Daniel Gordon, former chief energy trader for Merrill Lynch & Co., is being investigated for embezzling $43 million from the world's largest securities firm in 2000 by disguising the theft as an energy trade, according to a letter written by a U.S. Justice Department prosecutor and interviews with Canadian law-enforcement officials.
Merrill Lynch, based in New York, hasn't disclosed the loss in public filings. Gordon sent the money in 2000 to a Caribbean- incorporated shell company he controlled, according to the Justice Department letter. Merrill, the largest securities firm by capital, said in a civil-court filing on July 14 that it recognized the possibility of ``the alleged fraud.''
The embezzlement would be the largest employee theft from a financial institution, said John Coffee, Adolf A. Berle professor of law at Columbia Law School, where he directs the Center on Corporate Governance. Frank Partnoy, a securities-law professor at the University of San Diego School of Law, said the case suggests Merrill's oversight and control of its executives was inadequate.
``We're alleging Dan Gordon defrauded Merrill Lynch of $43 million'' and laundered the money with the help of a Canadian offshore-banking consultant, said Gregg Lepp, a Canadian prosecutor in Edmonton, Alberta, in a telephone interview. Gordon, also under investigation by federal prosecutors in New York, hasn't been formally charged with any wrongdoing.
``The usual credit-check and due-diligence procedures in place at Merrill Lynch were not followed with respect to'' Gordon's transactions, Assistant U.S. Attorney Jane Levine in New York wrote in a letter to Canadian law-enforcement officials, citing interviews with witnesses in Merrill's credit department and written internal communications.
Potentially Wider Problem
Partnoy, the San Diego law professor and author of ``Infectious Greed,'' said the episode should concern the company's investors.
``This is highly material information about how Merrill Lynch is run and how their controls and credit checks are able to detect theft or fraud,'' Partnoy said. ``It's evidence of a potentially wider control problem. In my opinion, because of the nature of the transactions, the $43 million loss should have been disclosed.''
Gordon, now chairman of Daticon Inc., a legal-document- storage company in Norwich, Connecticut, didn't return three phone messages to Daticon and his mobile phone requesting an interview.
Gordon's attorney, Alan Levine, managing partner of Kronish Lieb Weiner & Hellman LLP in New York, declined to comment. Levine also didn't respond to two faxes detailing the allegations against Gordon.
Merrill Cooperating
Merrill Lynch was unaware of the alleged theft until last October, two years after Gordon allegedly took the money, said Merrill spokesman Bill Halldin. He said that in all the time Gordon was at Merrill, the firm was unaware of any wrongdoing by Gordon. ``We're cooperating fully with the appropriate law enforcement officials on this matter,'' he said.
Gordon's energy-trading unit was under the supervision of Kelly Martin, senior vice president and head of global debt markets at Merrill, Halldin said. Martin resigned last December and is now chief executive of Elan Corp., Ireland's largest drug maker.
Martin reported to Thomas Davis, then head of Merrill's investment banking and capital markets business, Halldin said. Davis was fired in September for refusing to testify to the Securities and Exchange Commission and U.S. Justice Department about Merrill's transactions with Enron Corp. in 1999, Halldin said.
Asked what Merrill Chairman and Chief Executive Stanley O'Neal has done to tighten internal controls, Halldin said, ``We're continually improving our internal controls and compliance procedures.''
Third Incident
The breakdown in internal controls is the third incident reported in the past year in which Merrill has failed to adequately supervise its employees.
Merrill agreed to pay $80 million in March to settle SEC charges that it helped Enron Corp. commit accounting fraud. In April, Merrill agreed to pay $200 million to settle accusations by state and federal regulators that the firm allowed conflicts of interest by its research analysts.
Merrill neither admitted nor denied wrongdoing in either case.
Merrill sold its energy-trading unit to Allegheny Energy Inc., a Maryland-based utility, in January 2001, and Gordon became Allegheny's chief energy trader. The utility fired Gordon in September for violating company conflict-of-interest rules, spokeswoman Cynthia Shoop said. She declined to say what the conflicts were.
