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Houston-based Vinson & Elkins and Chicago-based Kirkland & Ellis both provided legal advice necessary for Enron Corp. executives to allegedly orchestrate a fraudulent scheme to enrich themselves at the expense of Enron shareholders, and both were named as defendants in the shareholders’ class action against those executives and their advisors in federal court in Houston. But Kirkland has been dismissed from suit; Vinson & Elkins has not. The difference was that Kirkland was able to keep quiet, Judge Melinda Harmon of the U.S. District Court for the Southern District of Texas ruled in a controversial 307-page decision that may also point out a loophole in efforts to police the legal profession. In her Dec. 20 ruling on motions to dismiss by “secondary actors” in the Enron class action, Harmon concluded that professionals — including lawyers and accountants — who made public statements about their client’s financial condition had a duty to third parties “not to knowingly or with severe recklessness issue materially misleading statements on which they intend or have reason to expect that those third parties will rely.” The judge, who also denied most of the demurrers filed by the nine banks named as defendants in the class action, found that lawyers at Vinson & Elkins and accountants at Arthur Andersen fell into the category of professionals who had made public statements. Lawyers at Kirkland & Ellis did not. “[H]ad Vinson & Elkins remained silent publicly, the attorney-client relationship and the traditional rule of privity for suit against lawyers might protect Vinson & Elkins from liability to nonclients for such alleged actions on its client’s (and its own) behalf,” the judge wrote. “But the [shareholders'] complaint goes into great detail to demonstrate that Vinson & Elkins did not remain silent, but chose not once, but frequently to make statements to the public about Enron’s business and financial situation,” she continued. The public statements Vinson & Elkins is charged with making were primarily the disclosure statements prepared on Enron’s behalf to the U.S. Securities and Exchange Commission. The drafting of such statements, quarterly and otherwise, would be one of the primary responsibilities of any law firm regarded as regular outside counsel to a public corporation. On the other hand, Kirkland represented not Enron itself but limited partnerships and special purpose entities that were allegedly used by Enron and its executives for nefarious purposes but were not themselves public companies. Thus, Kirkland was not required to make disclosures to the SEC in the course of its representation. “Any documents [Kirkland & Ellis] drafted were for private transactions between Enron and the [special purpose entities] and the partnerships and were not included in or drafted for any public disclosure or shareholder solicitation,” Harmon wrote. “Any opinion letters that the firm wrote are not alleged to have reached the plaintiffs nor been drafted for the benefit of the plaintiffs.” The judge therefore concluded in dismissing Kirkland from the suit that, because the firm “never made any material misrepresentations or omissions to investors or the public generally that might make it liable to nonclients under � 10(b) [of the U.S. Securities and Exchange Act of 1934],” shareholders had not successfully alleged that Kirkland’s conduct “exceeded activities [that] would be protected by an attorney-client relationship and the traditional rule that only a client can sue for malpractice.” But the determination of whether parties made or did not make such “material misrepresentations” according to the shareholder’s allegations rested on Harmon’s controversial reading of the U.S. Supreme Court’s 1993 decision in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164. That decision, cited in the demurrers of virtually all the secondary actors, held that shareholders could not sue “aiders and abettors” in securities fraud cases. Judge Harmon rejected the “bright line” reading of Central Bank favored by the 2nd U.S. Circuit Court of Appeals, which has held that actors like law firms and accounting firms can only be characterized as “primary violators” liable in shareholder suits if their statements on the financial condition of their clients are publicly attributed to them at the time of the statements’ dissemination to the public. Instead, Harmon adopted an analysis of Central Bank advanced by the SEC in an amicus curiae brief that argues for a less stringent definition of “making” a statement. In this view, a law firm or accounting firm could be found to be a “primary violator,” even if it were not publicly identified, if it made statements with knowledge and intent, and third parties relied upon them. Richard Painter, a professor of legal ethics at the University of Illinois College of Law, said Harmon’s decision represented a “very liberal reading of Central Bank” that could be vulnerable on appeal. But Painter noted that even the broadest reading of Central Bank would not have reached Kirkland & Ellis in this case, as the firm played no role in disseminating information to the public. “You’d have to overturn Central Bank legislatively,” he said, adding that he opposed such an approach. “There needs to be a meaningful distinction between the aiders and abettors and the primary violators,” said Painter. In that regard, he said, he parted company with some other law professors, including Cornell’s Roger Cramton, whom Harmon cited in her decision. Earlier this year, Painter spearheaded a letter-writing campaign by law professors encouraging Congress to incorporate � 307 in the Sarbanes-Oxley corporate governance act. The section obligated the SEC to regulate lawyers by requiring them to disclose knowledge of corporate misconduct to corporate boards. The SEC has recently proposed rules to that effect. Painter said he believes regulation by a disinterested SEC was a better approach to addressing lawyers’ participation in corporate scandals than shareholder litigation by plaintiff’s lawyers working for a contingent fee. But such regulation might not have reached a firm in Kirkland’s position in the Enron matter either. The current SEC proposal for � 307 applies to lawyers representing issuers of securities. While the proposal also states that issuers would be defined broadly to include subsidiaries and similiar entities, Painter said he was unsure those definitions would include partnerships similiar to those represented by Kirkland & Ellis. A clause that would have added issuer-created partnerships was discussed, he recalled, though he was uncertain whether it had been adopted by the SEC. “If they’re not covered, that’s a loophole that should be closed,” he said. Firms representing such partnerships can still be sued by the SEC, which is exempt from the “aiders and abettors” provision of Central Bank. They can also be sued by bankruptcy trustees or by individuals under state securities laws. Harmon said in her decision that the conduct of both law firms in the Enron matter may have breached rules of professional responsibility. Moreover, she wrote that, if the allegations against Vinson & Elkins were true, the firm “had to know of the alleged ongoing illicit and fraudulent conduct” and acted contrary to ethical rules by not resigning its representation of Enron. “[I]n light of its alleged voluntary, essential, material, and deep involvement as a primary violator in the ongoing Ponzi scheme,” the judge wrote, “Vinson & Elkins was not merely a drafter, but essentially a co-author of the documents it created for public consumption concealing its own and other participants’ actions.” In a statement issued Dec. 20 in response to the judge’s rulings, Vinson & Elkins said the allegations against the firm were not true and the firm would be exonerated when the facts were presented.

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