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Free «Merrill Lynch Fraud in Accounting» Essay Sample


Investment firms are found in all economies since they have a responsibility in creation of employment thus playing a role of regulation of money matters with the help of central government. In all countries, there are rules and regulations that govern the conduct of the investment firms so that they don’t defraud the investors but instead create confidence on the economy of a given country. Merrill Lynch is an investment company that played a role in helping Enron managers to defraud its investors through shady deals which finally they got scot-free since there wasn’t concrete evidence to have them convicted.

The managers of Enron wanted to prop the firm’s total income and all its cash flows in the year 1999. By December that same year, the treasurer made negotiations with the executives of Merrill since they had very crucial influence in the company investment. The treasurer and other officials made it easy by promising orally to repurchase investment after a period of six months and offered Lynch a return of 22%.



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The managers in Lynch agreed the deal which was then unwound in December 1999 and then reversed later in the year 2000 as Merrill sold all of the investments it had to in Nigerian barges. This paper aims to present role that Merrill Lynch played in the fraud of investor’s funds by Enron Corp.

Litigation Release

This discussion emphasizes on the Lynch and it’s involvement into this fraud scheme; the Securities Exchange Commission made a claim about Merrill and it’s executives that they committed fraud .The Securities and Exchange Commission was founded with a view to give control of capital markets and keep confidence of the customer immediately after 1929 when the great crash occurred. It has authority given by the Securities Act and Security Exchange Act. It has a mission of protecting the investors in the country and to ensure better markets that are free of corruption. Today’s challenges in the economy have made many companies to come up with strategies to protect themselves from any temptation to commit an offence which might include undertaking business opportunities which are not legal or partner with foreign partners who are not trust-worthy. Ketz (2009) suggests that Lynch encouraged fraud of the securities by aiding Enron managers in faking a loan as to be authentic selling of the Nigerian barges and the involvement in energy options which cancelled out between each one in the two companies, but from this transaction Enron Corp did not record it’s financial progress in the books of accounts well.

Security Exchange Commission made a ruling on the case based on the assistance that the Lynch gave to Enron leading to various violations of security federal laws which found that Lynch had made irregularities that would be punished by law although the company agreed to pay a fine. In the year 2004 a trial was carried out and a jury found the executives to be guilty of being involved in the scandal but after the ruling, they appealed the case where the fifth circuit relieved them the allegations saying that they supported services that were honest. The case assumes it is like the case of getaway drivers who give honest services to the ‘robbers’ of bank, and the lack of written material over the agreement showed that the case had no base for argument against Lynch over its malicious actions with Enron Corp. The shareholders were assisted by the representatives from university of California but the case never kicked off since it was voted out by the Fifth Circuit.

 In the year 2001, it was found that Merrill Lynch was promoting private investments that were damned and had false statements. They were suspected to be securing the banking investments deals in the stocks of the advocated companies (Merrill Lynch Fraud Information, 2009).

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 Enron is one of the clients who were known to be leaders of Energy options in the year 1998. Many events are said to have followed until the company analyst who was involved with the downgrading stock appraisal of Enron quit job by resigning. At this time it is believed that the stock had been overvalued and these two companies made many deals about the lucrative offerings in stocks which benefited them to become multibillions empires. Following the investigations by the Attorney General of the New York about the company practices and the fraud cases, Lynch agreed on a settlement which involved the fine that was levied onto it, promising to correct the vices it had committed.

Accounting cycle

Merrill Lynch incurred public embarrassment by admitting the wrong doing, then was asked to pay a fine of 100 million dollars and then the company agreed to disconnect the relationship of investment banking and research from working closely in the company. The closely-related working relationship of these two departments had encouraged them to work to achieve their selfish individual goals thus forgetting the shareholders goals. The fraud in the research department meant that they covered the analysts in the way to pay themselves salaries entirely depending on the market stock   performance in the economy thus realizing large gains to satisfy their selfish ambitions. According to Albrecht (2009, p. 142) the unusual relationship may not signal fraud but the transactions that do not make sense carry more weight in providing signs of fraud being in practice.

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US Securities and Exchange Commission (2003) suggests that the Merrill Lynch executives were involved in abetting Enron’s earnings through engaging in fraudulent deals in the transactions of the two year ends. They had purposed the transactions of fraud of the two year ends to be overstating financial results of the Enron. The circumstances then forced the Merrill Lynch company to agree very fast to pay a fine of 80 million dollars as a penalty and some interest which was levied on them by the courts , it also a greed to end this system of fraud so as to prohibit any future violations in the federal laws. Frederick (2006 p. 186) suggests that to be successful and great corporate fraudsters and most corrupt, then accompany must involve others in the shareholders company; he refers this to gang companies who make false claims to enrich themselves. Sometimes not all gang companies sign these contracts knowingly others are said to do this without taking much seriousness.

The executives of the Merrill Lynch were helping Enron to defraud investors in the company by making the financial statements look good than they were. They did this by asset-parking arrangement in which the Merrill Lynch purchased an interest at the Nigerian barges. Silverstone and Sheetz (2009) argues that many people who are able to commit fraud are mostly on the financial departments and this happens when they spend more money than they legally make. In this case, Barges were received from Enron Corp with a view that Enron was going to organize the selling of the interest in a span of six months time at a given required rate of return. In other words, this kind of transaction was to act as a loan since risks and rewards in the ownership of barges and their interest were not received by Merrill Lynch. The executives are found to have knowledge that Enron was to make 28 million dollars as revenue plus the 12 million dollars before income tax in regard to this transaction. Experts say Merrill Lynch agreed this deal so as to allow Enron commit fraud by embezzling the funds from its investors despite pretence to be helping and “abetting Enron corps earnings manipulation.”

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The other transaction was that in the last periods of 1999 Lynch and Enron Corp formed two major energy options that Lynch is said to have been aware had a sole intention of inflating income of Enron by about 50 million dollars.  The two trades were believed by Merrill to be a complete wash and the transaction was to have a great impact on the results reported by Enron. Having this information at hand, Lynch asked for    mult-dollar millions for agreeing to trade in this transaction which Enron completely agreed to pay in a some sums of money over a period of four years. During the year 2000 Enron Corp decided to unwind the deal before transacting in the new trade of energy options that was to start.The transaction they had previously entered into was changed and they decided to have new terms of trade where Lynch reduced the fee 8.5 million dollars.


Merrill Lynch did not testify before their employees but decided to count on the “Fifth Amendments” rights which made them go scot-free. Despite having purchased energy options trade, the managers did not bring this transaction into the employees’ attention even though they were pretty sure that employee never had any idea about its establishment. The commission appreciates the ongoing support from the Enforcement department and the department of justice in the Enron investigation. Investment companies intending to progress in the financial matters should eliminate and avoid such kind of fraud and desist any indulgement that leads to lack of confidence.


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