Merrill's Latest Fine Is Tip of the Iceberg

Updated from 7:42 a.m.

Merrill Lynch(MER Quote) is once again the first Wall Street firm to pay for the sins of its investment bankers.

This time Merrill is paying for some of its business deals with Enron. The nation's biggest brokerage will pay an $80 million fine to the Securities and Exchange Commission to resolve an inquiry into two transactions that enabled the fallen energy trader to improperly inflate its earnings.

Last year, of course, it was Merrill's hyping of Internet stocks during the bull market that sparked a regulatory inquiry of similar practices at 11 other Wall Street firms. Merrill paid a $100 million fine to end that inquiry. In all, Wall Street firms are paying a combined $1.4 billion in fines and fees to regulators to settle that investigation.

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But the Merrill payment in the Enron investigation is just the tip of the iceberg, and when securities regulators, prosecutors and the plaintiffs' lawyers are done, the costs to Wall Street in the Enron mess may make last year's research settlement look like chump change.

The SEC is still looking into some of the questionable financing deals that Citigroup(C Quote) and J.P. Morgan Chase(JPM Quote) arranged for Enron. The U.S. Department of Justice Enron Task Force, meanwhile, is continuing to explore whether or not to bring criminal charges against some of the individual bankers that worked on Enron-related transactions, including two former Merrill investment bankers -- Schuyler Tilney and Robert Furst. (Tilney's wife, Elizabeth, is credited with coming up with the idea of Enron's infamous logo -- the so-called crooked E.)

Enron's beleaguered shareholders, who are seeking billions of dollars in damages from Enron's Wall Street bankers, also are feeling emboldened these days. In December, U.S. District Judge Melinda Harmon handed them a huge victory when she refused to dismiss fraud claims filed against the Wall Street firms such as Merrill that provided financing for Enron's off balance sheet shenanigans. The judge's ruling means banks such as Merrill, Citigroup, J.P. Morgan Chase, Credit Suisse First Boston and CIBC could wind up providing the deep pockets that reimburse Enron investors for some of their losses.

As for Merrill, the SEC, which may not file a formal settlement decree for several weeks, will charge the brokerage firm with "aiding and abetting" Enron -- one of the more serious securities fraud charges regulators can level against a Wall Street firm. Even though Merrill is neither admitting nor denying any wrongdoing, the settlement should provide further ammunition to the class-action lawyers.

Here Comes the Judge

Things could get even dicier for Merrill and Enron's other bankers in the coming weeks, when the judge in the Enron bankruptcy proceeding will decide whether to make public a 2,000-page report that analyzes dozens of the company's off balance sheet transactions.

That report, compiled by Atlanta attorney Neal Batson, is said to focus on the maze of complex transactions Enron used to move $5 billion in assets off its balance sheet, in an attempt to juice its earnings. It's also believed to point a finger in the direction of the Wall Street banks and law firms that helped structure those off balance sheet deals, and in some cases even invested in the transactions.

The Batson report is eagerly awaited by the securities lawyers spearheading the Enron shareholder litigation. They've filed a motion asking the bankruptcy court to release the report, which was filed under seal last month, as soon as possible.

Right now, federal prosecutors looking into the Enron mess are reviewing that report and considering whether to ask the bankruptcy judge to keep all or a portion of the report confidential, sources close to the bankruptcy proceeding say.

Philip Hilder, the attorney for Sherron Watkins, the former Enron employee whom many have called a corporate whistleblower, said prosecutors probably want to make sure the report doesn't compromise any witnesses or investigative leads. He said the judge would have to weigh any request to keep the report confidential against the public's interest in understanding the events that led to Enron's collapse.

The Justice Department's Enron task force has pending indictments against a number of ex-Enron employees, including Andrew Fastow, the energy trader's former chief financial officer. Prosecutors recently have indicated they may indict several other former Enron employees in the coming months.

But the Justice Department review of the Batson report is fueling speculation that prosecutors are indeed serious about pursuing charges against some of Enron's bankers -- even if the individual firms manage to avoid being criminally charged themselves.