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For 2 1/2 years, Mayer, Brown, Rowe & Maw has had an Enron problem lurking in Oklahoma. And a federal judge recently refused to make it go away. The problem — a snarl of litigation that involves allegations of fraud — arises from work the Chicago-based firm handled for a formerly high-flying, and now defunct, client. During the 1990s, Mayer Brown served as the primary outside counsel for Commercial Financial Services Inc. Now bankrupt, the Tulsa, Okla., company was a privately held venture that bought huge quantities of bad credit card debt from banks. For a time, CFS was seen as a money-minting marvel: It appeared to wring streams of revenue from hopelessly uncollectible credit card receivables. The company was founded in 1986; by 1997, it pegged the book value of the debts it was servicing at $7 billion. It’s not clear when CFS first retained what was then Mayer, Brown & Platt. But by 1995, partner Jason Kravitt was overseeing the representation. According to investors suing CFS and Mayer Brown, Kravitt led a team of as many as 200 Mayer Brown lawyers on CFS matters. (The firm contends that fewer than 20 lawyers generated the vast majority of CFS billings.) Now a senior partner who practices out of the firm’s New York office, Kravitt, who until this year served as co-chair of the firm’s management committee, is widely regarded as a pre-eminent securitization lawyer, and a pioneer in the field. He recently helped form a trade association, the American Securitization Forum, to lobby on behalf of the industry. Kravitt chairs the group’s legal, regulatory, accounting and tax committee. But it was the alchemy of securitization deals that ultimately contributed to the collapse of CFS, according to investors suing the company in a cluster of little-noticed cases filed in Tulsa federal court in late 1999 and early 2000. The plaintiffs include investment funds like Luxembourg’s Alliance Capital, New York’s Cerberus Capital Partners and the Iowa State University Foundation. They claim that CFS executives, Mayer Brown and Arthur Andersen LLP, among others, misled them into investing more than $1 billion in overpriced CFS securitizations that were little more than Ponzi schemes. The suits don’t specify the amount of damages sought. This, of course, is not the first time that Andersen and Mayer Brown have been on the same side. The law firm has been representing the indicted accountancy in its struggles with the U.S. Department of Justice and Congress over the Enron debacle. The plaintiffs in the CFS cases contend that CFS actually failed to meet its collection targets, but beginning in 1997 concealed that fact by selling bundles of worthless credit card receivables to an undisclosed entity called Dimat Corp. — a shell effectively controlled by CFS executives. In effect, the plaintiffs argue, CFS was propping up its collection numbers by “selling” assets to itself at a premium, then booking the proceeds of those sales as collection revenue. Mayer Brown lawyers were closely involved in CFS’ day-to-day operations, and knew about the flaws in its business model, plaintiffs say. Nevertheless, the firm signed off on several CFS securitized debt offerings to outside investors. In those offerings, plaintiffs claim, the company failed to disclose the Dimat deals, and asserted that its collection performance was strong. Cash raised from the outside investors was ultimately used to fund the Dimat sales, plaintiffs say. This cycle screeched to a halt in September 1998, when credit-rating firms received an anonymous letter blowing the whistle on CFS’ alleged scheme. Unable to raise any more cash through securitization deals, the company soon filed for bankruptcy. Mayer Brown has strenuously challenged the plaintiffs’ assertions, and asked the court to dismiss the claims against the firm. But on March 28 Chief Judge Terry Kern, who is overseeing the consolidated cases in Tulsa, refused to dismiss most of those claims. Kravitt referred questions about the cases to Mayer Brown’s attorney in the litigation, John Villa, of Washington, D.C.’s Williams & Connolly. Villa notes that “the judge’s ruling, which is on a motion to dismiss, necessarily accepts the factual allegations of the complaint as true. We’re confident that when all of the facts are developed, Mayer Brown will be exonerated.” Arthur Andersen audited CFS’ financial statements. A spokesman for the firm did not reply to a request for comment. Weil, Gotshal & Manges partner Vance Beagles, who is based in Dallas and represents Andersen in the cases, declined to comment. Plaintiffs’ lawyers in the cases, including Kenneth Schacter of the New York office of Boston’s Bingham Dana and David Spears of New York’s Richards Spears Kibbe & Orbe, declined to comment on ongoing litigation. Schacter represents Alliance Capital. Spears represents Cerberus and other plaintiffs. The judge’s ruling, which covers most of the cases, relies on a voluminous report on the litigation prepared by Magistrate Judge Sam Joyner. His Dec. 21, 2001, report details the plaintiffs’ allegations against Mayer Brown and ultimately recommends denying Mayer Brown’s motion to dismiss the claims against the firm. Mayer Brown has filed a lengthy objection to the report. In the report, Judge Joyner offers an explanation of why a firm with a reputation to protect might get caught up in a client’s misconduct. A large firm like Mayer Brown, he notes, is “composed of many individuals. … Individual lawyers often do have a motive to obtain and keep large clients such as CFS. It is therefore not [outside] the realm of possibility that an individual lawyer in his desire to keep a large client may choose to ignore facts of which he is aware, or in his zeal to give the client what it wants, recklessly ignore facts.” Otis Bilodeau is a reporter with Legal Times.

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