Merrill Lynch reportedly viewed the sale of its Global Energy Markets (GEM) commodity trading group to Allegheny Energy for USD490 million last year (DW, 9/23) as a convenient and lucrative way to exit a business that it did not fully understand, according to an official familiar with the workings of GEM. Moreover, Dan Gordon, head of trading, either on his own or because he knew the firm was looking to get out, reportedly had been shopping the business to potential buyers without Merrill's knowledge.
Bill Halldin, a spokesman for Merrill in Sacramento, Calif., said reports that Gordon was trying to shop the unit are "absolutely false," adding that Merrill decided in 2000 to exit the energy trading business because it was not prepared to own generation plants. Debbie Beck, an Allegheny spokeswoman in Hagerstown, Md., declined to comment.
Merrill and Allegheny slapped lawsuits on each other last week relating to the sale in January 2001. Merrill is suing Allegheny for breach of contract over USD115 million the investment bank says it is owed as a result of the sale. Allegheny is suing Merrill for fraud. Allegheny announced earlier this year it would scale back the trading business because of the downturn in the energy markets and that Gordon would step down as head of trading but continue in an advisory capacity until next year. Gordon's position was abruptly terminated early this month for violating corporate policies, according to Allegheny. Merrill alleges that Allegheny has failed to make the final payment associated with the sale of GEM.
According to Allegheny's suit, Merrill artificially inflated the trading volume and revenue of GEM in disclosure schedules provided to the utility. The suit claims that: "...GEM's net operating revenues increased dramatically in December 1999 - from USD700,000 in November 1999 to USD3,000,000 in December 1999." In an article in early August, The New York Times reported that Merrill entered sham electricity transactions with Enron in December 1999 designed to help the Houston trader meet year-end profit targets. The suit also claims that "...Merrill Lynch also knew or should have known that...Daniel Gordon was very difficult to control or supervise."
Stanley Arkin, Allegheny's counsel, declined comment. Calls to Shearman & Sterling, a law firm representing Merrill, were referred to Mark Herr, a Merrill spokesman in New York. Herr described Allegheny's allegations as "baseless and untrue."
One senior energy lawyer believes the suits likely will be settled out of court, but not before attorneys have made a killing. "Merrill is pulling on the head of the cow and Allegheny is pulling on the tail [while the] lawyers are busy milking it," he quipped.
