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Merrill Lynch & Co. Inc. will be paid more than $115 million after winning a breach of contract action against an energy company that refused to pay the full purchase price for a Merrill Lynch unit because of alleged misrepresentations by the financial giant. Southern District of New York Judge Harold Baer Jr. on Monday ordered Allegheny Energy Inc. to pay that amount plus interest after rejecting Allegheny’s claims that it was wrongly lured into purchasing Merrill Lynch’s energy-commodities trading business, Global Energy Markets (GEM), four years ago. Allegheny agreed in December 2000 to buy the unit for a combination of cash and equity totaling $605 million in a deal that closed in March 2001. However, on Jan. 5, 2001, during the period between the reaching of the agreement and the closing of the deal, Merrill Lynch informed Allegheny’s representatives that the financial statements on which the sale was based were “significantly different” from the records of Merrill Lynch’s Finance Department, and that it had therefore overstated the operating revenues of the unit. Merrill Lynch supplied adjusted information to Allegheny. Although Allegheny still claims that the new financial information it received was inaccurate, and contends that it had rejected the Jan. 5 financials, Baer said in his opinion issued Monday in Merrill Lynch & Co, Inc. v. Allegheny Energy Inc., 02 Civ. 7689 that “Allegheny did not raise much of a fuss upon receiving the new financial information.” “Indeed, no one paid much attention to the new figures and at trial simply blamed one another for having gone along so meekly at the signing ceremony,” Baer said. “This is despite the fact that the signing could have been postponed to investigate the lower numbers. In the weeks that followed, and even at the closing in March, this was not an issue raised by any of the Allegheny deal team.” The lawsuit ultimately filed by Merrill Lynch took place against the backdrop of revelations that, in August 2000, Dan Gordon, who helped build the trading business, defrauded Merrill Lynch of some $43 million through the sale of energy “outage” insurance through a fictitious company. Gordon pleaded guilty to fraud for embezzling $43 million from the unit and, although he agreed to cooperate with Southern District prosecutors, no charges were filed against Merrill Lynch by the government. Gordon is scheduled to be sentenced in the fraud case in August. Baer said the facts at trial “clearly demonstrated” that the victim of Gordon’s “Falcon Insurance” fraud was Merrill Lynch and “Allegheny never directly suffered as a result of this deception.” “When the GEM was sold, Allegheny and its advisors never attributed any value to the Falcon Insurance contract so it can hardly have been harmed by the fraud,” he said. “The facts also show that Allegheny tolerated similar hijinks by Gordon who had been hired by Allegheny, until he was fired in August 2002.” In response to Merrill Lynch’s suit for breach of contract, Allegheny made a series of counterclaims. Among the counterclaims that made it to a bench trial before Baer in May 2005 were claims for negligent misrepresentation and breach of fiduciary duty. But in his opinion, Baer said “Allegheny has a critical problem here because it failed to prove either proximate cause or reasonably ascertainable damages.” The year after the unit was purchased, he said, the business exceeded Allegheny’s expectations and the “failure of GEM the following year was not shown to be caused by any breach by Merrill Lynch.” “Allegheny argues that it should be entitled to the difference between what it paid and what it would have paid had it known the true facts about Gordon and the financial data as of the purchase date,” Baer said. “But cases have repeatedly shown that overpayment alone does not prove causation” and a claimant who hopes to collect on such a theory “must prove that the breach or misrepresentation resulted in an actual injury or loss not attributable to other factors.” “It is clear that the only injury Allegheny has proven with reasonable certainty, connected to the actions of Merrill Lynch, is a loss of face,” which is “not compensable,” he said. Addressing specifically Allegheny’s claim that it was the victim of fraudulent inducement, Baer said Allegheny “is undoubtedly a sophisticated party that was represented at every step by competent, experienced and expensive advisors.” And given that Merrill Lynch accorded Allegheny four months to exercise due diligence by opening its books and records, he said, “Allegheny cannot now claim to have reasonably relied on non-disclosures as to information that was available had it pursued its due diligence with a little more pizzazz.” Stuart Baskin, Jeremy Epstein and John Gueli of Shearman & Sterling represented Merrill Lynch. Stanley Arkin and Howard Kaplan of Arkin Kaplan represented Allegheny along with David Bohan of Sachnoff & Weaver of Chicago.

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