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It’s every lawyer’s worst fear. Somewhere, in a worn folder toward the back of a jammed file cabinet, sits an obscure document you drafted long ago. And it’s ticking. The files of Houston’s Vinson & Elkins contained at least one such document, a two-page letter agreement that contributed greatly to the collapse of Enron Corp. The story of how the agreement came to be was not explored in the Feb. 2 report issued by a special investigative committee of the Enron board. That report criticized Vinson & Elkins mainly for its shabby drafting of disclosure language in Enron’s public filings. But based on interviews and newly disclosed internal reports, Vinson & Elkins’ role in preparing the letter agreement may turn out to be its biggest headache in the Enron debacle. The final gust of wind that brought down the house of Enron was an earnings restatement last November involving Enron’s JEDI joint venture and its transfer of funds to Chewco Investments, one of the principal outside partnerships Enron used for off-balance-sheet transactions. Under accounting rules, the $6.6 million transfer, used by Chewco to secure a loan to pay for its share of the JEDI venture, destroyed Chewco’s claims of independence from Enron’s balance sheet. Once the accounting was corrected, Enron’s net earnings over a four-year period were deflated by almost $400 million. The fund transfer was documented by a two-page letter agreement dated Dec. 30, 1997. Draftsmanship of the agreement is credited by the committee report to Vinson & Elkins. But who, specifically, at Vinson & Elkins wrote the letter agreement? And who else was in the know? That is where the Enron blame game kicks in. Enron’s accountants at Arthur Andersen LLP say that they did not know about the cash transfer to Chewco until last fall, a transaction the accounting firm now characterizes as “a secret side deal.” Enron’s board likewise claimed no knowledge of the arrangement. According to an internal Andersen memorandum obtained by The American Lawyer, on the evening of Saturday, Nov. 3, 2001, just five days before Enron would file its restatement with the Securities and Exchange Commission, Andersen’s Thomas Bauer met with a group of Enron officers and lawyers that included Ronald Astin, a 54-year-old partner at Vinson & Elkins. Astin worked on Chewco transactions and was the only Vinson & Elkins lawyer interviewed when the firm investigated charges made by Enron whistleblower Sherron Watkins. Bauer’s account of the meeting is that when he asked about the cash transfer from JEDI to Chewco, no one at the meeting claimed knowledge of it. According to Bauer, Astin, among others, was then shown the letter agreement, but said he’d never seen it before. A Vinson & Elkins spokesman confirms that Astin says that he had not seen the document prior to the meeting. According to the Vinson & Elkins spokesman, the agreement was drafted by Joel Ephross, then a fourth-year associate with Vinson & Elkins. The spokesman says that Vinson & Elkins believes that the agreement was a closing document that was circulated to other lawyers at the firm, in-house counsel at Enron, and Chewco’s lawyers at Kirkland & Ellis, but the spokesman declined to identify the other lawyers involved, citing attorney-client privilege. Ephross, now in-house with Enron, did not return calls seeking comment. His lawyer, Michael Levy, a partner with Washington, D.C.’s Swidler Berlin Shereff Friedman, said that his client couldn’t comment. An Enron spokesman did not respond to calls for comment. A Kirkland partner, citing confidentiality rules, said that the firm could not comment. A Vinson & Elkins partner designated to speak on background for the firm vigorously defended Vinson & Elkins’ role in the matter: “It will be entirely clear that the documentation we did was what the parties wanted. The bank demanded things and we documented what the parties agreed to. Why Andersen said it was entitled to separate treatment, I don’t know. But nothing about that transaction was wrong.” The partner also doubted Andersen’s claim not to know of the transaction: “I know of no reason they shouldn’t have been aware.” Is the memo destined to be Exhibit A in a malpractice case? The Vinson & Elkins partner is philosophical: “I’m sure that [Enron] will look at it, but if they look at it objectively, there is no basis to accuse us of malpractice.”

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