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The Enron examiner is back. And a few law firms can’t be too happy about it. R. Neal Batson, the court-appointed examiner investigating the exotic financing schemes that contributed to the Enron Corp.’s bankruptcy, publicly released his much-anticipated second report on March 5. Batson’s first installment, released last September, examined a handful of structured finance deals. The 160-page document also raised questions about legal opinions furnished in those deals to Enron and some of its banks by several major law firms. Batson’s latest report, which runs to 2,147 pages, offers a wider-ranging and more pitiless analysis of Enron’s manic financial maneuvering. As expected, it also sharply challenges tax advice given by several prominent law firms, including Akin Gump Strauss Hauer & Feld and McKee Nelson. Both firms last week defended their lawyering. The new report encompasses “substantially all” of Enron’s deals involving its now-infamous special purpose entities, or SPEs, Batson writes. Through suspect accounting techniques applied to these deals, he concludes, Enron kept $12 billion in debt off its books in 2000. Many of these elaborate structures are legally flawed, Batson claims. According to the report, several firms, including Andrews & Kurth and Vinson & Elkins, provided legal opinions assuring parties to these deals that the assets involved would be legally shielded from Enron creditors in the event the company went bankrupt. Batson now contends, in effect, that many of these legal opinions got it wrong. He concludes that roughly $2 billion in assets nominally held by Enron-related entities should be recouped by the company’s estate and made available to its creditors. Spokesmen from Andrews & Kurth and Vinson & Elkins have defended their work and denied any wrongdoing. Enron’s unsecured creditors have already sought permission from the judge overseeing Enron’s bankruptcy to file suit against some Enron entities in order to reach their remaining assets. STRATEGIES SCRUTINIZED Batson’s new report focuses closely on the lawyering of Enron’s tax strategies. He dissects, sometimes in great detail, 11 tax-driven transactions that he says Enron used to achieve nearly $887 million in reported net income between December 1995 and September 2001. In all, Batson writes, Enron projected that these tax maneuvers would ultimately allow the company to report nearly $1.8 billion in net income. Batson casts doubt on the legitimacy of almost all of these structures, and he singles out five as the “most egregious in the manipulation of the rules.” “Enron’s Tax Group went beyond normal tax savings techniques, and even beyond typical ‘tax shelter’ transactions, to a new genre of transactions aimed largely at ‘generating’ accounting income from projections of future tax savings,” Batson writes. “To achieve this financial statement benefit,” he adds, “Enron used the advice and expertise of many outside professionals,” including banks, tax consultants, and law firms. William McKee, of McKee Nelson, drafted tax opinions in two deals, one while he was still a partner at King & Spalding. Akin Gump and Vinson & Elkins also advised on two deals each. Shearman & Sterling handled one. Other advisers included Andersen, Deloitte & Touche, Chase Securities (now part of JP Morgan Chase & Co.), and Bankers Trust (now part of Deutsche Bank AG), which participated in four of the deals, more than any other firm. A February report from the Joint Committee on Taxation targeted the same transactions, and, like Batson’s report, questioned the advice from the same law firms. McKee Nelson and Akin Gump absorb some of the toughest shots in Batson’s report. Batson, a bankruptcy partner at Alston & Bird, comes down particularly hard on McKee, who is perhaps the pre-eminent U.S. expert on the taxation of partnerships, other tax lawyers say. McKee and his fellow name partner, William Nelson, co-wrote a legal treatise on the subject. Before entering private practice, McKee taught tax at the University of Virginia School of Law for 12 years and served as tax legislative counsel at the U.S. Treasury Department from 1981 to 1983. His bona fides earn him little in the way of praise from Batson, who challenges McKee’s tax opinions on two deals called “Teresa” and “Cochise.” According to Batson, Enron paid $2 million for opinions on the two deals. Enron and Bankers Trust consummated the Teresa transaction in 1997, when McKee was still a partner at King & Spalding. At the time, other tax lawyers say, that firm’s tax group was widely viewed as one of the most sophisticated in the country. Nevertheless, Batson writes, the “conclusions of the King & Spalding Teresa Tax Opinions are very aggressive.” And he opines that the IRS “could be expected to attack” the underlying transaction “under judicially developed doctrines involving ‘absence of business purpose’ and ‘sham transaction’ theory.” McKee’s Cochise opinion gets more vigorous treatment. Indeed, Batson devotes roughly 20 pages of his report to a detailed critique of the opinion, which deals with a complex transaction involving mortgage-backed securities. Enron and Bankers Trust completed the transaction in 1999. “The examiner has concluded that the entire arrangement [created by Enron and Bankers Trust] is one that distorts the overall scheme of the Internal Revenue Code,” Batson writes. He claims that “no case directly supports” a central theory of the Cochise tax opinion, and he argues that McKee’s position “cannot be reconciled” with Treasury regulations. McKee begs to differ. “McKee Nelson gave a single opinion to Enron relating to the Cochise transaction for fees based on hourly rates,” he says. “The examiner challenges our analysis of a single, albeit important, technical issue. After reviewing his analysis, we reaffirm our confidence in our opinion on that technical issue, as well as the opinion as a whole.” McKee also defends his Teresa opinion, saying that Batson’s report “raises no issues or arguments that cause me to believe that the Teresa opinion was incorrect, and I continue to believe that it is correct.” At Akin Gump, Batson points to tax opinions provided on Enron deals known as “Steele” and “Tomas.” The report names John Buser, a former Akin tax partner in Dallas, and Michael Mandel, a tax and real estate partner in the District. Batson stops short of condemning Akin Gump’s opinion on the 1998 Tomas deal. But, as with McKee Nelson’s Cochise opinion, Batson disputes Akin’s assertion that a key tax position taken in the 1997 Steele transaction “should” be legally sustained. To the contrary, Batson concludes that the IRS would “more likely than not” reject that tactic. Batson also points out that before Enron retained Akin Gump to give the Steele opinion, the firm “previously had been retained by [Bankers Trust] to develop the structure.” Buser, who left Akin Gump in 1999 to join a Dallas private equity firm, says he had been instructed to refer calls back to Akin. In response to requests for comment, Akin issued a prepared statement. (See “Akin Gump Responds to Enron Examiner’s Report” on this page). The statement confirms that Akin “was initially engaged to advise Bankers Trust on its proposed structure for these transactions.” The statement also says that, “with informed consent of both Bankers Trust and Enron,” Akin provided corporate and tax advice in connection with both Steele and Tomas. “Based on the information available to us at the time, as well as prevailing legal standards, we decided that we could opine on the transactions,” the statement continues. Batson’s second report does not explicitly endorse any legal claims against Enron’s law firms or other third parties, other than claims to recoup some fees paid immediately before Enron filed for bankruptcy. But he indicates that he may do so in a future report. His next installment is slated for release this summer.

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