Enron: the Nigerian Barge Deal

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  • Topic: Contract, Enron, Jeffrey Skilling
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April 4, 2006
1 Introduction: The Nigerian Barge Deal
Enron Corporation was an energy company based in Texas and created when InterNorth acquired Houston Natural Gas Company in 1985. Enron's growth was fast, it was named \America's Most Innovative Company" for six consecutive years and it soon became the seventh largest company in the United States, until its bankruptcy was declared in 2001. Accounting fraud, money laundering and conspiracy are some of the charges which Enron stood accused of in a series of scandals that nally came to a head in the largest bankruptcy in history.

One of these scandals was named the Nigerian Barges case ([Fleischer1, 2005]). Enron tried to sell an interest in three power-generating barges in the coast of Nigeria unsuccessfully. When Enron failed to sell it by December of 1999, Merrill Lynch, one of the world's leading nancial management and advisory companies, agreed to buy that interest. That transaction was closed at the end of December 1999, and therefore Enron could book about twelve million dollars in earnings that year and meet earning targets.

But the transaction was a fraud ([Kirkendall, 2005]). The main problem with this deal was that Merrill Lynch acted only as a temporal buyer to help Enron look more pro table than it really was. Enron's Chief Financial Ocer Andrew Fastow promised verbally to Merrill Lynch that Enron would buy back the barges at a determined pro t within six months, or Enron would nd a third company to do so. This fact turned the transaction to be a simple loan, and not a true sale, as Enron claimed. Enron's objective with this transaction was not other than making its nancial statements look better so that it could improve the income statement and then, for instance, borrow money from banks and the public at a lower interest rate, or simply pay the executives in Enron unwarranted bonuses. Six months later, Enron could not nd a purchaser to buy the interest that Merrill Lynch had acquired. Thus, Andrew Fastow arranged for LJM2 ([Fleischer2, 2005]), a company that he was operating at that moment, to ful ll the verbal promise of purchasing Merrill Lynch's interest. Enron also agreed to arrange for another third party to purchase LJM2's interest. 1

As a result of this transaction, four Merrill Lynch's executives were accused of lying, ob- structing justice, conspiracy and fraud to mislead Enron investors, and they were condemned to face prison sentences ([Chron, 2005]).

2 The Nigerian Barge Contract
Every business has di erent relationships with other business and it is dependent on them. The main way to strengthen these relationships is through legal agreements between several parties referred to as contracts. A contract can be de ned as follows (extracted from the document [Segal, 2005]): \a contract is an agreement between two or more parties that is legally enforceable in the event of a breach".

Enron and Merrill Lynch had a contract in which Merrill Lynch decided to buy the barges in Nigeria by December 1999, and verbally Enron undertook to buy them back within six months. After that sale started to be considered as a fraud, some lawyers claimed there was no global agreement between the parties (and then that the contract was not valid), and some others simply stated that the agreement was oral. In order for a contract to be considered valid, four basic elements are required to be carried out.

The rst requirement for a contract is that, as extracted from the above de nition of a contract, there must be an agreement ([Segal, 2005, Bagley, 2005]) between the parties in the contract. This agreement is only obtained when one party accepts what the other party o ers.

Enron o ered to Merrill Lynch three barges in Nigeria for seven million dollars. Enron's CFO Andrew Fastow also assured Merrill Lynch that it would not lose any money with the transaction, even predicting that it would earn an interest of 22:5% for it, since Enron or another...
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