Merrill Executive's Trial Opens
The Wall Street Journal 09/21/2004
Author: Ann Davis
(Copyright (c) 2004, Dow Jones & Company, Inc.)
Daniel H. Bayly, a former head of investment banking for Merrill Lynch & Co., will be held up by prosecutors this week as a symbol of Wall Street greed. As the highest-level banker so far to face criminal charges in connection with the collapse of EnronCorp., his conviction would be a coup for the Justice Department.
In looking for somebody in the Enron debacle to make an example of, prosecutors made an unlikely choice: Mr. Bayly had far less contact with Enron, and his firm did much less work, than investment bankers at other firms involved in its most controversial, multibillion-dollar accounting maneuvers. As Merrill watched rivals sop up millions of dollars in fees from Enron, its bankers were frustrated they weren't getting more business from Enron. [Daniel H. Bayly]
How the 57-year-old Mr. Bayly, known by friends as a cautious worrier, ended up on the defendants' bench is a study in the perils of being too can-do for a desirable client.
His trial, which began yesterday in federal court in Houston with the pool of prospective jurors being whittled down to 44, also will point to the hazards of a common Wall Street practice: Top investment bankers such as Mr. Bayly frequently parachute into financial deals at the 11th hour, using a script largely drawn up by the troops to assure a big client of a deal's importance. While the Enron deal in question -- which involved the sale of barges -- had been vetted by a company lawyer, prosecutors say Mr. Bayly erred by not halting an unusual and illegal transaction.
Mr. Bayly and three other former Merrill bankers now are in the hot seat, along with two ex-Enron employees, in part because prosecutors believe their case is easier to explain to a jury than the more-complex deals handled by rivals. Mr. Bayly resigned from Merrill in September 2002.
On a busy day just before Christmas in 1999, bankers who worked for Mr. Bayly asked him to support Merrill's purchase of some electricity-producing barges off the coast of Nigeria from Enron, with an upfront payment by Merrill of $7 million. Mr. Bayly and others worried the investment, atypical for Merrill, also could be money losing, but they wanted more of the Texas energy titan's business.
It fell to Mr. Bayly to call Enron's chief financial officer, Andrew Fastow, for assurances that Enron would try to find a buyer to take back the barges in a short time. According to Mr. Bayly's attorneys, he told the Enron financial chief that Merrill was doing the deal as a favor, and Mr. Fastow pledged his best efforts to locate an interested buyer later.
Prosecutors, however, contend that Mr. Fastow gave Mr. Bayly a verbal "guarantee" the firm would be out in six months -- at a specified profit. If such a guarantee existed, the government says, Merrill's money wasn't really at risk, the sale wasn't real and Enron illegally recorded a profit that helped it meet year-end earnings expectations.
As it turns out, an investment fund controlled by Mr. Fastow bought back the barges the following year. Merrill Lynch last year settled with the Justice Department in exchange for not being prosecuted, accepting responsibility for any hand its employees allegedly had in the fraud and overhauling its review procedures.
Clients and bankers who have worked with Mr. Bayly have voiced surprise at his indictment, saying on at least several occasions he turned away business he deemed dicey. The father of three children, he has been married to his wife for three decades and worked for Merrill for the same length of time. Unlike the stereotypical slick investment banker, Mr. Bayly came across as patient and unpretentious. Charles A. Lewis, a recently retired vice chairman of investment banking at Merrill who worked with Mr. Bayly in Chicago in the 1980s and 1990s, recalls reminding the low-key banker to "get a shoe shine."
"You think of him, and you think of 'The Importance of Being Earnest,' " Mr. Lewis says, referring to the play by Oscar Wilde. "For 'Boy Scout Bayly' from Illinois to be mentioned in the same breath as these cowboys from Texas is the height of irony and tragedy. The disconnect is so remarkable."
Still, Mr. Bayly showed plenty of savvy, those who know him say. He spent most of his career in Chicago, and was one of the few original Merrill employees to thrive in that office after Merrill in 1978 purchased White Weld & Co. Dubbed the "Chicago mafia" within Merrill, those new bankers rose to dominance, yet Mr. Bayly's apolitical style gave him staying power, those who know him say.
Mr. Bayly's core accounts were Midwestern industrial companies such as Snap-on Tools Inc., Sears, Roebuck & Co., and the real-estate and industrial companies owned by prominent Chicago businessman Samuel Zell. Mr. Zell says Mr. Bayly's current predicament doesn't square with a banker he viewed as playing "the role of little old lady."
"There were some guys in that role who were always promoting, and some guys in that role who always worried," Mr. Zell says. "When we launched a roadshow [presentation to investors], he was always worried, 'Was it going to be successful enough?' or 'Did we make enough calls?' "
After becoming co-head of investment banking in 1995 -- some say he was a dark-horse candidate given his plodding style -- he still helped pitched deals. Sid Goodfriend, a former Merrill banker who worked with him over two decades, recalls his boss flying out repeatedly to help him win business from Procter & Gamble Co. Merrill did subsequently win assignments.
Details are likely to emerge in court about meet-and-greet sessions he had with Enron officials in both Houston and New York prior to and after the barge deal. Mr. Bayly's attorneys describe the get-togethers as routine; many banking chiefs attend client meetings.
In December 1999, the Merrill bankers pushing the barge deal took it to an internal commitment committee for review. The committee, which didn't include Mr. Bayly, declined to take action but requested Mr. Bayly call Enron's Mr. Fastow and impress upon him that this wasn't a transaction in which Merrill normally would participate, according to a report by an Enron bankruptcy examiner.
Crucial to Mr. Bayly's defense is the fact that a Merrill in-house attorney, Katherine Zrike, was present both at that meeting and one that followed with Mr. Bayly and his boss, Tom Davis, documents and testimony to various agencies show. Merrill defendants have testified that Ms. Zrike told bankers she believed the transaction to be legal, say people familiar with their testimony. And a letter sent by attorneys for Merrill Lynch to Congress in September 2002 asserts that at the end of the second meeting, Mr. Davis gave the deal his approval. An attorney for Mr. Davis declined to comment.
Lawyers in the case say the government may argue Ms. Zrike was given incomplete information. However, prosecutors have designated her an "unindicted co-conspirator" in pretrial proceedings and could question her motives. Mr. Bayly's attorneys have subpoenaed Ms. Zrike, who still works for Merrill Lynch, to testify. Her attorney previously has declined comment and didn't return calls for this article.
Mr. Bayly's call with Enron's Mr. Fastow took place Dec. 23, 1999, as people at both companies listened in. It is expected to be a focal point of the trial. Prosecutors recently revealed in a pretrial letter that Mr. Fastow, as part of his cooperation tied to a guilty plea, has told investigators he didn't explicitly use the word "guarantee" to Mr. Bayly. However, other statements he made seem to support the government's contention of a promise.
Mr. Bayly's attorney, Richard Schaeffer, says he hasn't determined whether to put Mr. Fastow on the stand. The government has said it won't call Mr. Fastow.
After the deal, but before Mr. Bayly's resignation from Merrill and subsequent indictment, it appears he was acutely aware of the pressures bankers face to help clients manage earnings. In a trade book published in 2002, "Inside the Minds: Leading Investment Bankers," he argued in a chapter about strategies for success that "part of the responsibility of the investment banker" was to encourage clients to think long-term. The "level of scrutiny of a company's financial results has never been higher," he wrote. "Companies must not be pressured into immediate actions designed to boost [earnings per share] or the stock price over the short term."