Legal Dispute
Merrill's decision to sell the unit was made by Merrill's then-Chief Executive David Komansky, saying the division wasn't part of Merrill's core business, Halldin said.
Two months ago, in a lawsuit that began last year in federal court in New York City, Allegheny accused Merrill of concealing knowledge of Gordon's wrongdoing at the time of the sale. Merrill denied the accusation. ``The only party that suffered damages was Merrill Lynch,'' Merrill wrote in a July 14 legal response filed in U.S District Court in New York City.
Another issue in dispute is Gordon's age. Allegheny said in court documents that ``Gordon was several years younger than had been represented to Allegheny.'' Assistant U.S. Attorney Levine wrote in her letter dated Nov. 21, 2002, that Gordon was 26.
The allegations against Gordon are contained in a 76-page sworn statement filed by Sergeant Joseph Mamela of the Royal Canadian Mounted Police in the Provincial Court of Alberta in Edmonton, and in a 12-page letter written to Alberta's attorney general by Assistant U.S. Attorney Levine.
Mamela filed the statement with the Alberta court in December to establish probable cause to obtain a search warrant. The court granted the warrant to search Newport Pacific Financial Group SA, an Edmonton company Gordon had hired to establish two offshore companies, according to Canadian prosecutor Lepp.
Request for Assistance
Levine's letter, sent from the U.S. Attorney's New York office and titled ``Request for Assistance in the Investigation of Daniel L. Gordon,'' sought help in tracking Gordon's use of offshore bank accounts.
``This office has developed evidence that Daniel L. Gordon was involved in the embezzlement and laundering of approximately $43 million,'' Levine wrote. She wrote that Gordon directed Merrill to send the $43 million to Falcon Energy Holdings SA, a shell company incorporated in Anguilla, a Caribbean island, as payment for a ``fraudulent contract.''
Merrill wired the money to Falcon on or about Aug. 30, 2000, ``to a bank account held in the name of Newport Pacific Financial Group at AIG Private Bank Ltd. in Zurich, Switzerland, for further credit to Falcon,'' she wrote.
Levine declined to comment, citing Justice Department policy.
Merrill had accepted Gordon's word that Falcon was ``an international energy firm with investments in power plants, oilfields and gas reserves,'' Levine wrote.
Offshore Companies
Levine's letter sought assistance from Canadian officials already investigating Newport as part of a money-laundering probe. Newport charges $18,000 to establish an offshore corporation, trust and bank account, each in a different nation to ensure privacy, said Michael Ritter, its chief executive.
Ritter helped Gordon form the offshore companies, controlled by a trust in the Central American nation of Belize, and opened the accounts with AIG Bank in 2000, Ritter said in a telephone interview. Gordon said they were for two Merrill clients, Ritter said.
``When money comes from a bona fide like Merrill Lynch, you don't question its pedigree,'' Ritter said.
Newport Pacific Trust Co. of Belize, an affiliate of Newport Pacific, froze the money in 2000 after $32.5 million of the $43 million was wired out of the offshore companies' accounts soon after they were opened, because Ritter suspected something was amiss, he said.
Called Merrill
Ritter said he contacted Merrill lawyers shortly after Merrill sold its Global Energy Markets Unit, known as GEM, to Allegheny Energy, alerting them to his suspicions the account was used for money laundering. ``They didn't seem concerned,'' Ritter said. ``They seemed relieved it wasn't their problem.''
``Merrill Lynch received no information about Falcon or suggestions of impropriety affecting Merrill Lynch,'' Merrill spokesman Halldin said.
Ritter said Newport now holds the remaining $10.5 million in long-term investments, and that he's not spoken to Gordon for more than two years. ``I'd love to hear from him,'' Ritter said. ``It's a bizarre situation.''
The two offshore companies were Falcon and Ostrich Capital Partners, which was incorporated in the Marshall Islands, according to Assistant U.S. Attorney Levine.
Gordon used the companies to move the $43 million through Newport's accounts in the AIG Swiss bank, Levine wrote. American International Group Inc., the world's largest insurer by market value, owns the bank.
