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NEW YORK — Did Enron Corp.’s in-house and outside counsel willfully ignore signs that all was not right in the company’s executive suite or did they just fail to notice altogether? Those are among the possibilities raised in Enron examiner Neal Batson’s final report, particularly a 247-page appendix devoted to the role played by Enron’s lawyers in the sham financial transactions that ultimately led to the company’s collapse. “[T]here is sufficient evidence from which a fact-finder could conclude that certain of Enron’s attorneys involved in its [special purpose entity] transactions (i) committed legal malpractice based on Texas Rule 1.12, (ii) committed legal malpractice based on negligence or (iii) aided and abetted the Enron’s officers’ breaches of fiduciary duty,” Batson wrote in his report, which was released Monday. Vinson & Elkins, Andrews & Kurth and the several in-house lawyers whom Batson addresses in his report have all denied any wrongdoing. In his report, Batson notes that the evidence he has laid out against the law firms is entirely circumstantial, and significant defenses exist to any claims that might be brought based on that evidence. Some of those defenses may soon be put to the test. Citing both Batson’s previous reports and their own investigation, the Official Committee of Unsecured Creditors in the Enron Chapter 11 bankruptcy requested last week that Southern District Bankruptcy Judge Arthur Gonzalez grant them permission to sue law firms Vinson & Elkins, Andrews & Kurth and Kirkland & Ellis. All of those firms worked on transactions involving the limited partnerships and special purpose entities Enron executives allegedly created to move non-performing assets off the company’s balance sheets. The creditors are also seeking to sue Arthur Andersen and former Enron General Counsel James Derrick, among others. In his report, Batson notes that a judge or jury might conclude from the sequences of various events and information available to the parties at the time that the lawyers could or should have surmised the true purpose of some of Enron’s sham transactions. For instance, Batson notes that lawyers from Vinson & Elkins working on “Project Nahanni” might have realized its sole purpose was to create $500 million in cash flow to burnish Enron’s financial statement. Noting that Vinson & Elkins partners Ronald Astin and Kenneth Anderson reviewed the documents that “hardwired” the transaction to unfold at year-end and within a mere 30 days, Batson wrote: “In Project Nahanni, a fact-finder could conclude that Vinson & Elkins knew of Enron’s accounting goal — to recognize funds flow at year-end — and knew that the Nahanni transaction lacked any material business purpose apart from its impact on Enron’s financial statement.” The fact-finder, he said, could alternatively find that Vinson & Elkins lawyers were negligent in failing to recognize that Nahanni and similar transactions had no legitimate business purpose. Batson points to several other possible instances of negligence by lawyers for Enron. Attorneys failed to press former Chief Financial Officer Andrew Fastow on the extent of his interest in two of the partnerships, LJM1 and LJM2, even though he had once said the partnership would be shut down if former Chief Executive Officer Jeffrey Skilling found out how much money Fastow had earned through the partnerships. “No one asked Fastow the simple question: How much money have you made from your LJM activities?” Batson wrote. Derrick testified that he read only the first of the letters sent to then-Chairman Kenneth Lay by whistle-blower Sherron Watkins, an Enron vice president. He then subsequently engaged Vinson & Elkins to investigate the claims, even though Watkins had specifically written that Vinson & Elkins should not be selected for the purpose of examining the transactions in question. Though he catalogs potential claims against the lawyers, Batson also notes that they have considerable defenses. At the very least, lawyers could claim that Enron’s officers’ wrongful acts could be imputed to the company, and that their liability for malpractice would then be barred or reduced under comparative fault rules. Batson acknowledges there is “little or no direct evidence of a particular attorney’s knowledge of wrongful conduct by an Enron officer.” For every claimant who suggests a lawyer should have known, the lawyer or law firm can argue that such claims exaggerate the scope of lawyers’ engagements, as well as their abilities to divine or judge the business purposes of their clients. “Vinson & Elkins may claim that it did not substantially assist Enron, but acted merely as scriveners of the transactions, memorializing their terms,” Batson wrote. But he added, “The complexity of the deals and their documentation may permit a fact-finder to determine that Vinson & Elkins was not a ‘mere scrivener.’” Anthony Lin is a reporter for The New York Law Journal , a Recorder affiliate.

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