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Energy Trader Under Scrutiny

A former Merrill Lynch employee is a suspect in a Canadian probe of a $43-million scheme.

August 12, 2003|Thomas S. Mulligan | Times Staff Writer

NEW YORK — U.S. and Canadian authorities are investigating the role of the former head of Merrill Lynch & Co.'s energy-trading unit in a purported $43-million fraud and money-laundering scheme, according to court documents and a Canadian law enforcement official.

Daniel L. Gordon, who headed Merrill's Global Energy Markets unit until early 2001, is a suspect in a probe by the Royal Canadian Mounted Police, said Jason Chance, a spokesman for provincial prosecutors in Edmonton, Alberta.

Also considered suspects are Edmonton-based Newport Pacific Financial Group and its chairman, Michael Ritter, Chance said Monday.

No charges have been filed in the case. Neither Gordon nor Ritter nor their lawyers returned calls seeking comment Monday.

Bloomberg News, citing documents filed in an Edmonton court, reported Monday that investigators suspect Gordon of creating a shell company, Falcon Energy Holdings, based in the Caribbean island of Anguilla, to defraud Merrill's energy unit of $43 million and then launder the money through Swiss banks with the aid of Newport Pacific and Ritter.

The alleged fraud is described in a 76-page sworn statement by RCMP Sgt. Joseph Mamela and a 12-page letter to Alberta's attorney general from Assistant U.S. Atty. Jane Levine, a prosecutor in the major crimes unit in the Southern District of New York, which is assisting the RCMP in the investigation.

Gordon is chairman of Daticon Inc., a Norwich, Conn., document-storage firm, according to Bloomberg. Attempts to reach Gordon at the company's offices Monday were unsuccessful.

Merrill spokesman Bill Halldin said that in the summer of 2000, Gordon directed his Global Energy Markets unit, known as GEM, to pay Falcon $43 million, ostensibly for an insurance contract to protect GEM energy trades. Investigators are trying to determine whether the insurance contract was legitimate.

Merrill assumed the contract was above board and was unaware of any relationship between Gordon and Falcon, Halldin said Monday.

The insurance contract wasn't to take effect until 2003, by which time Merrill already had sold GEM's assets to Maryland-based Allegheny Energy Inc. for $490 million in cash plus $115 million in stock of Allegheny's energy-trading subsidiary, Halldin said.

Among the assets that changed hands in that March 2001 sale was a supply contract for 1,000 megawatts of power from Southern California plants operated by AES Corp. Six days after the sale closed, Allegheny signed a 10-year, $4.5-billion contract to sell its electricity to the state of California. It was one of a slew of controversial, long-term contracts signed during the state's power crisis.

Allegheny Energy recently warned that power-trading losses were threatening the company with bankruptcy protection.

Allegheny and Merrill are suing each other in U.S. District Court in Manhattan over issues arising from the GEM sale.

Gordon went to Allegheny after the sale, becoming head of its Allegheny Energy Supply trading arm, but was fired in September 2001 for undisclosed conflict-of-interest violations.

Merrill denied misleading Allegheny, asserting that it did not learn of the allegations surrounding the Falcon insurance contract until October.

"If the allegations are true, then Merrill Lynch was victimized by this individual," Halldin said. He added: "We are working with law enforcement authorities who are investigating this former employee's activities. We've taken steps to strengthen our controls as a result of our review of this matter."

Merrill has been embroiled in other recent controversies regarding oversight of personnel.

The Edmonton Journal, also citing the statement by the RCMP's Mamela, reported in June that Ritter allegedly used more than $1 million of the proceeds of the Falcon deal to buy two airplanes, a condominium and a skybox at the Edmonton Oilers' arena.

The statements by Mamela and Levine surfaced in a hearing over the legality of a court order under which prosecutors have frozen some of Ritter's assets, including the two airplanes.

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