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.
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 supervisorTodd 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
milliona 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
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.”
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
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
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
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 withindependenceandintegrity.”...
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.
FOUR POTENTIAL CONSEQUENCES
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
Despite the potential costs, Trone maintains his market rating of buy on Merrill
“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.
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
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.
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, APBnews.com
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
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
Linklaters, an international law firm based in London, also is advising the company,
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 leaderWilliam DiBella introduced him to Joseph Grano,
an old DiBella friend from Hartford’s South End who is president of Paine
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
Thayer also paid a $1.1 million placement fee to Merrill Lynch, according to the
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
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
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
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
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.
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
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
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
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, Brunswicksold its filtration technology business for $42 million pre-tax gain. Two years later, it sold two more divisions for an $84 million pre-tax
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
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
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
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
Indeed. There’s no doubt that corporations do so every day….
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