Standard & Poor’s Ratings Services says the start of criminal proceedings against four former Merrill Lynch & Co. Inc. investment bankers and two former Enron employees in Houston may hurt the brokerage’s reputation, but it will probably not impact its credit ratings or outlook.

S&P says that legal risks affecting the industry have been in place for several years and have already been factored into ratings. “This does not rule out, however, any negative rating action at any one financial institution should unexpectedly large settlements or judgments be realized.

“In assessing the impact of legal issues on ratings, we look at how the costs affect the ongoing operations and how large settlements impact leverage,” it says, noting that ongoing operations are affected in the following three ways: reputation, ongoing legal expenses, and management attention.

A broader issue, which S&P says makes this trial well worth watching, is the fervor with which the prosecutor will pursue the case, the view of the judge, and ultimately, the jury’s decision. “These may give insight as to the possible outcomes of other civil actions, such as the Newby v. Enron class action, which names Merrill Lynch and a number of other investment and commercial banks as defendants,” it says, noting the class action is now in discovery and is scheduled to come to trial in October 2006.

The transaction being questioned is really quite small, S&P says. In 1999, Merrill Lynch purchased an electricity barge that was intended to provide electricity to Nigeria. The sale to Merrill resulted in a small gain to Enron (about $12 million before taxes), but had much larger consequences for the investment bank. It has since been alleged that both Merrill Lynch and Enron acted fraudulently in the transaction. In July 2002, the four former Merrill Lynch investment bankers came under investigation. These four individuals as well as two former employees of Enron are now the defendants in this criminal case.

In March 2003, Merrill Lynch settled a civil action brought by the SEC concerning aiding and abetting Enron, related to the barge transaction. Merrill Lynch agreed to pay a fine of $80 million, but did not admit nor deny any wrongdoing.