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We’re lawyers, not accountants, and you can’t sue us — even if claims that we helped our clients hide losses, inflate stock prices, and cash in are true. That’s the essence of the arguments Vinson & Elkins and Kirkland & Ellis mounted last week in court papers urging a judge to dismiss lawsuits filed by the investors and employees of the Enron Corp. The plaintiffs claim that the two law firms played a central — and illegal — role in Enron’s swift and violent collapse. Enron was for years Houston-based Vinson & Elkins’ largest client. Chicago-based Kirkland & Ellis structured and advised several of the partnerships that allegedly contributed to Enron’s demise. But in motions to dismiss filed May 8 in U.S. District Court in Houston, the firms contend that federal securities law and U.S. Supreme Court precedent effectively bar the plaintiffs from pursuing their claims. Legal scholars and corporate deal lawyers, who wrestle with complex transactions and aggressive corporate clients every day, say that Vinson & Elkins and Kirkland appear to have the law on their side. But a few experts — including the former general counsel of the Securities and Exchange Commission — are questioning whether lawyers shouldn’t be expected to do more to try to prevent the corporate catastrophes that now clutter the headlines day after day. And in the wake of several statements by Enron lawyers disclaiming any responsibility for Enron’s accounting chicanery, one corporate law professor is proposing that lawyers be required, as a matter of competence, to acquire a better grasp of accounting. Such skills, he argues, might enable lawyers to identify and perhaps prevent at least some of the book cooking that is alleged to have occurred at Enron. Vinson & Elkins faces two Enron suits; Kirkland only one. In Mark Newby, et al. v. Enron Corp, et al., a class action led by William Lerach of Milberg Weiss Bershad Hynes & Lerach, Enron investors target both law firms, along with several major Wall Street banks, Arthur Andersen, and officers and directors of the bankrupt energy company. In the separate Pamela M. Tittle, et al. v. Enron Corp, et al. — a suit brought by participants in Enron’s retirement plan — Vinson & Elkins is the only law firm named as a defendant. TAKE IT TO THE BANK Both law firms say they’re totally protected from liability. They note that Congress in 1995 amended the securities laws in part with an eye toward preventing private plaintiffs from suing lawyers in cases involving misconduct by their corporate clients. And they point to the Supreme Court’s oft-cited 1994 decision in Central Bank of Denver v. First Interstate Bank of Denver, which erects a seemingly insurmountable hurdle for private plaintiffs in securities cases. The Court in Central Bank held that private plaintiffs may not sue lawyers on the theory that they aided and abetted a client’s violation of the securities laws. Vinson & Elkins and Kirkland argue that the Enron suits against them boil down to nothing more than untenable aiding and abetting claims. Central Bank “forecloses plaintiffs’ attempt to bring Kirkland within the scope of the securities laws by alleging that it helped others to commit fraud,” Kirkland contends in its brief. “No amount of ‘artful pleading’ can change this result.” Notes Vinson & Elkins in its Newby brief: “Although this case has received unprecedented publicity, from a legal standpoint it is a garden-variety federal securities fraud case alleging fraudulent accounting practices.” Thanks to Central Bank, the brief observes, the plaintiffs’ claim against the firm is “so clearly foreclosed.” John Villa of Washington, D.C.’s Williams & Connolly represents Vinson & Elkins in the two cases. Kirkland is represented by John Spiegel of Munger, Tolles & Olson in Los Angeles. The Newby complaint doesn’t directly address Central Bank or the recent amendments to federal securities law. The Tittle plaintiffs contend that their claims against Vinson & Elkins derive from federal racketeering and state laws, not federal securities law. The Tittle plaintiffs “attempt evasion of federal securities regulation,” Villa retorts. “This tactic is expressly forbidden” by 1995 and 1998 federal securities acts. Both firms make much of the fact that their lawyers never communicated directly with investors in Enron’s securities. Vinson & Elkins may have helped prepare Enron’s financial statements, Villa writes, but the firm didn’t sign them. Kirkland may have helped prepare private placement memorandums for Enron partnerships, Spiegel observes, but those were never distributed to the public. And they were designed to market the partnerships, not Enron securities. As a result, Vinson & Elkins and Kirkland assert, the plaintiffs cannot possibly support the claim that the firms deceived Enron investors. Each firm’s motions occasionally make comments