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In the months since Enron Corp.’s stock took a nosedive and the Houston-based energy trading company filed a Chapter 11 bankruptcy, Vinson & Elkins has been trying to free itself from the Enron morass. Despite its intimate link to Enron in its role as the company’s longtime outside counsel, V&E severed its ties with Enron earlier this year. Although two of the firm’s partners testified about Enron in March before a congressional committee, the firm has largely avoided the mass of litigation that has been filed against Enron, its former officers and board members, and former accounting firm, Arthur Andersen. So far only Andersen and one of its former partners face criminal charges stemming from Enron’s downfall. But now, V&E faces the huge challenge of defending itself from federal court allegations that the firm participated in a scheme to defraud investors by inflating Enron’s profits and financial condition and, in a second suit, from Racketeer Influenced and Corrupt Organizations Act claims. The Houston-based firm was named as a defendant in amended pleadings filed on April 8 in two Enron-related class actions pending before U.S. District Judge Melinda Harmon of Houston. One is a securities class action filed by investors in Enron stock and bonds; the other is a class action brought by participants in Enron’s 401(k) plan. According to the plaintiffs’ allegations in the securities class action, Enron, which once employed 7,000 in Houston, was no more than an elaborate Ponzi scheme. “Enron was a hall of mirrors inside a house of cards. It was built on the reporting of billions of phony profits built on billions of dollars of debt … hidden by mysterious transactions in companies operating in offshore tax havens,” lead plaintiffs’ attorney William S. Lerach said at a press conference on April 8 when announcing the new pleadings. He said the complaint — all 500 pages of it — builds a case alleging that the alleged massive fraud could not have occurred without the participation of bankers, lawyers and accountants. “This fraud could not have been accomplished by a few corporate executives, no matter how energetic,” alleges Lerach, a partner in Milberg Weiss Bershad Hynes & Lerach. “These professionals made a decision to join in and become partners with the people who were perpetrating the fraud.” He said V&E provided legal opinions to Enron on many of the alleged “sham” transactions that allowed Enron to inflate its profits going back to 1997. “V&E was as close to Enron as anyone could have been,” Lerach said. “They were Enron’s counsel in securities offering after securities offering, transaction after transaction.” Harry Reasoner, former V&E managing partner, says the allegations in the two suits are baseless. “The only thing accurate is that we did do work as outside counsel for Enron,” Reasoner says. “The claim that we acted in any capacity other than a professional one by assignment is just not true.” V&E isn’t the only institution with new troubles. The shareholder securities suit also added Chicago’s Kirkland & Ellis and nine banks — including J.P. Morgan Chase & Co. and Citygroup, which are members of the Official Committee of Secured Creditors in Enron’s Chapter 11. The case is pending in New York before U.S. Bankruptcy Judge Arthur Gonzalez. The suit filed by Enron employees brings RICO claims against V&E, alleging the 855-lawyer firm conducted and participated in an illegal enterprise, and alleging the firm participated in a cover-up when it prepared a review last fall of some of Enron’s transactions. The suit also specifically names four V&E partners who did work for Enron — current managing partner Joseph Dilg and partners Ronald Astin, Max Hendrick III and Michael Finch. John Villa, a partner in Williams & Connolly in Washington, D.C., is defending V&E in Enron-related litigation, along with Joseph Jamail, the partner in Jamail & Kolius who is a legendary trial lawyer from Houston and longtime friend of Reasoner’s. Joe Householder, a spokesman for V&E, says the individual partners won’t comment; Reasoner says Villa also represents the four V&E partners. Andersen, meanwhile, goes to trial on May 6 in Harmon’s court on a charge of obstruction of justice for shredding Enron documents. Prosecutors allege Andersen carried out the document destruction last fall at a time when the accounting firm’s partners knew the Securities and Exchange Commission was investigating Enron’s financial reporting. Andersen’s defense strategy was complicated on April 9 when former partner David Duncan pleaded guilty to a charge of obstruction of justice and promised to serve as a government witness. EXTENDING LIABILITY? The plaintiffs in the securities suit allege V&E participated in structuring Enron’s allegedly “illicit