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Accounting for Andersen In the tense weeks leading up to the Justice Department’s March 14 indictment of Arthur Andersen, the embattled partnership turned to Mayer, Brown, Rowe & Maw for help. In a widely publicized letter, a Mayer Brown D.C. partner, Richard Favretto, jumped into the negotiations between Justice and Andersen to try to hold off the indictment. The move surprised some in the criminal defense bar, who observed that Mayer Brown is not particularly well-known in Washington for its white-collar criminal litigators. But Chicago-based Mayer Brown is hardly a surprising choice for Andersen. Mayer Brown has been quietly working behind the scenes for Andersen on civil matters and congressional investigations over the past three months, according to a lawyer with knowledge of the representation. And the accountancy’s new general counsel, Andrew Pincus, was a partner at the firm. Pincus took the top legal job at Andersen just more than a year ago, after leaving the Department of Commerce, where he served as general counsel. Pincus joined the department in 1997, after William Daly, his former partner at what was then Mayer, Brown & Platt, was named commerce secretary by Bill Clinton. Now, with Andersen’s very existence — and Pincus’ livelihood — seemingly on the line, his former Mayer Brown colleagues have stepped in to wage war with Justice. Mayer Brown’s Favretto has been out in front on Andersen’s negotiations with Justice officials over the past week. Favretto is best-known as an antitrust expert, having served for 15 years in Justice’s Antitrust Division, where he rose from trial attorney to deputy assistant attorney general. Another D.C. partner, Mark Gitenstein, has also been advising Andersen. Favretto did not reply to a request for comment. Gitenstein declines comment, other than to confirm that Mayer Brown is working alongside New York’s Davis, Polk & Wardwell on Andersen’s criminal defense. In the March 14 indictment, handed down by a Houston grand jury, the United States charges Andersen with obstruction of justice. The charge stems from the destruction of documents, e-mail and computer records related to the Enron Corp., until recently a major audit and consulting client of Andersen. The firm has publicly admitted trashing Enron materials, but the indictment claims that Andersen destroyed far more than it has acknowledged. Andersen has signaled that it intends to fiercely contest the charges against the entire Chicago-based partnership, calling the indictment an “abuse of prosecutorial discretion.” Davis Polk has been the accountancy’s lead national counsel on Enron matters. The firm represents Andersen in numerous civil suits that flow from Enron’s collapse, in discussions with the Securities and Exchange Commission, and in connection with the criminal charge. Robert Fiske Jr., a senior Davis Polk litigation partner and former U.S. attorney who has handled several high-profile white-collar cases, did not return a call seeking comment. Calls to Davis Polk management committee member Christopher Mayer were referred to a spokesman, who declined to comment on the firm’s representation of Andersen. Another Andersen lawyer, Rusty Hardin of Rusty Hardin & Associates in Houston, says he now expects to be working closely with Davis Polk and Mayer Brown on the criminal case. Hardin has been serving as local counsel for Andersen in the civil cases. Hardin worked with Fiske while he was independent counsel investigating Whitewater. Andersen is a longtime Mayer Brown client. The law firm represented Andersen last year before the SEC, which charged the accounting firm with fraud in connection with the inflated financial statements of audit client Waste Management Inc. Andersen paid $7 million to settle that case without admitting guilt. Andersen and Mayer Brown are also named as defendants in a cluster of civil suits stemming from the 1999 collapse of Tulsa, Okla.-based debt collector Commercial Financial Services Inc. The suits echo the current Enron debacle. In those little-noticed cases, filed in 1999 in federal court in Tulsa, investors who paid more than $1 billion for CFS bonds claim that Andersen blessed CFS’ illegitimate accounting and certified the company’s false financial statements. The plaintiffs also claim that Mayer Brown, which had served as the company’s corporate counsel, misled investors about its true financial condition. The company, which purchased bad credit card debts from banks and then bundled them into new debt securities, declared bankruptcy in 1998 and ultimately went out of business. Andersen, represented by Weil, Gotshal & Manges, and Mayer Brown, represented by John Villa of Williams & Connolly, have asked the court to dismiss the claims against them. These motions are now pending. – Otis Bilodeau There Was No Dodging the DOJ As the Justice Department readied its indictment against Arthur Andersen last week, lawyers for the accounting firm pleaded with federal prosecutors not to bring criminal charges that might lead to the partnership’s collapse. Deputy Attorney General Larry Thompson dismissed the firm’s concerns when he announced on March 14 the government’s decision to charge Andersen with obstruction of justice in spite of the potential economic consequences. “I think it would be unfortunate for our criminal justice system if any individual or any entity could say that he or she or it was too big or too important, so as it couldn’t be indicted,” Thompson said. According to Thompson, who supervises the Justice Department task force investigating the collapse of the Enron Corp., the decision to charge Andersen as a partnership was based on evidence that the destruction of documents related to accounting work for Enron was widespread and conducted with the approval of high-level partners. When it comes to charging a corporation with criminal conduct as opposed to individual bad actors, Justice Department policy instructs prosecutors to