that seem intended for the court of public opinion as much as for U.S. District Judge Melinda Harmon in Houston. “Although plaintiffs’ allegations generally cannot be challenged at the motion to dismiss stage,” Spiegel writes, “Kirkland does want to state for the record that it vigorously disputes the allegations in the complaint, which is riddled with material misstatements of fact and outrageous allegations of complicity that have no basis in reality.” Vinson & Elkins’ Newby brief devotes nearly two pages to the distinction between legal work and accounting. “The nature of V&E’s legal services was no different than what law firms do for corporate clients across the United States every day,” the brief states. While Vinson & Elkins handled “routine transactional work,” Villa writes, “the complaint makes clear that the real issue-consolidation of financial statements-is governed by Generally Accepted Accounting Principles … a subject not within the purview of lawyers.” In a prepared statement issued the day its brief was filed, Kirkland echoes the point. The firm “had no responsibility for the accounting judgments at the center of the case,” the statement claims. Without weighing in on the merits of Newby or Tittle, some observers say that the Enron spectacle raises long-simmering questions about lawyers’ uneasy role in corporate America. David Becker, who until last week served as general counsel at the SEC and has now joined Cleary, Gottlieb, Steen & Hamilton, pointedly challenged the culture of corporate lawyering in a May 2 speech in San Francisco. “Not to put too fine a point on it, but what the hell is going on?” Becker said. “Have we adequately served the public while serving our clients? How is it that we have all these laws, rules, interpretations, and advice, but that we may advise our clients that there is still room for behavior that can only be described as shameful? “I don’t pretend that any of this is new,” he added. “But like the passage of years, it seems to be accelerating and more urgent. … Somehow, I believe, lawyers have become too accepting of a view of ourselves as purely economic actors.” CROSSING THE LINE Lawrence Cunningham, a corporate law professor and accounting expert at Boston College Law School, suggests that lawyers shouldn’t be permitted to hide behind their asserted ignorance of accounting rules. In a forthcoming article in The Business Lawyer, Cunningham, a former deal lawyer at New York’s Cravath, Swaine & Moore, argues that lawyers’ existing duty of competence should be understood to require business lawyers to familiarize themselves with basic accounting. In the corporate deal-making context, Cunningham observes, the distinction between legal questions and accounting questions is blurred. Lawyers have to understand whether or not a subsidiary will be accounted for in a particular way in order to negotiate other deal terms, for example, while accountants may have to rely on some legal analysis in order to decide how an asset or a liability should be valued. What Vinson & Elkins and Kirkland suggest — that as lawyers they had no responsibility for making accounting determinations — strikes Cunningham as “dangerous.” “It would be astonishing if business lawyers at Vinson & Elkins did not seek to understand, discuss, and negotiate the accounting treatment of transactions in the ordinary course of events,” he writes. Vinson’s statements to the contrary, he says, “defy reality” and smack of “post hoc advocacy.” The danger in this professional line-drawing, Cunningham argues, is that it produces a “crack” between the lawyers and accountants working on a transaction — a breach that unscrupulous corporate insiders can exploit in order to get an illegitimate deal papered. “An unethical CFO can say to the accountants, ‘Don’t worry about that, the lawyers have signed off on it,’ and then go to the lawyers and say, ‘Don’t worry, the accountants say this is how it should be treated,’” Cunningham says. Enron’s failure to properly account for and disclose some of its dealings may be a product of this divide, he suggests. “The captain of the accounting team may be a different person from the captain of the disclosure team, but the two go hand in hand, they must harmonize, the one must know what the other is doing and understand why,” he writes. Whether Vinson & Elkins or Kirkland & Ellis will prove to be victims of the crevasse they claim separates them from Enron’s accountants — and its investors — remains to be seen. The firms’ legal defenses to claims by private plaintiffs are formidable. But these defenses would offer far less protection from the SEC, which retains the power to go after lawyers on an aiding and abetting theory. Lawyers close to the agency and the Enron litigation say the SEC is weighing — but has not decided — whether to intervene in the Houston cases.

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