AIG spokesman Andrew Silver declined to comment.
`Shell Corporation'
``Falcon was not a legitimate company, but rather an offshore shell corporation controlled by Gordon and used as a vehicle to receive and launder the $43 million Merrill Lynch wired to Falcon under the terms of the fraudulent contract,'' Levine wrote.
Allegheny Energy purchased GEM for $490 million and a 2 percent stake in Allegheny's power-generating and wholesaling operations.
Merrill and Allegheny began their legal battle in the U.S. District Court in New York last September. Allegheny said it was defrauded by Merrill, and wanted the purchase rescinded. In court filings, Merrill has denied wrongdoing, and said it's still owed $115 million, in addition to $490 million it already received.
``Rather than terminate Gordon, Merrill Lynch instead swept its knowledge concerning the Falcon transaction under the rug and sold GEM to Allegheny,'' the power company said in a counterclaim against Merrill filed with the court on June 13.
Merrill Denies Allegations
``Merrill Lynch, knowing of the problems with GEM and its personnel, particularly Gordon, recognized an opportunity to solve its problems -- and profit handsomely -- by selling them to Allegheny,'' Allegheny said in the document. When it bought GEM, Allegheny said it ``had no reason to doubt Gordon's integrity or qualifications.''
Merrill said in its court-filed response that it remained unaware of Gordon's alleged theft for more than 18 months after the sale.
Gordon transferred $30 million from Falcon to Ostrich and wired the money to a New York bank account for Kings Holdings LLC, also owned by Gordon, in October 2000, according to Lepp and Levine. Gordon transferred an additional $2.5 million to another account, Lepp said.
Kings Acquires Daticon
The next month, Kings acquired a 70 percent interest in Daticon, Levine wrote. Kings then wired $25.5 million to an unidentified Connecticut law firm, which ``appears to be for the Daticon acquisition,'' according to the Levine letter.
Glenn Gordon, Daniel's father, who is now chief executive of Daticon, declined to comment.
Daticon stores more than 100 million pages of data in an Internet-based document repository for law firms, according to its Web site.
Merrill Lynch is a minority, passive investor in Bloomberg LP, the parent of Bloomberg News.
Merrill Lynch, based in New York, hasn't disclosed the loss in public filings. Gordon sent the money in 2000 to a Caribbean- incorporated shell company he controlled, according to the Justice Department letter. Merrill, the largest securities firm by capital, said in a civil-court filing on July 14 that it recognized the possibility of ``the alleged fraud.''
The embezzlement would be the largest employee theft from a financial institution, said John Coffee, Adolf A. Berle professor of law at Columbia Law School, where he directs the Center on Corporate Governance. Frank Partnoy, a securities-law professor at the University of San Diego School of Law, said the case suggests Merrill's oversight and control of its executives was inadequate.
``We're alleging Dan Gordon defrauded Merrill Lynch of $43 million'' and laundered the money with the help of a Canadian offshore-banking consultant, said Gregg Lepp, a Canadian prosecutor in Edmonton, Alberta, in a telephone interview. Gordon, also under investigation by federal prosecutors in New York, hasn't been formally charged with any wrongdoing.
``The usual credit-check and due-diligence procedures in place at Merrill Lynch were not followed with respect to'' Gordon's transactions, Assistant U.S. Attorney Jane Levine in New York wrote in a letter to Canadian law-enforcement officials, citing interviews with witnesses in Merrill's credit department and written internal communications.
Potentially Wider Problem
Partnoy, the San Diego law professor and author of ``Infectious Greed,'' said the episode should concern the company's investors.
``This is highly material information about how Merrill Lynch is run and how their controls and credit checks are able to detect theft or fraud,'' Partnoy said. ``It's evidence of a potentially wider control problem. In my opinion, because of the nature of the transactions, the $43 million loss should have been disclosed.''
Gordon, now chairman of Daticon Inc., a legal-document- storage company in Norwich, Connecticut, didn't return three phone messages to Daticon and his mobile phone requesting an interview.