partnerships” and “bogus” off-balance sheet entities, while allegedly knowing they were designed to falsify Enron’s reported financial results and condition. “Vinson & Elkins repeatedly issued false opinions on these transactions — that they were ‘true sales’ or otherwise legitimate business transactions — when they were, in fact, manipulative contrivances designed to artificially boost Enron’s reported profits and hide billions of dollars of debt that belonged on Enron’s balance sheet,” the plaintiffs allege in the suit. The suit also alleges V&E drafted and/or approved the adequacy of Enron’s press releases, shareholder reports and SEC filings, and wrote disclosures regarding related-party transactions — including those of Andrew Fastow, former Enron chief financial officer — which concealed the true nature of the transactions. The suit claims that Kirkland & Ellis, which represented many of the off-balance sheet partnerships, allegedly repeatedly issued false opinions on transactions with the knowledge they would falsify Enron’s financial condition. In a statement, Kirkland & Ellis says the allegations against the firm are a “transparent attempt” to extend liability far beyond precedent. The statement asserts the pleadings in In Re Enron Corp. Securities Litigation misrepresent the timeframe of the firm’s work for the partnerships, the specific transactions it worked on, the work it performed and the fees it received. Lerach says the plaintiffs seek damages of $25 billion to $30 billion, which explains in part why deep-pocketed entities such as investment banks and firms were added to the roster of defendants. The lead plaintiff, the University of California, lost more than $144 million because of its Enron investment. But the suit alleges, for example, 28 current or former Enron officers or directors made nearly $1.2 billion in trading proceeds while they were privy to insider information during the class period of October 1998 through November 2001. A mediation involving Andersen, Enron and the plaintiffs was ongoing as of presstime on April 11, but reports indicate Andersen and its insurance companies only may be able to put about $300 million on the table. Andersen’s financial stability has been rocked in recent weeks not only by the indictment, but also by the loss of dozens of clients. Roger Greenberg, a partner in Houston’s Schwartz, Junnel, Campbell & Oathout who is on Milberg Weiss’ team, says he believes this week’s filings will do more to encourage settlement of the litigation than hinder it. Enron’s troubles began to bubble out last fall, after it restated earnings in October and announced a $1.2 billion decline in shareholder equity. The stock price plunged, a last-ditch merger with Houston’s Dynegy Inc. fell through and Enron sought protection from creditors in bankruptcy court in December 2001. Milberg Weiss’ extremely detailed pleadings — which include a notice of copyright — allege a “frenzy of fraud” at Enron that enriched the defendants, including V&E. V&E billed Enron $36 million in 2001 and a total of $150 million in the five-year period beginning in 1997, according to pleadings in the employee suit, Pamela M. Tittle, et al. v. Enron Corp., et al. “At some point in its representation of Enron, V&E lost its independence and at times was either a central participant in the wrongdoing alleged herein, or turned a blind eye and, by silence or inaction, effectively joined in the wrongful conduct,” alleges the suit filed by a plaintiffs’ team that includes Robin Harrison and Justin Campbell, partners in Houston’s Campbell, Harrison & Dagley. Harrison says the RICO allegations make possible the claims against third parties. Harmon has set both suits for trial in December 2003. HURDLES AND ROADBLOCKS The plaintiffs face some hurdles in getting the allegations to stick against V&E and other defendants. One roadblock is getting past a U.S. Supreme Court case that gives protection to lawyers in securities litigation, Central Bank of Denver v. First Interstate Bank of Denver. That 1994 case says private plaintiffs cannot bring securities litigation against lawyers and other professionals simply because they aided or abetted other defendants by working on a deal. “The Central Bank of Denver case has helped law firms, but the problem is that the line between what is a primary violator and a secondary violator is pretty fuzzy. The lower courts haven’t really glommed into what is a standard,” says Henry Hu, a corporate and securities professor at the University of Texas School of Law. “From the plaintiffs’ perspective, it gives them wiggle room to try to put people like law firms in a different box,” he says. Hu says the detail in Milberg Weiss’ suit is an attempt to prove that various defendants, including the law firms, were primary violators. “This is one of the