- 129 -
into its hedge swap with Merrill. The purpose and effect of that
swap were to neutralize the impact of the LIBOR Notes on ABN's
investment in the partnership. Nor was there any illusion that
Kannex could pursue its own risk management strategy independent
of the purposes of ABN. That knowledge alone would have been
sufficient to enable Merrill to conclude that, in managing
Kannex's participation, ABN had no use for a hedge within the
partnership. There is also unequivocal evidence that Merrill was
in fact aware of the activities ABN was conducting outside the
partnership to hedge exposure to the Colgate debt on Kannex's
behalf. Merrill consulted with ABN on revaluations of the
Colgate debt, as an internal memorandum of the Merrill Swap Group
explains, "[s]ince Kannex must actually trade Treasuries based
upon the Base Treasury Yields".
The misleading explanations we find in the minutes were
prepared long before the events they describe, during the
planning of the section 453 investment strategy. Therefore, they
raise the more fundamental issue of whether Merrill and Colgate
could honestly and reasonably have planned to have ACM acquire
the LIBOR Notes for ABN's use in managing the risks of Kannex's
participation. The evidence is overwhelming that from the early
stages in the planning of the liability management partnership at
least Merrill, if not Colgate as well, expected that, as a matter
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