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For weeks, the press and public talked around the edges of the quality of the legal work Vinson & Elkins did for the disgraced and embattled Enron Corp. Then the Powers report laid it bare. Prepared by a former enforcement director of the Securities and Exchange Commission, Wilmer, Cutler & Pickering partner William McLucas, the Feb. 1 report on behalf of a special committee of the Enron Corp. board contends that Vinson & Elkins was in fact involved in many of Enron’s most controversial deals — and was also involved in decisions about how to disclose those deals to the public. The document never accuses Vinson & Elkins lawyers of violating any laws. But it sharply criticizes the firm for “an absence of … objective and critical professional advice.” Enron was the Houston-based law firm’s largest client, and last year accounted for 7.8 percent of Vinson Elkins’s $455 million in revenue, according to a firm spokesman. Now the law firm is aiming to counter its portrayal in the report, commissioned by an Enron panel chaired by board member William Powers Jr., the dean of the University of Texas School of Law. In a four-hour telephone interview, a senior partner at Vinson & Elkins, speaking for the firm, responded point by point to virtually every assertion in the report regarding the firm. Vinson & Elkins agreed to the interview on the condition that the partner not be identified by name. “We are confident that when all the facts are known it will be understood that we fulfilled our professional obligations,” this partner says. PUBLICITY-SHY The Powers report focuses on the formation and activities of Enron’s now-infamous partnerships — known as JEDI, Chewco, LJM1, LJM2, and the cluster of entities dubbed the Raptors. The report also details Enron’s public disclosures — or lack thereof — of these entities, which were managed by Enron officials, and which entered into numerous complex deals with Enron. The report’s summary of Enron’s use of Chewco, LJM1, and LJM2 is particularly damning. “Many of the most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk.” It continues, “Other transactions were implemented — improperly, we are informed by our accounting advisors — to offset losses. They allowed Enron to conceal from the market very large losses resulting from Enron’s merchant investments by creating an appearance that those investments were hedged … when in fact that third party was simply an entity in which only Enron had a substantial economic stake.” The report asserts that these deals “resulted in” Enron overstating its earnings from the third quarter of 2000 through the third quarter of last year by almost $1 billion. The report casts much of the blame for these deals, as well as Enron’s “creative efforts to circumvent accounting principles,” on company managers and Arthur Andersen, the company’s then-auditor. But the report also asserts that Vinson & Elkins played a significant role. According to the Powers document, the law firm “provided advice and documentation” for many of these partnership deals and “assisted Enron with the preparation of its disclosures of related-party transactions in the proxy statements and the footnotes to the financial statements in Enron’s periodic SEC filings.” Enron’s managers and its board “relied heavily on the perceived approval by Vinson & Elkins of the structure and disclosure of the transactions,” the report claims. While it would be “inappropriate to fault” Vinson & Elkins for accounting matters, the report concludes, the firm “should have brought a stronger, more objective and more critical voice to the disclosure process.” The senior Vinson & Elkins partner, who says Wilmer, Cutler lawyers interviewed only three Vinson & Elkins partners in connection with the report, confirms that the firm assisted with some of the documentation and disclosures of the partnerships. But he insists that he and his partners were “shocked” by some of the details disclosed in the report. “Many of the transactions in this report were completely unfamiliar to our lawyers,” he says. He declined to be more specific. He emphasizes that the Enron partnerships were not clients of Vinson & Elkins. Both of the LJM partnerships — which were originally developed and managed by Enron’s then-chief financial officer, Andrew Fastow-were represented by Kirkland & Ellis, the Vinson & Elkins partner notes. The Powers report identifies Kirkland as outside counsel to LJM1. Kirkland & Ellis lawyers and spokespeople decline to comment. But lawyers with knowledge of the matter say that the Chicago-based law firm was called in to handle the LJM entities by Fastow, who developed a rapport with Kirkland when he was working at Chicago’s Continental Bank during the 1980s. Continental was a major Kirkland client at that time. The LJM work