consider collateral consequences such as the impact on innocent third parties like employees and shareholders. Yet the 1999 memorandum laying out guidelines for indicting corporations also states that the mere existence of such an effect should not rule out prosecution. “I think it’s appropriate for the department to consider the impact on our economy,” says Richard Rossman, former chief of staff of the Criminal Division and now a partner in the Detroit office of Pepper Hamilton. “On the other hand, they have to make sure that they send a message that obstruction of justice is a very serious offense.” To the defense bar, the speedy legal assault on Andersen, a limited liability partnership with about 27,000 U.S. employees, may indicate that prosecutors took Andersen’s actions personally. “To indict a major professional services firm for a felony in two months is just remarkable. It’s just got to be because the prosecutors at Justice were truly outraged by what they saw,” says one D.C. white-collar defense lawyer. “Obstruction of justice — interfering with their investigation — really is the cardinal sin to these people.” In bringing charges against a corporate entity, a number of factors are considered, in addition to usual law enforcement concerns, such as the strength of the evidence and the likelihood of success at trial. Uniquely corporate considerations include whether the company has an adequate self-policing program, whether company management condoned the behavior and whether a pattern of similar conduct exists. Andersen’s past record — including serious run-ins with the Securities and Exchange Commission last year over its accounting for the Sunbeam Corp. and Waste Management Inc. — likely weighed heavily in favor of prosecution. “I think the department was trying to get Andersen’s attention and get them to take these matters seriously,” Rossman says. It won’t just be Andersen paying attention. In the wake of the government’s prosecution, all the major accounting firms will be taking a close look at their internal compliance programs. “This was a very smart move on their part, tactically in terms of the case and politically,” says one Clinton-era DOJ official. “Part of this is a shot across the bow to the entire accounting industry.” –Vanessa Blum Climbing the Hill Lawyers are used to asking the questions — not answering them. Last week, two partners from Vinson & Elkins and in-house lawyers from the Enron Corp. were on the receiving end of an extraordinary congressional hearing, during which they were accused of contributing to the company’s catastrophic fall into bankruptcy. Lawyers, of course, have been called before Congress before. But Capitol Hill sources couldn’t think of another time lawyers were summoned and sworn for an inquiry whose sole focus was the conduct of lawyers and the legal advice they tendered a client. With members of Congress lashing out, Vinson managing partner Joseph Dilg stood by his firm’s work for Enron, and steadfastly defended his own integrity. Rep. James Greenwood, R-Pa., chairman of the House committee that conducted the March 14 hearing, said Enron’s plight involved a “systemic failure” on the part of its lawyers. “Where were the professionals whose job it was to ferret out wrongdoing?” Greenwood asked in his opening statement. The company’s lawyers, he said, “were paid to know better, and should have done more, much more.” In addition to Dilg, who fielded the lion’s share of the committee’s questions about Vinson & Elkins at the four-hour hearing, corporate partner Ronald Astin also testified briefly. Dilg has been the firm’s lead partner for Enron matters; Astin has handled financial disclosures for the company, Vinson & Elkins’ biggest client. Vinson & Elkins’ lawyer, John Villa of D.C.’s Williams & Connolly, was also present at the hearing, although he did not testify. James Derrick Jr., until recently Enron’s general counsel, testified along with Scott Sefton, the one-time general counsel for Enron Global Finance, and Carol St. Clair, the former assistant general counsel for another Enron division. The only other witness, Rex Rogers, was also the only current Enron employee to testify. An associate general counsel for the embattled corporation, Rogers has overseen many of its filings with the Securities and Exchange Commission. All of the lawyer-witnesses said they were attending voluntarily. A spokesman for the committee said no subpoenas had been issued for the hearing. Dilg was treated to tongue-lashings and caustic scorn by Republican and Democratic committee members. Several focused on the report Vinson & Elkins prepared for Enron last fall in response to concerns raised by employee Sherron Watkins about the company’s accounting and outside partnerships. Rep. W.J. “Billy” Tauzin, R-La., interrogated Dilg about the report, questioning whether Vinson & Elkins had vigorously investigated Watkins’ claims. Dilg acknowledged that the firm had not interviewed several people who appear to have had relevant knowledge, including former CEO Jeffrey Skilling and various investment bankers. “We did not interview anyone outside of the company,” Dilg said. Vinson & Elkins had been asked to conduct a quick, “preliminary investigation” of Watkins’ claims in order to determine whether further investigation was warranted, Dilg noted. Several members expressed exasperation over the fact that Vinson & Elkins did not ask an accounting firm other than Arthur Andersen, Enron’s then-auditor, to evaluate the issues Watkins raised. Dilg pointed out that the firm’s assignment from Enron had specifically excluded accounting analysis. Committee members angrily asserted that Vinson & Elkins’ limited investigation amounted to nothing more than legal cover. Some suggested it was willfully blind in order to please a key client. Enron “got exactly what it paid for,” said one member. “You acted like Inspector Clouseau, stumbling over obvious evidence, not interviewing obvious witnesses,” Rep. Edward