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The irony is inescapable. In 1994, Congress was putting the final touches on legislation aimed at reining in a securities class action bar led by New York-based Milberg Weiss Bershad Hynes & Lerach. That same year, the U.S. Supreme Court made class actions less lucrative, safeguarding accountants and law firms by removing aiding-and-abetting liability from the plaintiffs’ securities fraud arsenal. Eight years later, Enron has turned everything upside down. Milberg Weiss has skillfully manipulated the Private Securities Litigation Reform Act of 1995 to become lead counsel of what could become one of the most lucrative class actions in history. To make that happen, the firm is now looking to finesse the high court’s 1994 ruling in Central Bank of Denver v. First Interstate Bank of Denver, reaching past a destitute Enron to the fatted secondary players: investment banks and law firms. The strategy is necessary if the firm’s clients are to reclaim the billions of dollars they lost when the Houston-based energy firm collapsed. But succeeding against those law firms, Vinson & Elkins of Houston and Kirkland & Ellis of Chicago, is going to be difficult. In a 500-page complaint filed on April 8 in U.S. District Court for the Southern District of Texas, Milberg alleges that the law firms are liable for structuring the “phony deals” that inflated Enron’s profits and led to its collapse. Newby v. Enron Corp., No. 01-3624. The complaint frames the alleged actions of the two firms in the language of Central Bank, saying that, as part of a “frenzy of fraud,” Vinson & Elkins “participated in the cover up of the fraudulent scheme” and that Kirkland & Ellis helped “structure those partnerships and their … manipulative devices…to falsify Enron’s financial condition.” Kirkland & Ellis says the complaint is “a transparent attempt to extend liability far beyond legal precedent.” Joseph Dilg, managing partner of Vinson & Elkins, did not return calls seeking comment. But just as the Supreme Court in Central Bank was addressing a deep split among the circuits, legal experts say that another has developed since that case was handed down. “I think it’s going to be a very steep incline for the plaintiffs,” says Tucker K. Trautman, a partner in the Denver office of Minneapolis-based Dorsey & Whitney. Trautman argued on behalf of Central Bank of Denver before the Supreme Court. “Primary liability means you have to have been the central focus and had knowledge of wrongdoing.” Between 1986 and 1988, his client was a trustee for $26 million in bonds issued by the Colorado Springs-Stetson Hills Public Building Authority to finance improvements to a mixed-use development in Colorado Springs, Colo. In 1988, Central Bank officials raised concerns that, due to declining real estate values, the property backing the bonds was no longer valuable enough to equal the required 160 percent of bond principal and interest. Before the bank could obtain an appraisal, the authority defaulted on the bonds. Having purchased $2.1 million of the bonds, First Interstate Bank of Denver and others sued Central Bank, alleging that it had aided and abetted in the securities fraud by delaying a review of the real estate value by an outside appraiser. Associate Justice Anthony Kennedy wrote in the 5-4 majority opinion in Central Bank that a strict reading of the securities law does not allow for simple aiding-and-abetting liability. Instead, it requires that a defendant actually engage in manipulative or deceptive acts. “Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable,” he wrote. Using that measure, the court held that simple inaction by Central Bank did not rise to the level of liability. Eight years later, in today’s Enron litigation, Milberg Weiss is alleging that Vinson & Elkins was at the center of the strategic partnerships that were the primary tool used by Enron to report false profits. “True sale” letters issued by the law firm were the linchpins in forming such “special-purpose entities,” since they enable a transferred asset, and its liabilities, to be listed by Enron as sold. Those partnerships, however, generally included an agreement saying that if the value of the asset sold to it decreased below a certain level, Enron would buy it back. In some of the partnerships allegedly approved by Vinson & Elkins, Enron promised to issue more stock to prop up the partnerships when the assets, such as pipelines or power plants, decreased in value. But as both the value of the assets and Enron stock began to plummet, the partnerships, and then the company, collapsed. The plaintiffs also allege that Kirkland & Ellis, in helping structure the partnerships, knew they were not “independent entities” but in fact sham partnerships. In its complaint, Milberg alleges that those partnerships were “manipulative devices” for purposes of satisfying Central Bank. TWO STANDARDS The 5th U.S. Circuit Court of Appeals, which includes the U.S. district court in Houston where the complaint was filed, has not interpreted Central Bank. Others have, however — and they don’t agree. Marcel Kahan, a securities law professor at New York University School of Law, says decisions by the 9th and 10th circuits are emblematic of the divide that now exists over just how high Central Bank set the bar for liability. The 9th Circuit has held that an accounting or law firm can be held liable for securities fraud if there is a “reasonable inference that [the firm] knew or recklessly disregarded” false information while substantially participating in the drafting of financial statements. In re Software Toolworks, 50 F.3d 615 (1994). But most circuits, says Kahan, agree with the 10th Circuit’s strict reading of Central Bank. Writing for a unanimous three-judge panel, Judge Carlos F. Lucero said “the critical element separating primary from aiding and abetting violations is the existence of a representation, either by statement or omission, made by the defendant, that is relied upon by the plaintiff. Reliance only on representations made by others cannot itself form the basis of liability.” Anixter v. Home-Stake Production Co., 77 F.3d 1215 (1996). “I think the Supreme Court may have to break that tie,” says Trautman. But William F. Alderman, a securities defense lawyer with Orrick, Herrington & Sutcliffe, says the split may be obviated by the reform act. “It helps erase the distinction,” he says, explaining that the act’s strict pleading requirement is more likely to result in a high court interpretation akin to Anixter. But unlike the frivolous cases the reform act was meant to prevent, Kahan says Enron, the “scandal of the century,” is one that a federal judge will find difficult to dismiss. He adds that attorney-client privilege is unlikely to be a problem since Enron may find it beneficial to forfeit privilege to give plaintiffs’ lawyers a chance at recovering from someone else. “If Enron has something to gain by throwing the law firms to the wolves,” says Kahan, “they will.”

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