Merrill Lynch was plunged into fresh controversy on Monday when allegations emerged that a former energy trader had embezzled $43-million from the firm.
The former chief energy trader, Daniel Gordon, is being investigated by United States and Canadian authorities for allegedly disguising a payment made in 2000 to Falcon Energy Holdings, an offshore company he controlled, as an insurance contract to cover power shortages.
The claims give another black eye to one of Wall Street’s best-known banks. It has suffered 18 months of being linked to scandals and allegations of freewheeling and lack of internal controls during the dotcom boom.
The latest investigations have become public in a legal wrangle between Merrill and Allegheny Energy, a Maryland firm that bought the energy trading business from the bank in January 2001.
Allegheny accused Merrill of concealing knowledge of Gordon’s alleged wrongdoing at the time of the sale. The company also alleges that Gordon’s age and experience were misrepresented by the bank. Merrill in turn is suing Allegheny for payment of $115-million it claims it is still owed from sale of the energy division.
In its counterclaim, filed on July 14, Merrill says: ”The Falcon trade was a transaction by which Gordon allegedly defrauded Merrill Lynch (not Allegheny) of $43-million. The only party who suffered damages was Merrill Lynch.” It adds that the bank was not aware ”of the possibility of the fraud” until the autumn of 2002.
According to a letter written by assistant US attorney Jane Levine, the transaction in question was a $43-million payment to Falcon Energy Holdings, a company incorporated in Anguilla, a Caribbean island. The money was wired to the company in August 2000 in the belief that Merrill was entering into a contract to insure the energy trader against sudden failures in supply.
The money was deposited in a Zurich account, Levine wrote in the letter to Canadian authorities, requesting assistance. About $32,5-million of the money was then allegedly wired out of the account shortly after it was opened, the majority to another offshore company, called Ostrich Capital Partners and registered in the Marshall Islands, and then to an account in New York controlled by Gordon, the letter claimed.
He is alleged to have worked with a Canadian offshore banking consultant.
A spokesman for the US district attorney’s office in southern Manhattan declined to comment. No charges have been brought against Gordon.
Merrill Lynch spokesperson Bill Halldin said: ”We are working with the appropriate law-enforcement authorities on this matter and we have taken steps as we continually do to improve our systems of controls to ensure problems don’t occur in the future.”
Calls to Gordon’s firm, Daticon, and his lawyer, Alan Levine of the New York firm Kronish Leib Weiner and Hellman, were not returned.
Gordon joined Allegheny when the energy business was transferred but subsequently left. He is now chairperson of Daticon, a legal-document storage firm in Connecticut. According to the Levine letter cited by Bloomberg, Gordon used the money to acquire a 70% stake in Daticon.
The agency also quoted Gregg Lepp, a Canadian prosecutor in Edmonton, Alberta. ”We are alleging Dan Gordon defrauded Merrill Lynch of $43-million,” he said.
The energy-trading business at Merrill was under the auspices of Kelly Martin, senior vice-president and head of global debt markets, who resigned last December and is now chief executive of the Irish drugs maker Elan.
Martin reported to Thomas Davis, the erstwhile head of Merrill’s investment banking and capital markets business. Davis was sacked in September for refusing to testify to the securities and exchange commission and the US justice department about Merrill’s transactions with Enron, the bankrupt energy firm. — Guardian Unlimited Â