Updated from 3:30 p.m. EDT
put one of its top investment bankers on administrative leave, after learning that he wouldn't testify before a Senate committee investigating the role of Wall Street financial firms in the collapse of
Schuyler Tilney, managing director of Merrill's energy investment banking division, was one of three witnesses scheduled to appear Tuesday before the Senate Permanent Subcommittee on Investigations.
Tilney was one of about 100 Merrill executives who invested more than $16 million of their own money in the LJM2 Partnership -- the much-publicized off-balance-sheet venture that Enron's former chief financial officer, Andrew Fastow, established in 1999. Merrill itself also invested $5 million in the partnership, which played a pivotal role in shaping Enron's strategy of dumping billions of dollars in debt onto dozens of off-balance-sheet entities.
Merrill was also the placement agent for the $394 million LJM2 fund, which attracted investments from a virtual Who's Who of Wall Street institutions, including
J.P. Morgan Chase
Credit Suisse First Boston
. Investors in LJM2 not only got a glimpse into some of Enron's behind-the-scenes financial maneuvers, they also were promised at least a 30% annual return on their investments.
In a release, Merrill says Tilney decided not to testify "upon the advice of his counsel after learning of a Department of Justice investigation into a transaction being reviewed by the Senate subcommittee." Robert Trout, Tilney's lawyer, didn't return a phone call.
At one time Tilney, who lives in the Houston area, had a particularly close connection to the now-bankrupt energy-trading firm. His wife, Elizabeth, was a former senior vice president of marketing at Enron. The couple is said to have been close friends with Fastow and his wife.
Elizabeth Tilney, hired by Enron's former chief executive Kenneth Lay in 1996, was part of Enron's 26-person management team. Coming out of the advertising world, Lay reportedly told her to do whatever it took to make Enron into a name-brand company, according to a 1998 profile of her in the Houston Chronicle. It was Tilney's marketing department that came up with concept for the tilted "E" in Enron's insignia in 1997.
Merrill, meanwhile, says it is not a target of the investigation and intends to cooperate with the Senate's inquiry. A witness list put out by the Senate panel late Friday shows that G. Kelly Martin, a Merrill senior vice president, is supposed to testify. A Merrill spokesman says Martin will appear and testify.
Schuyler Tilney's name also appears on the witness list, along with that of Robert Furst, a former Merrill investment banker in the brokerage's Dallas office. Furst, who left Merrill in January, also is declining to testify, according to the firm. Furst's lawyer, Ira Sorkin, a well-known New York white-collar defense lawyer, could not be reached for comment.
A spokesman for the Senate panel declined to comment on the refusal of the two men to testify, but said the hearing is still scheduled to go forward as planned.
The main focus of the Senate's inquiry, sources say, is a $7 million equity investment that Merrill made in complicated transaction involving the sale of nine Nigerian barges. It was a deal that also involved the LJM2 partnership.
In the deal, Merrill apparently invested money along with Enron in a special purpose entity called EBARGE that was set up by Enron. The barges were then sold for $7.5 million to LJM2, according to sources familiar with the transaction. LJM2 then later turned around and sold the barges to another company.
In the transaction, a source says Merrill made more than $500,000. It's not clear how much Enron and the LJM2 partnership made in the transaction.
Next Tuesday's hearing will before the same Senate panel that held hearings this week into $8 billion in questionable energy deals that J.P. Morgan and Citibank made with Enron.