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Now that the demise of Enron Corp. has made deregulation a dirty word on Capitol Hill, reform-minded lawyers are urging lawmakers to use the company’s bankruptcy, the largest in U.S. history, as a vehicle to tighten bankruptcy controls and bolster penalties for fraud. Plaintiffs’ lawyers and securities law experts say that a key provision of the Private Securities Litigation Reform Act laid the groundwork for accounting practices allegedly performed by Arthur Andersen that hid huge discrepancies between Enron’s real and reported health. That section of the act significantly reduced the potential liability of accounting firms in securities class actions. It was strongly supported by the Big Five accounting firms when it was enacted in 1995. Bankruptcy law experts are also warning that a section buried inside the Bankruptcy Reform Act of 2001, which has remained before a congressional conference committee since last spring, will make it easier for companies such as Enron to move assets off the books and out of the reach of creditors seeking redress in bankruptcy. Both warnings came as the expanding Enron drama changed venues, moving from the company’s Houston headquarters to Washington, D.C., where hearings on the matter began Jan. 24 before committees of both the U.S. House of Representatives and the U.S. Senate. Though a highly technical provision, � 912 of the pending bankruptcy act performs the simple task of allowing companies to keep secret many of the details of asset-backed securitizations. These are sales of the company’s financial assets, such as an existing or future debt owed to them, in exchange for cash from a buyer. The buyer is often a “special purpose entity” created by the company expressly for securitizations. On Jan. 23, 35 bankruptcy and commercial law professors wrote to Sen. Patrick Leahy, D-Vt., and Rep. James Sensenbrenner, R-Wis., urging both judiciary committee chairmen to revisit the proposed bill. They argued that the legislation would allow companies to disguise “a loan so that it will be treated as a ‘true sale’ under bankruptcy law.” The label “true sale” enables the transferred asset, and any liabilities associated with it, to be placed off the seller’s books since it has been “sold.” This also places it out of the reach of other creditors if the seller should file for bankruptcy. The catch with such agreements is that the seller often agrees to buy the asset back from the special purpose entity if its value decreases too much. In Enron’s case, the energy trading firm, with additional financing from outside investors, issued stock to fund partnerships that in turn invested in Enron assets. Enron promised to issue more stock if the value of those assets — property such as pipelines and power stations — decreased in value. When the value of Enron’s assets started to plummet, however, so did the value of its stock, causing a fiscal death spiral. Under current law, lawyers are obligated to investigate both parties in an asset securitization to guarantee they are truly separate entities. Section 912 of the proposed legislation would allow such agreements to go forward without public disclosure, making such inquiries pro forma efforts, say bankruptcy law experts. They warn that such limited disclosure rules would promote more questionable asset securitizations that unfairly limit assets available to other creditors. “The irony is that Congress is about to approve a bankruptcy act that would make it easier for the Enrons of the world to do this,” says Jonathan C. Lipson, a bankruptcy law expert and professor at the University of Baltimore School of Law. “The existing rules force a certain amount of clean bookkeeping. The new law would eliminate the power of bankruptcy courts to undo asset securitizations that weren’t properly disclosed,” he says. “Lenders who search a company’s background would be fooled into thinking the debtor has no secured creditors.” REFORMING THE REFORM Before 1995, Big Five accounting firm Arthur Anderson could have been held liable for the bulk of a class action judgment against an insolvent Enron, say securities lawyers. But the 1995 securities reform act reduced the liability of such third parties from “joint and several liability” to a level of liability “proportionate” to the party’s wrongdoing. Securities lawyers say this provision is in part to blame for an increase in securities class actions, which they attribute to bad accounting practices. In 2001, 487 such class actions were filed, as compared to 188 in 1995, according to Stanford Law School’s Security Class Action Clearinghouse. Accounting firm lobbyists “kept using the words ‘strike suits’ when pushing these laws,” recalls Joel B. Strauss, a partner with New York’s Kaplan Fox, which has filed a class action against Enron and favors changing the law. “Now, everyone is focusing on the fact that the lead auditor was destroying documents.” But Marcel Kahan, a securities law professor at New York University School of Law, notes that the billions of dollars involved in the Enron bankruptcy will obviate any benefit Arthur Andersen would get from proportionate liability. “Even a fraction of that could annihilate Arthur Anderson,” says Kahan.

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