Nigerian Barge Deal

The Nigerian Barge Deal was one of the most prominent fraudulent transactions exposed during the Enron scandal. On December 29, 1999, Enron arranged for Merrill Lynch to purchase an interest in electricity-generating power barges moored off the coast of Nigeria, allowing Enron to improperly record approximately $12 million in earnings and $28 million in funds flow for the fourth quarter. The critical fraud element was a secret oral agreement guaranteeing that Merrill Lynch would be taken out of the deal within six months at a fixed profit of approximately 22 percent, effectively making the transaction a bridge loan rather than a legitimate sale. The subsequent prosecutions became significant for holding a major financial institution criminally accountable for participating in corporate fraud, while the appeals produced landmark rulings on the scope of federal fraud statutes.

The Transaction

Background and Structure

In late 1999, Enron was attempting to sell an interest in electricity-generating power barges moored off the coast of Nigeria but could not find a legitimate buyer before year-end. Faced with the prospect of missing its earnings targets, Enron arranged for Merrill Lynch to serve as a temporary purchaser so that Enron could record earnings and cash flow in the fourth quarter of 1999, making the company appear more profitable than it actually was.

The transaction closed on December 29, 1999, with a purchase price of $28 million. Of this amount, Merrill Lynch contributed $7 million in equity, while Enron provided a $21 million loan to a special entity that would make the purchase. From this transaction, Enron reported a profit of approximately $12 million, boosting its fourth-quarter results and enabling executive bonuses tied to those results.

The Secret Oral Agreement

What made this transaction fraudulent rather than a legitimate sale was an undisclosed oral “handshake” side deal that was deliberately kept out of the written contracts. Under this secret agreement, Enron promised Merrill Lynch three things: first, that Merrill Lynch would receive a return on its investment of approximately 22 percent, annualized at 15 percent; second, that Enron would arrange to sell the barges to a third party or repurchase them within six months; and third, that Merrill Lynch would face no real risk of ownership.

This arrangement meant the transaction was not a legitimate sale under generally accepted accounting principles. Because the risks and rewards of ownership did not genuinely pass to Merrill Lynch, Enron should not have booked the sales price as income. The deal was, in substance, a “parking” arrangement, a temporary placement of assets with a financial institution designed solely to inflate Enron’s quarterly financial results.

The LJM2 Buyback

Having found no genuine third-party purchaser, Enron fulfilled its secret promise through Andrew Fastow’s LJM2 partnership. On June 29, 2000, exactly six months after the original transaction, LJM2 purchased Merrill Lynch’s interest for $7,525,000, delivering the promised 15 percent annualized profit to the investment bank.

LJM2 was a special purpose entity that Fastow had created to raise private equity for deals with Enron. According to testimony at trial, Enron would use LJM as an “off-ramp” to warehouse assets. There was an undocumented understanding between Fastow and Enron senior management that LJM2 would only hold the Nigerian barge asset temporarily, no longer than through year-end 2000.

Key Evidence

The Glisan Email

While the fraudulent transaction was conducted through oral agreements to avoid documentation, prosecutors later obtained critical email evidence that revealed the secret promises. Ben Glisan Jr., Enron’s treasurer, sent an email on May 11, 2000, that became crucial trial evidence. The email stated plainly: “To be clear, ENE is obligated to get Merrill out of the deal.” (ENE was Enron’s stock symbol.)

This email, presented to the jury, directly contradicted claims that the transaction was a legitimate arms-length sale. Sean Long testified that he received this email from Glisan, which pointedly spelled out the terms of the 1999 handshake deal with Merrill Lynch.

Document Destruction Allegations

According to the indictment, in January 2001, Sheila Kahanek, an Enron accountant, reportedly “severely reprimanded” a colleague for documenting the secret oral agreement and demanded destruction of evidence. This allegation suggested that Enron employees were aware the arrangement was improper and needed to be concealed from auditors and regulators.

The Prosecutions

Criminal Charges

The Enron Task Force pursued criminal charges against six executives from Enron and Merrill Lynch related to the Nigerian Barge transaction.