reasons they are going through it in so much gory detail,” Hu says. The pleadings specifically detail V&E’s alleged role in various transactions the plaintiffs allege helped Enron inflate its earnings and its financial condition. The suit alleges V&E provided structuring advice for virtually all Enron’s off-balance-sheet transactions and prepared the transaction documents for at least 38 entities. The suit traces V&E’s alleged role in connection with several of the entities that have received extensive attention in recent weeks in news stories and at congressional hearings, including Chewco and LJM2. But it also makes numerous new allegations about the involvement of the investment banks, including the loan of millions of dollars to Enron in late 2000 through offshore subsidiaries. Hu says it makes sense for Lerach to go after other defendants with deep pockets not only because of the magnitude of the plaintiffs’ losses, but also because Andersen’s financial condition has deteriorated since the class action litigation was filed last fall. “A lot of these securities lawsuits settle for 10 cents on a dollar. There are so many zeros here, that’s still a lot of money,” he says. Lerach said Central Bank won’t be a factor because the pleadings allege V&E and the other new defendants directly participated in the alleged fraudulent scheme. Collecting from V&E’s presumably deep pockets could be complicated by the firm’s insurance coverage, which is through the Chicago-based Attorneys’ Liability Assurance Society Inc. The firm likely has excess insurance coverage as well. Reasoner, V&E’s managing partner, says the firm’s insurance will cover the causes of action alleged in the suits. “The factual allegations in these pleadings turn entirely on our professional activity as lawyers. That we documented these transactions. That we did this and that. They clearly are attacking our role as lawyers for Enron,” he says. But the coverage could face scrutiny from other large firms that ALAS insures, suggests Gordon Caine, a securities litigation partner in the Silicon Valley office of Minneapolis-based Oppenheimer Wolff & Donnelly. He says a settlement could be more difficult if infighting occurs among members of ALAS. “In theory, they’re all on the hook,” says Caine. Lerach suggested the plaintiffs may ask Harmon for leave to add additional defendants, including firms, depending on what the continuing investigation reveals. ANDERSEN’S DILEMMA In Houston, though, Andersen is facing the most pressing risk. It goes to trial on May 6 on the obstruction of justice charge, the same charge former partner Duncan pleaded to on April 9. Andersen and the government may settle before then; The New York Times reported at presstime on April 11 that Andersen and the government had agreed to a broad outline of a settlement whereby Andersen would admit it illegally destroyed documents. Andersen’s lead defense attorney, Houston’s Russell “Rusty” Hardin, of Rusty Hardin & Associates, could not be reached on April 11 before presstime. Neither could Bryan Sierra, a spokesman for the DOJ. Hardin has taken the position that neither Andersen nor Duncan shredded Enron documents with the intent of hindering the SEC investigation into Enron’s financial reporting. “I was surprised and saddened to see him do it [plead] because we had terminated him because of what we believe was bad judgment. We had consistently believed him when he maintained he had no corrupt intent and was simply following the office policy, and that is what we are representing to the government,” he says. “He’s made us look like we were wrong.” Duncan told Harmon on April 9 he personally destroyed Enron documents and he accepted his conduct violated federal law. But Duncan’s plea is good news for the prosecutors, who continue to bring evidence to a grand jury in Houston investigating Enron’s downfall. Duncan was the lead Andersen partner on the Enron account; he has knowledge of not only the internal shredding program, but also of Enron’s accounting and financial statements. On April 9, Harmon issued an order denying Hardin’s request to prevent prosecutors from bringing Andersen employees before the grand jury while the charge against the firm is pending. Prosecutors strengthened their case in the Andersen indictment in a big way by securing Duncan’s testimony, says Michael E. Clark, a partner in Houston’s Hamel, Bowers & Clark and a former chief of the criminal division at the U.S. attorney’s office in Houston. “If I was in the government’s shoes, I would certainly want to turn a critical witness before trial to tell a story,” Clark says. Hardin says settlement discussions with the U.S. Department of Justice are continuing, but both sides have agreed not to discuss the progress of the talks.

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