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The collapse of Enron Corp. has shone a bright light on the ethics of the accounting profession. Now, as the beleaguered company works its way through bankruptcy, it is dragging lawyers into the spotlight. The topic: conflicts of interest and the tortured lengths that big firms go to avoid them. Fittingly, New York-based Weil, Gotshal & Manges, the pre-eminent bankruptcy firm in the country, stands at the center of this unfolding drama. Enron hired Weil Gotshal to steer it through Chapter 11, but first the law firm must dodge some thorny conflict problems. If Weil Gotshal succeeds, it will say as much about the realities of modern bankruptcy practice as it does about whether Weil Gotshal, in fact, had conflicts of interest worthy of disqualification. The firm got off to a sour start in the Enron case. It began advising the energy giant last fall, in Enron’s planned merger with Dynegy Inc. After the merger fell through, Weil Gotshal took the lead in Enron’s Chapter 11, filed Dec. 2. One thing Weil Gotshal didn’t do, however, was pause to ask PG&E Corp., another of its major clients, how it felt about Weil Gotshal taking on Enron’s reorganization. Weil Gotshal is representing PG&E in the bankruptcy of its subsidiary, Pacific Gas and Electric Co. And PG&E and Enron aren’t exactly fond of each other. They are major creditors in each other’s reorganization. Enron claims that PG&E owes it more than $500 million, while PG&E is demanding more than $200 million from Enron. Those figures, of course, are bitterly disputed in both directions. When Bruce Worthington, general counsel of PG&E, discovered in early December that Enron had hired Weil Gotshal, he wasn’t happy. His concerns were twofold: that Enron, through Weil Gotshal, might be able to gain access to confidential PG&E information, and that Weil Gotshal’s resources might be strained by trying to handle both cases simultaneously. Interviewed in mid-December, Worthington was still peeved: “Normally,” he said, “counsel is required to consult with a client in advance [of a potentially conflicting representation] and obtain consent. [Weil Gotshal] didn’t do that.” Couldn’t PG&E simply hire a new firm? Worthington scoffed: “A year into the process? I don’t think so. We have had over 200 attorneys at Weil Gotshal working on the PG&E matter … not all of them working full time, around the clock, but there is a huge core team.” Martin Bienenstock, the Weil Gotshal partner in charge of the Enron case, says the firm now has PG&E’s consent to handle both bankruptcies. He won’t say when it acquired that consent. “We have worked out any issues with Enron and PG&E, and they are comfortable with us in this role,” he says. That consent was conditional. Weil Gotshal agreed to erect a Chinese wall, and PG&E provided a list of lawyers who have to stay on the PG&E side of the wall, including Harvey Miller, the dean of the bankruptcy bar and head of Weil Gotshal’s bankruptcy section. Weil Gotshal also agreed to stay out of any PG&E-Enron disputes. Enron hired New York bankruptcy boutique Togut, Segal & Segal, a firm Bienenstock recommended, to work on matters in which Weil Gotshal might be conflicted. The Togut firm has worked with Weil Gotshal and other big firms before to help them out of conflicts jams. Albert Togut bristles at any suggestion that his firm is a lapdog. He stresses that his firm has also represented some huge debtors all by itself. “I don’t get pushed around by anybody. That is why we get picked [to work on conflict matters],” says Togut. “If a [lead debtor's] firm brings in a patsy [as conflict counsel,] it is transparent, and it doesn’t work.” Even with the consent of Enron and PG&E, Weil Gotshal still needs clearance from the judge in the Enron case. But therein lies another problem. Weil Gotshal and bankruptcy judge Arthur Gonzalez of Manhattan have history. In 1994, when Gonzalez was a U.S. trustee and the year before he took the bench, he moved to disqualify Weil Gotshal from representing The Leslie Fay Companies Inc., a bankrupt women’s clothing manufacturer. Gonzalez concluded that Weil Gotshal hadn’t disclosed its business connections to parties that were adverse to Leslie Fay. Judge Tina Brozman wouldn’t disqualify Weil Gotshal, but she did hit the firm with more than $800,000 in sanctions. At press time, in mid-January, no party had objected to Weil Gotshal’s dual representation of Enron and PG&E. But Gonzalez will take a close look at the arrangement, regardless of who objects. And he’ll also consider some of Weil Gotshal’s other business relationships, such as its close ties to Andersen, Enron’s outside auditor and, most likely, a soon-to-be adversary of Enron. In deciding whether Weil Gotshal has divided loyalties, Gonzalez will consider the magnitude of its representation of PG&E, Andersen and any other Enron adversary. “If a [would-be debtor] firm has done hundreds of thousands of dollars of work in the last two or three years [for a debtor's adversary],” says Jay Westbrook, a bankruptcy professor at the University of Texas School of Law, “courts will consider that a significant representation even if you are a big firm and that is .001 percent of your revenues.” Bienenstock wouldn’t disclose how much the firm has billed PG&E. It is hard to imagine, though, that Gonzalez wouldn’t consider PG&E a significant client. As for Andersen, Weil Gotshal handled the accounting firm’s high-profile divorce from Andersen Consulting, a 31-month arbitration that surely generated eight-figure billings. Weil Gotshal will once again step aside and allow another firm to handle any disputes between Enron and Andersen, Bienenstock says. Weil Gotshal is currently representing Andersen, but not in any matters remotely connected to the Enron bankruptcy, says Richard Davis, the Weil Gotshal partner in charge of conflict issues. So the firm doesn’t need to erect an Andersen Chinese wall, he adds. A strict reading of the bankruptcy code would appear to jeopardize Weil Gotshal’s role in Enron. The code squarely provides that a debtor’s counsel may not represent parties adverse to the debtor. The reality, though, is quite different. Conflict rules are rarely interpreted strictly in big Chapter 11 cases, because judges in huge cases like Enron’s typically agree that big cases require the biggest firms, and conflicting out those firms would only hurt the clients. By that logic, even Weil Gotshal’s extensive entanglements with PG&E and Andersen can be excused, because the firm has employed all the right Chinese-wall and conflict-counsel mechanisms. Thus, many lawyers believe that Gonzalez will anoint Weil Gotshal as debtor’s counsel. Problem solved? Not according to critics of the compromises endemic in big bankruptcies, such as Texas’ Westbrook, who believes that it is worth the effort to find a competent firm that is free of conflicts. “Is it really true that there is no firm that can handle [Enron] that doesn’t have serious conflicts?” he asks. “I mean, jeez, there are a lot of law firms with big bankruptcy practices.” Westbrook is skeptical of Chinese walls, as are other academics. Firewalls — used to segregate lawyers in the same city, as Weil Gotshal is attempting to do in the Enron case — are especially dubious, adds one bankruptcy lawyer. Westbrook believes that special conflict counsel provide far better insulation than firewalls or Chinese walls. But he prefers something more: naming small bankruptcy boutiques as lead counsel in large Chapter 11 cases. Big firms, and all their conflicts, would provide the manpower. “Then the ultimate decision maker is someone [who is] without conflicts,” he says. No matter what Gonzalez and the circuit court may decide, the notoriety of the Enron case will make the handling of Weil Gotshal’s m�nage � trois an important precedent. With bankruptcy one of the few growth areas in the legal business, In re Enron Corp. has just gotten that much more important. Related chart: Togut to the Rescue

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