As noted in this earlier post, the Enron Task Force‘s first trial in a case stemming from its over two year investigation into the collapse of Enron Corp. will begin next Monday in U.S. District Judge Ewing Werlein‘s court in Houston.
The case has been dubbed the “Nigerian Barge case” because it involves the actions of two former Enron executives and four Merrill Lynch executives in arranging Merrill’s purchase of an interest in a barge off the coast of Nigeria at the end of 1999. The Task Force alleges that the deal was a sham that was done merely to improve Enron’s financial condition artificially at the end of its fiscal year. The Task Force’s proof of the alleged sham is that former Enron CFO Andrew Fastow allegedly promised that Enron would broker a sale of the interest in the barges for Merrill the following year and that Merrill would not have done the deal but for Fastow’s promise. Thus, argues the government, the sale was not a “true sale” of the interest, and Enron’s accounting of the deal as a true sale was false.
An apparent weakness in the government’s theory is that, even if the government could prove that Fastow made the promise and that Merrill would not have done the deal but for that promise, Fastow’s promise was made before the parties entered into the final deal documents, which contain the typical provision that essentially provide that the parties are relying only on the written representations in the documents and that any oral promise made prior to the written agreements between the parties is not being relied upon. Thus, even if Fastow had made the promise to broker a deal for the interest in the barges to induce Merrill to buy it, that promise was not contained in the written agreements and, by signing them, Merrill confirmed that it was not relying on them. Stated simply, Merrill would not have been able to enforce Fastow’s oral promise to broker a deal for the barges.
In view of the foregoing and Fastow’s plea bargain with the government, it would seem that Fastow’s testimony that the deal was a sham would be of great importance to the government. However, this Chronicle article reports that the Task Force has decided not to call Fastow as a witness in presenting its case in chief during the trial.
Given the importance of Fastow’s allegedly fraudulent deal-making to the government’s case, this is good news for the defense. Moreover, in light of the written agreements between Enron and Merrill, is there really any way that the Task Force can sustain its burden that an oral side deal to broker a deal for the barges was an enforceable part of the deal? Stay tuned.