Markey, R-Mass., said to Dilg. “If you had not conducted this phony investigation,” he added, “we might have had time” to prevent Enron’s failure. “Your report was not a cover-up, was it?” asked Greenwood. Dilg answered that it was not. Greenwood then asked how a cover-up would “look different” than Vinson & Elkins’ report. “I don’t know,” Dilg answered. “I’ve never participated in a cover-up. My integrity is not for sale.” Derrick and the other Enron in-house counsel came under fire for failing to question the apparent conflicts of interest of several former Enron officials who invested in various purportedly independent partnerships and profited from deals those entities entered into with Enron. Derrick suggested at one point that there is no way for in-house lawyers to police such conflicts if the officials don’t disclose them. The in-house lawyers, including Derrick, who oversaw Enron’s entire legal team, repeatedly claimed that they lacked personal knowledge of many of the matters raised by the committee or were not directly involved in dealing with them. “Did you ever think about not continuing Enron as a client?” one member asked Dilg. Not until after the company filed for bankruptcy, Dilg responded. To his knowledge, he said, no one at the firm ever saw evidence that the company was acting illegally. Dilg also said he was “not aware” of any instance in which the company had pursued a course of conduct that Vinson & Elkins advised would be illegal. Harry Reasoner, a senior Vinson & Elkins partner who also serves as spokesman for the firm on Enron matters, said after the hearing that Dilg and Astin had done “a good job of presenting the facts” about the firm. The hearing “did clarify to a degree what our actual role was.” – Otis Bilodeau Law Firm Exposed Under the unaccustomed sharp glare of media and government scrutiny since the meltdown of the Enron Corp., Vinson & Elkins has taken some aggressive steps to counter public opinion and keep its attorneys and clients from walking out the door. Just an hour after two Vinson & Elkins partners finished testifying on Capitol Hill March 14, voice-mail boxes across the firm were blinking. Associates and partners alike heard a message from Harry Reasoner, the firm’s former managing partner. “I said that I thought that Joe [Dilg] and Ron [Astin] had done an excellent job,” says Reasoner, who has been the firm’s spokesman on Enron matters. “Concerns raised by Sherron Watkins” were addressed and “our side of the story had been presented as well as it could have been.” Reasoner’s move was not unusual or unexpected, say several associates in the firm. Vinson & Elkins has regularly sent out updates via voice mail and e-mail and held firmwide and officewide meetings, with updates on the Enron situation, they say. “We do get frequent updates on the situation,” says one New York-based associate. “I do feel like we’ve been included the whole way.” Vinson & Elkins has been “consistently leaving voice mails firmwide” and there have been “at least five meetings,” adds another associate. Following the attorney meetings, “there’s usually another meeting for the staff.” “If there are stories that we believe contain misinformation, we will send out a voice mail or e-mail,” explains Reasoner. Reasoner says he doesn’t anticipate holding a firmwide meeting to discuss last week’s congressional appearance. The need for that may have been eliminated, at least in part, because many attorneys report watching the hearing on C-SPAN. Vinson’s messages and meetings have apparently helped keep morale up, and stopped associates and partners from fleeing in droves, or even at all. “I’ve never noticed morale going down,” says a Houston-based associate. “Obviously, [Enron's] a concern,” says a midlevel associate. But “I do not know a single person who is trying to leave.” Keeping attorneys inside the firm happy is only part of the battle, though. Concerned that “the press stories might raise questions,” Reasoner sent out a three-page letter on Feb. 15 to all “clients and friends” to give “a complete picture of the situation” and refute news reports and congressional hearings that have “created a great deal of misunderstanding and misinformation.” Vinson & Elkins is trying as hard as it can to answer everyone’s questions, says D.C. managing partner Mark Tuohey, but because of its attorney-client relationship with Enron, “there are real limits to what we can say.” The letter to clients talks a lot about what Vinson & Elkins did not advise the energy company on or where its review was limited, and asserts, “When Vinson & Elkins gave advice, Enron made the determination whether it would follow our advice.” The firm will not answer the next most logical question: what advice it did give to Enron. Wrote Reasoner: “We are not at liberty, because of professional obligations of confidentiality, to discuss the advice we gave to Enron.” Before the letter even went out, though, Vinson & Elkins hired public relations powerhouse Powell Tate in January, confirms Reasoner. “When it became clear that the fate of Enron” was going to be splashed across the national news, says Reasoner, “we felt we needed some expert assistance.” The PR and lobbying company, which has managed to remain out of the public eye in the Enron matter, refuses to discuss its relationship with Vinson & Elkins. “We don’t talk about the work that Powell Tate performs for its clients,” says a spokesman. So far, Powell Tate’s work has been entirely behind the scenes. Reasoner and Vinson & Elkins Media Relations Manager Joseph Householder have been the ones fielding numerous media calls each day. Reasoner also does not disclose much about Powell Tate’s work for the firm, but says that Vinson & Elkins has entered into an “open-ended” relationship with the PR shop. Powell Tate is in it for the long haul, and not just for a smaller, finite project, says Reasoner, but “I hope it will come to an end” soon. – Jennifer Myers

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