was handled by Kirkland D.C. partner Michael Edsall, the sources say. Edsall did not return calls seeking comment. The senior Vinson & Elkins partner also says his firm was, as a rule, called in by Enron in-house counsel to provide legal advice on discrete matters. “We were not charged with or given the information to evaluate [Enron's] overall financial disclosures,” he says. As for advising on the partnership transactions, he adds, “Our task was to document a transaction that the parties had agreed upon, and not to pass upon the accounting treatment.” In general, the partner argues, the Powers report overstates Vinson & Elkins’s input into Enron’s business dealings. He stresses that Enron’s huge in-house legal team — which numbered about 250 lawyers at its peak — dealt with much of Enron’s legal matters. The Vinson & Elkins partner claims that his firm was never asked for advice on “the whole notion of Fastow being involved” in managing the LJM entities. Fastow, who was originally the general partner of those limited partnerships, earned roughly $30 million from LJM deals done with Enron while Fastow was also Enron’s CFO, according to the report. In response to the Powers report claim that Vinson & Elkins was insufficiently critical of Enron’s dealings, the partner points to advice the firm gave that Enron opted not to follow. According to the report, Fastow last year sold his interest in LJM2 to another former Enron employee, Michael Kopper. Vinson & Elkins “recommended disclosure of this fact,” the report states, but Enron objected, “and the Vinson & Elkins lawyers felt that they could not say it was legally required.” As a result, Enron’s 10-Q filing for the second quarter of 2001 says only that the “senior officer, who previously was the general partner of these partnerships, sold all of his financial interests.” The filing does not say that the interest had been sold to another former Enron insider. The Vinson & Elkins partner also asserts the firm made an oral report to the Enron board on Sept. 21, 2001. In that report, the partner says, “We advised them of concerns regarding conflicts of interest, and we advised them that these transactions could lead to litigation.” PAYDAY One scenario in the Powers report about Fastow’s compensation illustrates the delicate nature of Vinson & Elkins’ work for Enron. “There was significant discussion, both within Enron Management and with outside advisors, about whether Enron could avoid disclosing Fastow’s compensation” from the LJM deals, the report states. Vinson & Elkins was involved in those discussions, which related to the company’s 2000 proxy statement. According to the report, Vinson & Elkins and in-house lawyers came up with a rationale that would allow the company to avoid the disclosure. Under the relevant regulation, Fastow’s compensation would have to have been disclosed “where practicable.” The Powers report, citing an in-house memo, describes how the lawyers reasoned that because the ultimate amount of Fastow’s compensation depended on certain “open” transactions, disclosure of that amount was not “practicable.” A year later, a discussion again focused on Fastow. He had received substantial compensation from a major LJM deal that had closed. According to the report, in-house lawyers and Vinson & Elkins then reasoned, in effect, that the compensation had been already sufficiently disclosed in the prior year’s proxy. The report faults the lawyers for doing “little if any investigation into what transactions actually remained ‘open.’ “The lawyers apparently searched for and embraced a technical rationale to avoid disclosure,” the report concludes. It also notes that Vinson & Elkins never “pressed for” the amount “or even the magnitude” of Fastow’s interest in the deals. “The magnitude of the amount was knowable and should have been disclosed,” the report states. The Vinson & Elkins senior partner says the firm’s advice “would have been based upon the facts that had been given to us.” “We didn’t know what [Fastow] made,” he says. “They were asking our advice on what we thought their latitude was under [the relevant regulation]. What our lawyers were being told is that [Fastow's interest] was unclear. I’m not saying we didn’t ask. I’m saying we didn’t know. “It’s not our place to make an appointment with Fastow, the CFO of the company, and ask him how much he was making. That is a misunderstanding of how this process worked. “When clients ask us is there a legal way to do something, our job is to take the facts given us and figure out if there is a legally appropriate way to do it. That’s what we do. And so does every other law firm in America.” The partner says the firm never believed that Enron’s conduct was so egregious that the firm should drop the company as a client.

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