Enron's Law Firm Is in the Crosshairs

Vinson & Elkins' heavy reliance on the work it did for the energy giant is now a potential liability for the law firm

Aftershocks from the collapse of Enron (ENE ) have rocked the energy giant's auditors, bankers -- and now its attorneys. Houston law firm Vinson & Elkins was the latest to be hit when news broke that it had shrugged off allegations of accounting fraud by whistle-blower Sherron S. Watkins.

That's an incendiary revelation, for certain. But it may not pose nearly as much of a threat to V&E as some of the other work the firm may have done for Enron -- namely, helping to construct the web of partnerships the company used to move debt off the balance sheet and providing advice on what executives should disclose to the Securities & Exchange Commission.

Why are these activities such a big potential problem? Under the law, it is hard to pin the blame on lawyers for financial fiascos. They would have had to play a role nearly equal to that of the primary perpetrators.

Most experts agree that V&E's seemingly dismissive attitude about the Watkins allegations -- months after the transactions she complained about took place -- probably does not meet the standard for either criminal or civil liability. But that verdict might be different if it turns out that the firm's attorneys also helped Enron devise some of the complex deals that wound up sinking the company in the first place.


  There are growing indications that may just be the case. In her missive to Enron Chairman and CEO Kenneth L. Lay, Watkins suggested the law firm wrote so-called opinion letters vouching for the legality of some of the deals now under scrutiny. And according to two ex-Enron executives contacted by BusinessWeek, Vinson & Elkins played a creative role in structuring and managing some of the company's controversial "special purpose" partnerships.

One former executive in the company's Houston office says employees would approach V&E lawyers "and say, 'this thing needs to work. How do we make it work?'" This source adds that the firm also gave Enron advice on how much information it had to disclose about its financial machinations in its 10K and 10Q reports to the SEC.

Legally speaking, the key issue will be whether V&E blessed activities it knew to be fraudulent. If so, it could be in trouble, says University of Illinois law professor Ronald D. Rotunda, an expert in legal ethics. "Under those fact scenarios, they could have real problems," he says.


  The law firm denies it has done anything wrong. Because Vinson & Elkins' conduct is under federal scrutiny, Managing Partner Joseph Dilg declined to discuss the firm's investigation of the letter written by Watkins, citing attorney-client privilege, and was only willing to offer a few details about the firm's other work for Enron. He said V&E's professional responsibility committee reviewed its work for Enron in October and November and found no improprieties. "Everything that the firm's lawyers who have represented Enron have done has been [accomplished] in a completely professional, competent, and ethical manner," says Dilg, who is also a key contact for the Enron account.

He and fellow partners will undoubtedly find themselves called upon to prove that point. Enron and V&E have enjoyed one of the closest lawyer-client relationships in Corporate America. Both Enron's general counsel, James V. Derrick Jr., and his top lieutenant, Deputy General Counsel Robert H. Walls Jr., are former partners at the law firm. An additional 20 or so V&E attorneys have taken jobs at Enron's legal department over the past decade, Dilg estimates.

Enron is V&E's single largest customer. In 2001, Enron accounted for more than 7% of V&E's $450 million in revenue. The law firm had several lawyers working virtually full-time on company business, including some permanently stationed in its offices. By contrast, Enron contributed less than 1% to auditor Arthur Andersen's revenues.


  The exact details of V&E's work for Enron are still sketchy. In her letter, Watkins claimed the firm "provided some true sale opinions on some of the deals" related to the so-called Condor and Raptor deals. She could not be reached for elaboration. According to one New York corporate finance attorney, true sale opinions are letters that law firms write vouching for the fact that business transactions meet particular legal requirements.

So, for example, they might certify that title has passed in a particular deal or that it was conducted between two legally independent parties. Such documents would have been important to Enron, since many of its deals took place with partnerships in which it held a large stake. V&E declined to discuss the opinion letters.

True sale opinions in the energy sector are always requested by auditors before they are willing to sign off on the accounting treatment for a particular deal, according to finance lawyers. They are also requested by rating agencies, which need to assure lenders that both of the participants in a particular related-party transaction would be treated independently in the event one of them went bankrupt. Otherwise, one party could be left unfairly holding the bag for the failure of a company or partnership with which it has no ties.


  According to one former Enron employee, the company might not have been able to pull off many of the transactions now under investigation without Vinson & Elkins' opinion letters. The company "opinion-shopped for what it needed," says this source. "If it hadn't gotten the opinion letters, it couldn't have done the deals."

Accusations by embittered ex-employees obviously have to be taken with a grain of salt. There's still little hard evidence about what V&E did or didn't do for Enron. But if the firm turns out to have worked hand in hand with top management, it could be finding itself in the same hot water as the energy giant's auditors and bankers.

By Mike France in New York, with Wendy Zellner in Dallas and Christopher Palmeri in Los Angeles

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