Merrill Lynch defendants:

• Daniel Bayly (age 56), former head of Merrill Lynch’s Global Investment Banking division, was charged with conspiracy to commit wire fraud and falsify books and records.
• James A. Brown (age 51), head of Merrill Lynch’s Strategic Asset Lease and Finance group, was charged with conspiracy, wire fraud, perjury, and obstruction of justice. Brown allegedly made false statements under oath before a federal grand jury in September 2002, claiming he was “not aware of the promise” regarding Enron’s commitment to repurchase the barges within six months.
• Robert S. Furst (age 42), Enron relationship manager in Merrill Lynch’s investment banking division, was charged with conspiracy to commit wire fraud and falsify books and records.
• William R. Fuhs, a vice president at Merrill Lynch, was charged with conspiracy to commit wire fraud, falsifying records, false statements, and obstruction of the grand jury investigation.

Enron defendants:

• Dan O. Boyle, a finance executive earning $250,000 in 1999, was charged with conspiracy and wire fraud.
• Sheila K. Kahanek, a mid-level in-house accountant earning $100,000 in 1999, was charged with conspiracy to commit wire fraud and falsify Enron’s books and records.

A federal grand jury in Houston issued a superseding indictment in June 2004 adding two wire fraud counts for all defendants and one false statement charge against Boyle. The maximum sentences ranged from 15 years for Bayly, Furst, and Kahanek, to 30 years for Brown and Fuhs, who faced additional perjury and obstruction charges.

The Trial and Verdict

The trial took place in fall 2004. Ben Glisan served as the government’s star witness, testifying while wearing prison garb rather than a suit after having pleaded guilty to conspiracy and received a five-year sentence. Glisan listed nearly a dozen deals, including the Nigerian barge deal, which he believed were illegal.

Michael Kopper, the first former Enron executive to strike a plea bargain with prosecutors, also provided crucial testimony. Kopper testified that Andrew Fastow confided that making Enron’s books look good would turn him into a hero with CEO Jeff Skilling. He also testified that Fastow and Enron Treasurer Jeff McMahon told him they had “promised” Merrill Lynch that they would ensure the investment bank’s exit from the Nigerian barge transaction.

In November 2004, the jury returned guilty verdicts against five of the six defendants: Daniel Bayly, James Brown, Robert Furst, William Fuhs, and Dan Boyle. Sheila Kahanek was acquitted.

Why Kahanek Was Acquitted

Several factors contributed to Sheila Kahanek’s successful defense. Unlike the other defendants, Kahanek did not receive or author the most incriminating emails, nor was she involved in the two potentially damaging phone calls that solidified the improper oral side deal. Several witnesses testified that Kahanek repeatedly told them early on that guarantees and secret side deals would make the transaction a sham. She testified that she never earned a bonus on the barge deal and never even considered how she could benefit from a run-up of Enron stock. As the lowest-paid defendant at $100,000 annually, compared to $224,000 to $850,000 for the Merrill Lynch bankers, her defense successfully portrayed her as a mid-level employee caught up in decisions made by more senior executives.

Initial Sentences

Before the appeals process began, the convicted defendants received the following sentences:

The Appeals and Reversals

Fifth Circuit Reversal (August 2006)

On August 1, 2006, the Fifth Circuit Court of Appeals issued a ruling in U.S. v. Brown that reversed the conspiracy and wire fraud convictions of Bayly, Brown, Furst, and Fuhs. The court held that the government had tried the defendants on an invalid theory of theft of “honest services.”

The key ruling stated that the “honest services” language in federal fraud statutes has been interpreted to require actions close to bribery. Since the government failed to offer proof of that type of conduct, the Fifth Circuit reversed the fraud convictions. By this time, the Merrill Lynch executives had already served part of their sentences.

The appeals panel upheld Brown’s separate convictions on perjury and obstruction of justice charges related to his false testimony before the grand jury. For Fuhs, however, the court erased all convictions for lack of evidence, meaning he could not be retried and achieved complete exoneration on appeal.

Final Outcomes

The aftermath of the Fifth Circuit decision played out differently for each defendant:

Daniel Bayly: Prosecutors asked that all charges be dropped, and a federal judge ordered dismissal of all charges. His passport was returned after having been confiscated following his 2004 conviction.

Robert S. Furst: He negotiated a favorable plea deal that led to dismissal of the remaining charges.

William R. Fuhs: All convictions were erased for lack of evidence. He could not be retried and achieved complete exoneration.

James A. Brown: The Department of Justice pursued retrial efforts on his remaining perjury and obstruction charges. In August 2011, the federal appeals court upheld those convictions. Brown argued that prosecutors had withheld exculpatory evidence, but the Fifth Circuit ruled the evidence “at best might have marginally helped Brown and would not likely have changed the result.” He served one year in prison total.