Gordon's attorney, Alan Levine, managing partner of Kronish Lieb Weiner & Hellman LLP in New York, declined to comment. Levine also didn't respond to two faxes detailing the allegations against Gordon.
Merrill Cooperating
Merrill Lynch was unaware of the alleged theft until last October, two years after Gordon allegedly took the money, said Merrill spokesman Bill Halldin. He said that in all the time Gordon was at Merrill, the firm was unaware of any wrongdoing by Gordon. ``We're cooperating fully with the appropriate law enforcement officials on this matter,'' he said.
Gordon's energy-trading unit was under the supervision of Kelly Martin, senior vice president and head of global debt markets at Merrill, Halldin said. Martin resigned last December and is now chief executive of Elan Corp., Ireland's largest drug maker.
Martin reported to Thomas Davis, then head of Merrill's investment banking and capital markets business, Halldin said. Davis was fired in September for refusing to testify to the Securities and Exchange Commission and U.S. Justice Department about Merrill's transactions with Enron Corp. in 1999, Halldin said.
Asked what Merrill Chairman and Chief Executive Stanley O'Neal has done to tighten internal controls, Halldin said, ``We're continually improving our internal controls and compliance procedures.''
Third Incident
The breakdown in internal controls is the third incident reported in the past year in which Merrill has failed to adequately supervise its employees.
Merrill agreed to pay $80 million in March to settle SEC charges that it helped Enron Corp. commit accounting fraud. In April, Merrill agreed to pay $200 million to settle accusations by state and federal regulators that the firm allowed conflicts of interest by its research analysts.
Merrill neither admitted nor denied wrongdoing in either case.
Merrill sold its energy-trading unit to Allegheny Energy Inc., a Maryland-based utility, in January 2001, and Gordon became Allegheny's chief energy trader. The utility fired Gordon in September for violating company conflict-of-interest rules, spokeswoman Cynthia Shoop said. She declined to say what the conflicts were.
Legal Dispute
Merrill's decision to sell the unit was made by Merrill's then-Chief Executive David Komansky, saying the division wasn't part of Merrill's core business, Halldin said.
Two months ago, in a lawsuit that began last year in federal court in New York City, Allegheny accused Merrill of concealing knowledge of Gordon's wrongdoing at the time of the sale. Merrill denied the accusation. ``The only party that suffered damages was Merrill Lynch,'' Merrill wrote in a July 14 legal response filed in U.S District Court in New York City.
Another issue in dispute is Gordon's age. Allegheny said in court documents that ``Gordon was several years younger than had been represented to Allegheny.'' Assistant U.S. Attorney Levine wrote in her letter dated Nov. 21, 2002, that Gordon was 26.
The allegations against Gordon are contained in a 76-page sworn statement filed by Sergeant Joseph Mamela of the Royal Canadian Mounted Police in the Provincial Court of Alberta in Edmonton, and in a 12-page letter written to Alberta's attorney general by Assistant U.S. Attorney Levine.
Mamela filed the statement with the Alberta court in December to establish probable cause to obtain a search warrant. The court granted the warrant to search Newport Pacific Financial Group SA, an Edmonton company Gordon had hired to establish two offshore companies, according to Canadian prosecutor Lepp.
Request for Assistance
Levine's letter, sent from the U.S. Attorney's New York office and titled ``Request for Assistance in the Investigation of Daniel L. Gordon,'' sought help in tracking Gordon's use of offshore bank accounts.
``This office has developed evidence that Daniel L. Gordon was involved in the embezzlement and laundering of approximately $43 million,'' Levine wrote. She wrote that Gordon directed Merrill to send the $43 million to Falcon Energy Holdings SA, a shell company incorporated in Anguilla, a Caribbean island, as payment for a ``fraudulent contract.''
Merrill wired the money to Falcon on or about Aug. 30, 2000, ``to a bank account held in the name of Newport Pacific Financial Group at AIG Private Bank Ltd. in Zurich, Switzerland, for further credit to Falcon,'' she wrote.
Levine declined to comment, citing Justice Department policy.
