washington office, the same firm that promoted the BOSS shelter.

Kies’s view carried some weight with Republican members of the House. Dick Armey, the House majority leader, reacted angrily to any suggestion that shelters deserve legislative attention. On Feb 15, 2000, at his weekly press briefing, he declared, “Since tax is a very large part of [a corporation’s] costs, anything they can do to minimize that share of their costs would be a legitimate thing. … The fact of the matter is that we write the tax code, and any corporation ought to do what they can to minimize that cost [to] their shareholders.”

Indeed. There’s no doubt that corporations do so every day….


# # #










~ ~ ~










~ ~ ~


Part IPart IIPart IIIPart IVPart VPart VI

~ ~ ~

































FAIR USE NOTICE. This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

For more information go to: If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.


Last Updated on July 29, 2006 by The Catbird