Enron: The Nigerian Barge Deal

April 4, 2006

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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.

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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 dierent 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

oers.

Enron oered 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 third-party purchaser would buy the barges back. Although Merrill Lynch executives

knew that helping Enron within this transaction could be considered as a manipulation of

Enron's income statement, Merrill Lynch nally accepted the oer. Merrill Lynch's main

interest was to accommodate a very important client, as Enron paid millions in fees to Merrill

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Lynch ([Glisan, 2003]). Furthermore, it can be considered that there was an agreement

between Enron and Merrill Lynch in this contract, since the latter accepted the oer and all

the conditions of the former.

The second requirement that needs to be fullled by the parties in the contract is the

consideration, which