In the Courts

On Aug. 12, the United States Court of Appeals for the Fifth Circuit, in an opinion authored by Circuit Judge Jerry E. Smith, affirmed the obstruction of justice and perjury convictions of former Merrill Lynch & Co. (“Merrill Lynch”) executive James A. Brown. United States v. Brown, No. 10-20621. The decision was based on the grounds that the district court's ruling ' that evidence not completely disclosed by the government prior to trial would have left the case's outcome unchanged ' did not constitute clear error.

Brown's convictions were tied to a 1999 transaction between Merrill Lynch and Enron Corporation (“Enron”). For a sum of $28 million, Merrill Lynch had acquired an equity interest from Enron in three barge-mounted power generators off the Nigerian coast. The government alleged that the equity sale, in which 75% of the purchase price was in the form of a loan from Enron to Merrill Lynch, was a sham transaction. Specifically, the government alleged that Enron never actually sold the barge stake to Merrill Lynch; rather, Enron secretly promised that it would re-purchase the equity within six months, via a company run by then-CFO Andrew Fastow, while guaranteeing Merrill Lynch a 15% return along with an “advisory fee” of $250,000. The government alleged that the equity purchase was designed to artificially enhance Enron's fourth-quarter earnings for that year, assisting the company in meeting its earnings forecasts. Enron booked approximately $12 million in profit based on the transaction.