Counsel for Merrill Lynch retained Cornerstone Research to assist in analyzing valuation and accounting issues related to the sale of its energy trading unit to Allegheny Energy.
Retained by Shearman & Sterling
In 2001 Merrill Lynch sold its energy trading unit to Allegheny Energy. Merrill Lynch retained an equity interest in the trading unit, as well as the right to sell that equity to Allegheny Energy at a later date for $115 million. When Merrill Lynch attempted to exercise that right, Allegheny Energy refused to honor it, leading Merrill Lynch to file a claim for $115 million.
Allegheny Energy filed a counterclaim for approximately $600 million, claiming breach of contract and fraudulent inducement related to the sale. Among other things, Allegheny Energy alleged that Merrill Lynch had conspired to inflate the value of the largest energy derivative contract held by the trading unit and had improperly booked accounting profits from that contract to make the sales proposal more attractive.
Counsel for Merrill Lynch retained Cornerstone Research to assist in analyzing valuation and accounting issues related to the sale. Our analysis helped establish that the value of the derivative contract was subject to tremendous fluctuations based on inputs related to energy market conditions and that Allegheny Energy was aware of this volatility and the potentially extreme high and low valuations of the contract prior to the sale.
Cornerstone Research also assisted Professor Stephen Ryan of New York University in demonstrating that the profit recognition for the energy derivative contract was consistent with the accounting standards applicable to derivative contracts.
In its decision, the court awarded the full $115 million, with interest, to Merrill Lynch, and denied any damages award to Allegheny Energy.