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Congressional investigators and plaintiffs’ lawyers are closing in on Enron Corp.’s so-called enablers — the banks that made Enron’s suspect deals possible. But the lawyers on those deals haven’t received much attention. Yet. If that changes — and there are clear signs that it may — one firm with cause for concern is New York’s Milbank, Tweed, Hadley & McCloy. Milbank Tweed represented four banks under scrutiny for their role in questionable “prepay” deals designed, according to a July 2002 Senate report, to mask billions of dollars of Enron balance sheet problems. Those deals were one of the bases for an effort to disqualify Milbank as counsel to the creditors committee in the Enron bankruptcy. Last spring Enron creditor Exco Resources Inc. objected to Milbank’s representation, claiming that the firm was one of the engineers of the questionable Enron structured finance deals, that the revelation of that role would jeopardize Milbank Tweed’s reputation, and that, as a result, Milbank Tweed did not have “the inclination or the interest” to investigate the deals. Milbank Tweed beat back the challenge, thus keeping the valves open on a gusher of a case that is currently earning Milbank Tweed an average of $2 million per month in fees. The decision, by Enron bankruptcy judge Arthur Gonzalez in Manhattan, is currently on appeal. Milbank Tweed is also feeling heat from the prepays on other fronts. The firm’s name has come up in the U.S. Senate investigation of the deals, and plaintiffs in the Enron shareholder class action have considered adding Milbank Tweed as a defendant because of its work on the prepays, according to a source familiar with the class action plaintiffs’ strategy. The American Lawyer contacted several of Milbank Tweed’s lawyers, but they declined to comment for this story. Firm Chairman Mel Immergut directed all inquiries to firm ethics counsel Stephen Blauner, who, in turn, declined to answer questions. In response to an e-mail, Blauner wrote, “Most of your observations and implications are flatly wrong.” In its bid to represent the creditors committee, Milbank Tweed made extensive disclosures to the bankruptcy court about its ties to Enron and the banks. The firm said it was making such detailed disclosures “because of the considerable publicity that some of Enron’s structured finance arrangements have received.” Those arrangements received more publicity in July, at hearings held by the U.S. Senate Permanent Subcommittee on Investigations. According to a report by that committee, more than $8 billion flowed from J.P. Morgan Chase & Co., Merrill Lynch & Co. Inc., Citigroup Inc., and Credit Suisse First Boston Corp., through offshore entities, to Enron. The money was allegedly disguised as energy trades rather than loans so that Enron wouldn’t have to show the debt on its books. The subcommittee found evidence of at least 26 such deals. Milbank Tweed represented all of those banks in prepays at one time or another. The firm’s work, according to its disclosure documents, included due diligence, evaluating structured financing, arranging structured financing, and representing lenders and buyers with respect to gas rights. In addition, documents filed in the bankruptcy proceeding show that Arthur Andersen LLP wrote “comfort letters” to the banks on at least some of the deals, and that Milbank Tweed received copies. Experts say that such letters, common in structured finance deals, are designed to give “comfort” to the underwriter about liability for securities violations. The bankruptcy court sealed those documents, but comfort letters typically say that the auditor has reviewed the deal and found no misstatements. They may also set forth the accounting treatment the deal is expected to receive. “As a practical matter, a good structured finance lawyer has to know as much about accounting as an accountant,” says Ronald Gilson, a professor of law and business at both Columbia University and Stanford University. The Senate committee did not call any witnesses from Milbank Tweed, but the firm’s work was discussed at least twice during the hearings. At one point, Richard Caplan, a managing director of Citigroup subsidiary Salomon Smith Barney, was asked about a sale of notes from an offshore entity called “Yosemite.” According to Caplan’s testimony, Salomon reviewed Enron’s finances before the sale, and found $6 billion in off-balance sheet liabilities. Those liabilities weren’t disclosed in the prospectus for the notes, which prompted the following exchange: Caplan: And we relied upon experts in determining what the appropriate disclosure in this instance was and received legal opinions consistent with that and comfort letters. Sen. Peter Fitzgerald, R-Ill.: Who is your lawyer? Who is your law firm? Caplan: … We actually received two different legal opinions on the securities law issues. One was from Milbank Tweed, — basically on the Yosemite structure, and then Vinson & Elkins … gave a 10b5 opinion. … Sen. Fitzgerald: So let me just get this straight. … You don’t believe that was material information that someone who might want to invest directly or indirectly in Enron needed to be aware of? Caplan: It was verified by our experts, effectively. Milbank Tweed’s work on the prepays is also at issue in a case before federal Judge Jed Rakoff in Manhattan. The case involves surety bonds issued to back prepay deals between Chase and Enron and an entity known as Mahonia. After Enron’s default, the sureties refused to honor the bonds, claiming that the deals were really loans and that they’d been fraudulently induced into issuing them. Milbank Tweed represented Chase in some of the original Mahonia deals and, according to Chase’s counsel in the case, Kelley Drye & Warren, worked with the sureties to structure the bonds. Rakoff ruled that the sureties were entitled to know what Milbank Tweed told Chase about the bonds, and ordered Chase to hand over its communications with its Milbank Tweed lawyers to lawyers for the sureties. At press time lawyers for the sureties had scheduled depositions of Milbank Tweed lawyers. Parties in the Enron class action pending in Texas are also eyeing Milbank Tweed. A source familiar with the plaintiffs’ strategy says that Milbank Tweed was identified as a potential defendant at the time of failed settlement talks with Arthur Andersen last spring. Milbank Tweed, like any law firm, makes a tough target in a securities case. There is no private cause of action against a law firm for aiding and abetting a securities fraud, and, according to experts, suing a firm as a “direct violator” is a high hurdle to clear. Christopher Patti, in-house counsel for the lead plaintiff in the Enron class action, The Regents of the University of California, won’t disclose his plans, but says, “We’re certainly not excluding law firms.”

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