Dan O. Boyle: The sole defendant who did not appeal his conviction, Boyle served his full sentence of three years and ten months.

Cooperating Witnesses

Andrew Fastow

Fastow pleaded guilty on January 14, 2004, to two counts of wire and securities fraud. Under his original agreement, he faced 10 years in prison, but his cooperation with federal authorities earned him a reduced sentence. On September 26, 2006, Judge Ken Hoyt sentenced him to 6 years in prison and 2 years probation, along with asset forfeiture of $23.8 million. The judge believed Fastow deserved leniency because he was “credible, contrite and truthful” in his testimony, and his help was a “key breakthrough” in the government’s investigation of Ken Lay and Jeff Skilling.

In the broader Enron prosecutions, Fastow testified that Skilling gave him a “bear hug” after the Nigerian barge deal, essentially promising that Fastow would be made good on the transaction and would not lose money.

Jeff McMahon

McMahon, who served as Enron treasurer at the time of the transaction, was never criminally charged despite testimony from both Glisan and Kopper that he and Fastow had “promised” Merrill Lynch they would ensure its exit. McMahon approached Merrill Lynch with the deal when efforts to sell the barges to another company had failed. At trial, the parties stipulated that McMahon was unavailable as a witness because he would invoke his Fifth Amendment privileges if called to testify. Years later, McMahon settled an SEC civil suit by paying a small fine without admitting guilt.

Corporate Settlement

Merrill Lynch reached a settlement with the Department of Justice separate from the criminal prosecutions of its individual executives. Under the terms, the firm accepted responsibility for any criminal conduct by its employees in dealings with Enron, agreed to cooperate fully with the ongoing investigation, agreed to implement sweeping reforms addressing the integrity of client and third-party transactions, and accepted a court-appointed monitor for 18 months.

The Securities and Exchange Commission also charged Merrill Lynch and four former senior executives, including Bayly and Furst, with aiding and abetting Enron’s securities fraud through the Nigerian barge transaction and a second fraudulent year-end 1999 transaction.

Significance

Accounting Fraud Mechanics

The Nigerian Barge case illustrated a common accounting fraud technique known as “parking,” where companies temporarily place assets with financial institutions to fraudulently enhance their financial position. The case demonstrated how companies manipulated earnings through transactions that lacked economic substance, contained undisclosed side agreements, failed to transfer risks and rewards of ownership, were timed to boost quarter-end results, and enabled executive bonuses based on false performance metrics.

Corporate Accountability

The case became a significant precedent for holding financial institutions criminally liable for knowingly participating in corporate fraud schemes. Prior to this prosecution, it was less common to see major investment banks face criminal charges for their role in facilitating client accounting fraud. The case signaled that financial institutions could not claim they were merely executing client transactions when they possessed knowledge of the fraudulent purpose.

The “Honest Services” Controversy

The Fifth Circuit’s 2006 reversal became part of a broader legal controversy about the “honest services” fraud theory under federal law. The court’s ruling that the theory required proof of conduct akin to bribery had significant implications: it narrowed the government’s ability to prosecute certain corporate fraud cases, triggered concerns about the Enron Task Force’s prosecutorial approach, resulted in the release of executives who had already served substantial prison time, and influenced subsequent white-collar crime prosecutions nationwide.

See Also

• Andrew Fastow - Enron CFO whose LJM2 partnership completed the buyback
• Ben Glisan - Enron treasurer who became the government’s star witness
• LJM Partnerships - The special purpose entities used to facilitate the buyback
• Michael Kopper - First Enron executive to plead guilty; testified about the deal
• Jeff McMahon - Enron treasurer who approached Merrill Lynch
• Jeff Skilling - CEO allegedly gave Fastow a “bear hug” after the deal
• Enron Bankruptcy - The eventual collapse of the company

References

This article draws on Department of Justice press releases from September 2003, October 2003, and June 2004; the Fifth Circuit Court of Appeals decision in U.S. v. Brown (August 2006) and the 2011 decision upholding Brown’s perjury conviction; SEC enforcement actions against Merrill Lynch; and contemporaneous news coverage from the Houston Chronicle, CNN Money, PBS NewsHour, and legal commentators. The Enron email corpus contains limited direct evidence of the transaction itself, as the fraudulent arrangement was conducted through oral agreements to avoid documentation. The most incriminating evidence, including Glisan’s May 2000 email, was obtained through government investigation.