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When reports surfaced in January that Enron Corp. employees were shredding documents, one of Enron’s in-house lawyers who works overseas was instructed to box documents and send them to Houston. But one thing troubled him about the instructions from Enron General Counsel James Derrick. They were told to send the boxes not to Enron but to its main outside law firm, Houston’s Vinson & Elkins. In this lawyer’s view, that’s the last place they should have gone. What made Vinson & Elkins “absolutely the wrong place to send them,” the Enron lawyer says, is that ultimately the company may find itself in court suing the law firm. Or Enron may point the finger at Vinson & Elkins when explaining its own actions to the Securities and Exchange Commission, congressional investigators or even federal prosecutors. In either case, Vinson & Elkins lawyers shouldn’t be the ones receiving the documents. On Feb. 2, a few days after this lawyer was interviewed, the likelihood that Vinson & Elkins would indeed be sued as a result of its work for Enron seemed significantly greater. That day, the special committee established by Enron’s board of directors released the results of its investigation into Enron’s controversial transactions that catapulted the company into bankruptcy. Written by board members Raymond Troubh, Herbert Winokur and University of Texas School of Law Dean William Powers, who chaired the committee, the report describes a dizzying number of partnerships created and managed by Andrew Fastow, Enron’s former chief financial officer. The committee’s most severe criticism is reserved for Fastow himself. But he has plenty of company. A host of executives, company employees and even the board is taken to task. So are two outside firms on which the company often relied: its auditors, Andersen and lawyers at Vinson & Elkins. LAW FIRM MAY BE VULNERABLE Several lawyers interviewed who are not involved in any Enron cases say that Vinson & Elkins may be vulnerable to a malpractice lawsuit or possibly a suit brought by shareholders. One lawyer asserts the information contained in the Powers report alone could support a claim. “Could somebody articulate a claim that would entitle them to a jury trial today, based on the Powers report? It certainly seems likely to me that they could,” says Larry Doherty, a name partner at Houston’s Doherty Long Wagner and a prominent plaintiffs’ malpractice lawyer. As an example, he points to the following passage from the executive summary that opens a report that runs more than 200 pages: “Management and the Board relied heavily on the perceived approval by Vinson & Elkins of the structure and disclosures of the transactions. Enron’s Audit and Compliance Committee, as well as in-house counsel, looked to it for assurance that Enron’s public disclosures were legally sufficient. It would be inappropriate to fault Vinson & Elkins for accounting matters, which are not within its expertise. However, Vinson & Elkins should have brought a stronger, more objective and more critical voice to the disclosure process.” Specifically, the committee notes: “Attorneys from Vinson & Elkins were consulted frequently, particularly on securities law issues, and also prepared the transaction documents” on some of the partnerships that were riddled with conflicts of interest. The committee also faulted the law firm for failing to raise more objections when it reviewed public filings that included inadequate disclosures. “There’s enough to file a lawsuit now,” based on the Powers report, says Andrew Berman, a partner with Young, Berman, Karpf & Gonzalez in North Miami Beach, Fla., who often defends securities class actions and lawyers in bar grievance proceedings. “But I would want to know a lot more.” One factor that makes Vinson & Elkins particularly vulnerable, Berman says, is the firm’s “institutional knowledge” as the company’s longtime counsel. “The greater the participation of the law firm in the overall business practices, including the creation of the separate partnerships which enabled the company to hide losses,” Berman says, “the harder it may be to persuasively convince anybody that you were unaware of the purposes for which those partnerships were created.” If Vinson & Elkins is sued, he adds, its likely defense will be that the problems were caused by accountants, not lawyers. VINSON & ELKINS TRUSTED ACCOUNTANTS Harry Reasoner, a Vinson & Elkins partner and until recently managing partner, agrees that the accountants were central. His firm never advised Enron about accounting and had no reason to doubt the accountants. “Why on earth would you not trust Arthur Andersen?” he says. And contrary to some people’s misconceptions, “there is nothing wrong with having off-balance-sheet partnerships per se.” The Powers report acknowledges as much and, he adds, “they are widely used by major American corporations.” Vinson & Elkins wasn’t Enron’s only outside counsel, he notes, and the firm never expressed its opinion before the Enron board waived the company’s ethics code to allow Fastow to manage partnerships with which it did business. “Our role was one of documentation and, in some instances, drawing up partnerships,” Reasoner says. “Many facts that the Powers committee found were unknown to us.” They never knew, for example, that some Enron employees reaped personal profit from partnerships. “We know of no legitimate basis for people to file suit against us,” declares Reasoner. “People other than Enron don’t even have standing.” Even so, the firm hired malpractice defense lawyer John Villa of Washington, D.C.’s Williams & Connolly shortly after Enron recruited Powers to join its board last October. “We recognize there’s the risk,” Reasoner explains. “And we certainly want to be prepared to defend ourselves.” More recently, the firm has provided documents to federal investigators. Although Vinson & Elkins lawyers haven’t been asked to testify, Reasoner believes they shouldn’t represent themselves. SUIT BY SHAREHOLDERS Vinson & Elkins, which still represents Enron on a very limited basis, actually was sued by Enron shareholders back in November, before Enron even filed for bankruptcy, but the claims were withdrawn. Now, in light of the Powers report, many lawyers believe that new claims are likely. The easiest case would be a malpractice claim brought by Enron, which would require proof of negligence, according to malpractice lawyer Doherty. An action could be brought by Stephen Cooper, the company’s interim CEO. If the company decided not to proceed, a bankruptcy lawyer explains, the creditors’ committee could ask the bankruptcy judge to authorize them to sue on the company’s behalf. A shareholder suit against the law firm would be more difficult, Doherty says, but not necessarily out of reach. It would require proving more egregious behavior, like fraud. Before Powers joined the board, Enron’s executives had commissioned one prior investigation of its partnerships. In response to the now-famous letter written by Enron Vice President Sherron Watkins, the company decided to hire outside attorneys to investigate. The firm it chose, to the surprise of many, was Vinson & Elkins. Watkins herself had assumed Vinson & Elkins had a conflict because it had worked on some of the deals she found troubling. The firm accepted the assignment with the understanding that it would not second-guess the accountants and would advise Enron whether a broader inquiry was warranted. In mid-October it concluded one wasn’t. In January, Enron waived confidentiality and a Congressional committee posted Vinson & Elkins’ “preliminary investigation” on its Web site. The criticism has not yet abated. Five lawyers experienced in malpractice cases but not involved in cases involving Enron agree that, at a minimum, Vinson & Elkins ought to have discussed the conflict with Enron and secured a waiver in writing. They also agree that the prudent thing to do would have been to decline the assignment. The Powers report adds that “the V&E review was largely predetermined by the scope and nature of the investigation and the process employed.” Reasoner cites this very sentence in his firm’s defense. There was no conflict, he says, because they weren’t asked to examine their own work. The company had the right to ask for a limited review. Furthermore, the investigation had a salutary effect: Shortly before the report was delivered, Fastow divested himself of the partnership interests and shortly after, Enron took a $540 million charge to earnings. And the stock price went up. To Doherty, however, “this investigation is nothing short of a joke. If the Powers report is anything at all, it’s evidence of the lie.” It was only two weeks later, he points out, that Powers was recruited to head the very investigation that Vinson & Elkins had deemed unnecessary — the same investigation that has focused on the firm a glaring light.

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