Merrill had accepted Gordon's word that Falcon was ``an international energy firm with investments in power plants, oilfields and gas reserves,'' Levine wrote.
Offshore Companies
Levine's letter sought assistance from Canadian officials already investigating Newport as part of a money-laundering probe. Newport charges $18,000 to establish an offshore corporation, trust and bank account, each in a different nation to ensure privacy, said Michael Ritter, its chief executive.
Ritter helped Gordon form the offshore companies, controlled by a trust in the Central American nation of Belize, and opened the accounts with AIG Bank in 2000, Ritter said in a telephone interview. Gordon said they were for two Merrill clients, Ritter said.
``When money comes from a bona fide like Merrill Lynch, you don't question its pedigree,'' Ritter said.
Newport Pacific Trust Co. of Belize, an affiliate of Newport Pacific, froze the money in 2000 after $32.5 million of the $43 million was wired out of the offshore companies' accounts soon after they were opened, because Ritter suspected something was amiss, he said.
Called Merrill
Ritter said he contacted Merrill lawyers shortly after Merrill sold its Global Energy Markets Unit, known as GEM, to Allegheny Energy, alerting them to his suspicions the account was used for money laundering. ``They didn't seem concerned,'' Ritter said. ``They seemed relieved it wasn't their problem.''
``Merrill Lynch received no information about Falcon or suggestions of impropriety affecting Merrill Lynch,'' Merrill spokesman Halldin said.
Ritter said Newport now holds the remaining $10.5 million in long-term investments, and that he's not spoken to Gordon for more than two years. ``I'd love to hear from him,'' Ritter said. ``It's a bizarre situation.''
The two offshore companies were Falcon and Ostrich Capital Partners, which was incorporated in the Marshall Islands, according to Assistant U.S. Attorney Levine.
Gordon used the companies to move the $43 million through Newport's accounts in the AIG Swiss bank, Levine wrote. American International Group Inc., the world's largest insurer by market value, owns the bank.
AIG spokesman Andrew Silver declined to comment.
`Shell Corporation'
``Falcon was not a legitimate company, but rather an offshore shell corporation controlled by Gordon and used as a vehicle to receive and launder the $43 million Merrill Lynch wired to Falcon under the terms of the fraudulent contract,'' Levine wrote.
Allegheny Energy purchased GEM for $490 million and a 2 percent stake in Allegheny's power-generating and wholesaling operations.
Merrill and Allegheny began their legal battle in the U.S. District Court in New York last September. Allegheny said it was defrauded by Merrill, and wanted the purchase rescinded. In court filings, Merrill has denied wrongdoing, and said it's still owed $115 million, in addition to $490 million it already received.
``Rather than terminate Gordon, Merrill Lynch instead swept its knowledge concerning the Falcon transaction under the rug and sold GEM to Allegheny,'' the power company said in a counterclaim against Merrill filed with the court on June 13.
Merrill Denies Allegations
``Merrill Lynch, knowing of the problems with GEM and its personnel, particularly Gordon, recognized an opportunity to solve its problems -- and profit handsomely -- by selling them to Allegheny,'' Allegheny said in the document. When it bought GEM, Allegheny said it ``had no reason to doubt Gordon's integrity or qualifications.''
Merrill said in its court-filed response that it remained unaware of Gordon's alleged theft for more than 18 months after the sale.
Gordon transferred $30 million from Falcon to Ostrich and wired the money to a New York bank account for Kings Holdings LLC, also owned by Gordon, in October 2000, according to Lepp and Levine. Gordon transferred an additional $2.5 million to another account, Lepp said.
Kings Acquires Daticon
The next month, Kings acquired a 70 percent interest in Daticon, Levine wrote. Kings then wired $25.5 million to an unidentified Connecticut law firm, which ``appears to be for the Daticon acquisition,'' according to the Levine letter.
Glenn Gordon, Daniel's father, who is now chief executive of Daticon, declined to comment.
Daticon stores more than 100 million pages of data in an Internet-based document repository for law firms, according to its Web site.
Merrill Lynch is a minority, passive investor in Bloomberg LP, the parent of Bloomberg News.
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