HOUSTON – An internal Enron Corp. report and a request for more information by the bankrupt company's creditors have heightened the possibility that Enron's outside lawyers could be sued, legal experts say.
The Houston law firm of Vinson & Elkins is vulnerable to lawsuits by Enron's creditors, shareholders, former employees and even the company itself, the observers say.
Last week's report by a special committee of Enron's board provided new details about partnerships that inflated Enron's profits and hid losses.
The report also gave a rare glimpse at the work done by a major corporation's law firm. The authors said Vinson & Elkins helped Enron obscure details of the partnerships that seemed designed to enrich insiders instead of benefiting Enron.
"The report didn't paint a pretty picture for Vinson & Elkins," said James Finberg, a San Francisco lawyer representing pension funds that lost money in Enron investments. "A lot of things were brought to their attention, and they didn't do anything to stop the web of transactions."
Finberg predicted that lawyers for shareholders and Enron creditors would sue the law firm on grounds that it helped prepare misleading financial reports.
A senior partner at Vinson & Elkins declined to discuss details of the firm's work for Enron. But he defended the firm's actions and said Enron didn't tell the lawyers everything about the partnerships.
"We didn't have the ability to examine what the facts were. We didn't have access to the executives," said the partner, who spoke on condition he not be identified.
Enron "would take our advice when they concluded that they wanted to, and rejected it when they didn't," he said.
The Enron board committee's report was issued Feb. 2. On Friday, Enron's creditors asked a federal judge to see records of Enron, Vinson & Elkins and other Enron advisers related to more than 50 of the partnership deals that played a key role in Enron's collapse.
Lawyers familiar with the case said the unsecured creditors committee rejected a recommendation by Enron's bankruptcy advisers that it immediately sue accountants Arthur Andersen and some former Enron officials, opting instead to investigate further.
They said that the creditors did not want to appear they were helping Enron blame Arthur Andersen for its collapse, and that a longer investigation increased the likelihood creditors would sue lawyers and other Enron advisers. The creditors' lead attorney did not return calls for comment.
The creditors may try to undo some of the partnership transactions to bring money back on to Enron's books. They also are likely to examine how much Vinson & Elkins knew about Enron's deteriorating financial situation while it was helping the company prepare financial-disclosure documents, lawyers said.
Dan Boyd, a corporate litigator in Dallas for Patton Boggs, said Vinson & Elkins' most dangerous enemy could be Enron.
"If they did the legal work for transactions that served no purpose for Enron and gave no benefit to Enron, that could be a breach of fiduciary duty to Enron," Boyd said. "Enron is still friendly with Vinson & Elkins for now, but there could be changes."
Enron has been Vinson & Elkins' largest client, with $35 million in billings last year, 8 percent of the firm's total.
Last month, Vinson & Elkins asked a federal bankruptcy court in New York to let it keep working for Enron. The senior partner said the firm has permission, but said that the firm is winding down its work for the company.
He noted that Vinson & Elkins, too, is an Enron creditor — it told the bankruptcy court it is owed $8.6 million.
Vinson & Elkins has been roundly criticized for, in effect, for not having a third party review its work after Enron executive Sherron Watkins raised alarms about the partnerships and accounting practices last year. Legal experts said that incident posed much less of a legal problem for Vinson & Elkins than its other work for Enron.
Vinson & Elkins has primary malpractice insurance from the Attorneys' Liability Assurance Society. The firm declined to detail its coverage, but lawyers familiar with such matters said large firms — Vinson & Elkins has 860 lawyers in nine offices around the world — would have upward of $75 million coverage per case from its main carrier and additional policies with smaller carriers.
Since the first lawsuits against Enron last year, Vinson & Elkins has taken aggressive steps to avoid being named as a defendant. After the firm was named in two early lawsuits, it hired prominent Houston plaintiff's lawyer Joe Jamail, who visited the lawyers who filed the lawsuits. Both quickly dropped the law firm as a defendant.
Another lawyer, James H. Pearson, who represents former Enron employees, said he wasn't about to go after Vinson & Elkins.
"You're taking on the home team," he said. "They've got about 1,000 lawyers who are fighting for their lives. That's a pretty formidable opponent."