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The first report from the investigator sifting through the Enron Corp.’s finances casts a harsh light on the role that corporate lawyers played in some of the company’s exotic business deals. The lawyers in those deals furnished what are known in the arcane world of asset securitization as true sale opinions. These legal documents, which are almost always required by the parties in such deals, amount to a lawyer’s blessing of the underlying legal basis for the transactions. Now the report by R. Neal Batson, the court-appointed Enron examiner, is raising questions about the true sale opinions in some of Enron’s deals. Batson’s report also highlights the involvement of a major law firm that has received relatively little attention in the Enron debacle. According to Batson’s report, Houston-based Andrews & Kurth furnished two legal opinions that were crucial to a transaction dubbed “Cerberus.” Securitization experts say that these opinions appear contradictory. That deal enabled Enron to recognize a $31 million gain on its 2000 income statements and to bolster its reported cash flow by nearly $520 million, without clearly disclosing any debt from the deal, Batson asserts. Batson’s carefully worded 160-page document, filed Sept. 21 with the New York bankruptcy court overseeing Enron’s Chapter 11 case, avoids unequivocal conclusions. But the report nevertheless strongly suggests that the Cerberus deal was in fact a disguised loan that Enron was obligated to repay. “[T]he Cerberus transaction appears to be, from both an economic and risk allocation perspective, a loan rather than a sale of assets,” writes Batson. According to his accounting experts, Batson notes, “Enron’s disclosure of its obligations” in Cerberus was “not in accordance” with generally accepted accounting principles. Batson’s report — expected to be the first of several — describes only six “selected transactions” and explicitly links Andrews & Kurth to two of them. In one of these two deals, the firm appears to have refused to provide a legal opinion sought by Enron because “Enron managers were unwilling to provide certifications as to factual matters recited in the opinions,” according to “Enron employees” cited by Batson. But according to three sources with knowledge of the matter, Andrews & Kurth furnished legal opinions on several other Enron securitization transactions, including deals not addressed by Batson thus far. David Barbour, an Andrews & Kurth partner in Dallas who is named in Batson’s report, did not return calls seeking comment. The firm’s managing partner, Howard Ayers, also did not reply to requests for comment. The deals Batson attempts to unpack all involve the securitization of assets held by Enron or by an Enron affiliate. Enron’s creditors are keenly interested in these elaborate transactions, which with typical Enron swagger were given names like “Nikita,” “Hawaii” and “Backbone.” The creditors want to figure out whether the assets that underpinned these deals were really, legally sold by Enron to one of its myriad special purpose entities. If the assets were never really sold, bankruptcy lawyers say, and the transactions amounted to little more than artfully lawyered-up loans, then those assets may very well be corralled back into Enron’s estate. And that means more cash for the company’s creditors. In fact, it could mean a lot more. Batson pegs the current value of the underlying assets in his six “selected transactions” at roughly $500 million. (That’s a fraction of the amount of cash Enron pocketed. According to Batson, the company cleared about $1.4 billion on these six deals alone.) Batson’s report suggests that all six of the deals he autopsied — “with the possible exception” of one called Destec — appear to be loans, not true sales. SECURITY BLANKET Securitization is a financing technique that enables companies to raise cash cheaply. It’s a technique that requires considerable legal dexterity. To “monetize” an asset — like, say, a heap of credit card receivables — through a securitization, a company moves the asset into a specially created corporate vehicle — the now infamous “special purpose entity” or SPE. That SPE in turn issues securities, usually bonds, backed by the assets. The cash proceeds from the bond sale flow back to the company, and the investors’ loans get repaid by the SPE. Investors in these deals are often willing to accept relatively low interest rates because the risks associated with the assets are readily understood and quantified. That’s because the assets are, for legal purposes, separate from the more complex array of operations and business risks at the company that originally held the assets. And, more to the point, the assets are typically deemed — by outside counsel — to be sufficiently “remote” from that company that they won’t be considered part of its estate in the event it goes bankrupt. That’s where the true sale opinions come in. In essence, these legal documents serve as assurances to the parties in a securitization deal that the assets have in fact legally been severed from the company that wants to securitize them. If they haven’t, and the company goes bankrupt, the assets get sucked back into the company’s estate, and the bondholders lose the assets that secure their investment. Not surprisingly, the underwriters in securitization deals almost always demand a true sale opinion. And they usually get one penned by counsel to the company. Securitization lawyers and legal scholars say Enron appears to have been much more aggressive than most other companies that take advantage of securitization as a financial tool. And they stress that the device is, in the great majority of cases, both legally sound and beneficial to the broader economy. But some experts and corporate law professors say they see reasons to be concerned about the quality of the lawyering on securitization deals, which have evolved over the past 15 years from an ultra-technical rarity to a commonly deployed method for financing everything from home mortgages to future revenue streams from international shipping. “Securitizations are unusually complex transactions,” says Gregory Shaw, head of the securitization practice at Cravath, Swaine & Moore, and one of the pioneers of the field. “Tax, bankruptcy, secured transaction, and securities law issues arise in unusual and sometimes conflicting ways. But in some cases, you’ve got new people on these deals who don’t really understand the issues very well.” Another cause for concern grows out of the economics of the securitization practice at some law firms, says Lawrence Cunningham, a Boston College law professor who is an expert in both corporate law and accounting. “As the industry has matured, a lot of these deals have become much more cookie-cutter, and low margin” for the firms, says Cunningham, who worked on securitizations as a lawyer at Cravath before entering academia. That often means that more-senior partners “no longer participate directly” as they once did, he says. And more-junior partners, or associates, may be less confident in pushing back an overly aggressive client. POLICING THE LAWYERS It remains to be seen whether Batson’s investigation, which now encompasses discovery efforts directed at 45 law firms, will unearth other assets for Enron’s creditors, or other targets for suits by angry shareholders. William Lerach, of New York’s Milberg Weiss Bershad Hynes & Lerach, has already sued two law firms — Houston’s Vinson & Elkins and Chicago-based Kirkland & Ellis — that handled Enron-related work. Among many other things, Lerach has accused Vinson & Elkins of furnishing true sale opinions that Enron relied upon in its deceptive accounting. Says a spokesman for the University of California, the lead plaintiff in that shareholder litigation: “Our position is that any firm that issued false ‘true sale’ opinions as part of a scheme to help Enron falsify its financial statements is liable. � Our investigation of additional potential defendants continues. If we believe it is warranted, such parties may be added in the future.” Cravath Swaine partner Shaw, the dean of the securitization practice, worries about the underlying conditions in the profession that can lead to situations like Enron. “How does the legal profession police itself in this area or in similar areas?” he asks. As a practical matter, he says, the answer is it doesn’t and probably can’t. Says Shaw: “I just don’t think policing in areas of professional judgment in complex, highly fact-sensitive issues is feasible except in the most egregious cases.”

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