Enron's Last Mystery

Was Enron's law firm, Vinson & Elkins, as blind to the company's shenanigans as it maintains? Internal messages reviewed by BusinessWeek suggest the firm doubted the legitimacy of some of Enron's business practices

Amid all the carnage that has surrounded Enron Corp.'s collapse, one player in the drama has remained remarkably unscathed: Vinson & Elkins, the giant Houston-based law firm that played a central role advising the company throughout its spectacular rise and fall. Accounting firm Arthur Andersen is dead, JPMorgan Chase & Co. (JPM ) has spent $2.2 billion settling a shareholder fraud lawsuit filed in a Houston federal court, a handful of other banks and outside Enron directors have coughed up nearly $5 billion more, and yet V&E has not even had a slap on the wrist. Not a single lawyer at the firm has faced professional misconduct charges by the Texas bar, the firm has yet to pay a penny in damages, and Joseph C. Dilg, the partner who oversaw the Enron account, is now V&E's managing partner. In 2005, it became the first Texas law firm in which average partner compensation broke $1 million.

But the firm's Teflon days may be coming to an end. Enron's bankruptcy trustee is negotiating to settle claims with V&E for $30 million, BusinessWeek has learned. As part of the deal, the law firm will also drop its claim for $3.9 million in legal fees billed to Enron before the company went out of business, a small fraction of the $162 million the firm charged Enron from 1997 to 2001. Although the biggest fish at Enron, Kenneth L. Lay and Jeffrey K. Skilling, were convicted in a Houston courtroom on May 25, the Securities & Exchange Commission is continuing to investigate the advice that V&E and other outside law firms gave the company. And in the same class action in which they have targeted the banks, plaintiffs' lawyers are preparing to unleash a new volley of evidence on June 13 to support allegations that V&E should be liable for some of the $40 billion in investor losses resulting from the energy giant's collapse.


The legal filing will shed light on one of the last remaining mysteries in the Enron drama: the role played by the company's main outside law firm. Were V&E's lawyers co-conspirators? Or were they merely scribes who unknowingly drafted documents that helped Enron fleece its shareholders? These questions have been hard to answer because only a small portion of V&E's handiwork has been made public. The firm insists it did nothing wrong and has long maintained that its attorneys played no role in helping Lay, Skilling & Co. perpetrate the most sweeping corporate fraud in recent history.

But documents and transcripts reviewed by BusinessWeek indicate that V&E attorneys had doubts about the legitimacy of Enron's business practices. Sometimes they even made light of the company's aggressive accounting. At the end of 1997, as Enron scrambled to complete a series of deals aimed partly at burnishing its financials, it dumped a pile of paperwork on V&E. On Christmas Eve, Dilg sent an e-mail to buck up his beleaguered troops. It contained a poem (page 30), which read in part: "no sooner than you could say 'mark to market'/Our client's year end financials began to sparkle." That passage referred to Enron's use of mark-to-market accounting, which allowed it to recognize the entire revenues from a 20-year gas contract, say, in the first year.

In a 1999 voice mail that was forwarded to Dilg, V&E partner Boyd G. Carano expressed concern after learning that the now notorious entity known as LJM, which was buying part of Enron's interest in a Brazilian power plant, was actually controlled by the company's chief financial officer, Andrew S. Fastow. "Basically, this is a fund that he set up in order to do these deals with Enron, where Enron pays him a 13 and then 25% return in order to get stuff off the balance sheet," he said. "Frankly, I don't approve."

In another voice mail, Carano told fellow V&E partner Mark R. Spradling that he had not been able to speak directly to Enron Chief Accounting Officer Richard A. Causey to get assurances that Enron had not secretly guaranteed Fastow's LJM investments. Instead, Carano had been forced to rely on the assurances of Kent Castleman, a lower-ranking employee. In his response to Carano's concerns, Spradling said: "I think the problem is that anything we do either calls into question the truthfulness of Kent Castleman or imbues this whole issue with our view that there may be fraud going on here." Castleman could not be reached for comment.

John K. Villa, an attorney at Williams & Connolly in Washington, D.C., who represents V&E in the shareholder suit, responded on behalf of the firm. Villa says the Enron board was fully informed that Fastow was heading LJM and V&E had no obligation to question the directors' business judgment.

V&E also played a critical role in helping the energy company complete a series of complex transactions designed to generate cash from the sale of otherwise illiquid assets. Yet through complex "total return swaps," Enron actually retained control of the assets, rendering the transactions, and the cash proceeds from them, suspect. Court-appointed bankruptcy examiner Neal Batson noted in his report that obtaining V&E's opinion letters was "crucial to Enron's ability to complete" these transactions. Legal opinion letters, which are signed by a law firm itself, are needed to complete some types of deals.

Yet even as V&E provided important opinion letters to Enron, the firm appeared uneasy about its role. In notes made in preparation for a meeting with Enron General Counsel James V. Derrick Jr., V&E partner Dilg wrote, "We [are] unsure of how opinion rendered satisfies requirements of [the Financial Accounting Standards Board]." Language that V&E included in a March, 1998, opinion letter seemed to undermine the whole point of the document, which is to assure that the transactions actually involved a true transfer of the assets. Dilg seemed aware of how critical these deals were to the financial picture that Enron was presenting to investors. "Large transactions with significant earnings impact," he wrote in the same set of notes, adding further down: "Don't want deal to blow up at last moment and cause earnings surprise."

Villa, V&E's attorney, defends the firm's opinion letters. V&E, he says, repeatedly checked with Enron and its accounting firm, Arthur Andersen, to be sure the letters met the needed requirements. "When an accountant tells you that's what he wants, what's a lawyer to do?" Villa says. He also denies there were internal contradictions in the March, 1998, document.


Will the evidence prove to be a major liability for V&E? Lawyers are often the most elusive quarry in cases of corporate wrongdoing. As a matter of public policy, they have broad latitude to express concerns about clients without fear that such exchanges will be held against them. Also, clients don't always follow their lawyers' advice. Still, in rejecting investors' claims against two other law firms in 2002, Judge Melinda Harmon kept V&E in the case, ruling that if the plaintiffs could show that V&E lawyers knowingly acted in furtherance of the Enron "Ponzi scheme," they could be held liable.

If shareholders do prevail, the harm suffered by V&E may be mostly to its reputation. Like many law firms, V&E reorganized as a limited liability partnership in 1992. That insulates partners from personal liability, leaving plaintiffs looking at insurance for a payoff. Sources familiar with the firm's insurance say that $150 million is available for Enron claims. But four years of fees paid to Williams & Connolly, one of the nation's best and most expensive law firms, has already done a lot to empty that pot.

By Michael Orey

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