How Enron's lawyers wriggled off the hook.

The law, lawyers, and the court.
June 21 2002 10:45 AM

Scummery Judgment

Why Enron's sleazy lawyers walked while their accountants fried.

The recent conviction of Enron's auditor, Arthur Andersen, for obstructing justice raises a disturbing question: Why isn't Enron's outside law firm, Vinson & Elkins, on trial for its conduct, too? While no allegations have been made that V & E obstructed justice, the current class-action complaint contends that the firm did participate in a fraudulent scheme by approving and structuring Enron's notorious loss-hiding transactions and by drafting and approving Enron's allegedly false and misleading SEC filings.

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These claims open up the possibility of criminal fraud charges against V & E, as well. Yet despite some critical commentary in the business press, Vinson & Elkins has by and large avoided not only an indictment, but any real blame at all for Enron's collapse. The harsh spotlight under which Andersen has all but shriveled hasn't seemed to fall on V & E at all. Indeed, V & E was not even named in the initial class-action complaint filed against Enron and Andersen last year in Houston federal court. (This April, in the 500-page amended complaint, V & E was named, among a laundry list of dozens of new defendants. Check out pages 403-432 for the specific allegations relating to V & E.)

Why shouldn't the law firm be on the hook as well? It is Vinson & Elkins that's alleged to have given the crucial legal blessing to the dubious accounting transactions that destroyed Enron and, in so doing, destroyed many of its shareholders' lives. It is also V & E that is alleged to have approved false and misleading Enron disclosures when the truth would have educated shareholders about the company's misdeeds and kept them from losing their savings.

How can the lawyers who approved the transactions be held blameless while the government takes down the company that merely trusted its lawyers' advice? Indeed, between the lawyers and accountants, shouldn't it be the lawyers who are blamed when accounting practices turn out to be illegal, especially if the lawyers specifically opined on those practices? Accountants, after all, are not lawyers.

So the brief against V & E may sound overwhelming, and it may seem that it should be V & E, not Andersen, in the hot seat now. But surprise! From a legal perspective, Vinson and Elkins may not have done much that was wrong. Why? Because Andersen had a responsibility to the public that V & E simply did not have.

Andersen's audits were meant to, and did, act as a seal of approval, a willingness to put a stamp of good practice on Enron transactions. But V & E's opinions and investigations—done for Enron and its shareholders, not the public—were not directed outward in the same way. It was to Enron, its shareholders, and the boundary constraints of the law, not the welfare of the public or abstract concepts of justice, that V & E owed its loyalties.

Accountants' professional ethics rules are very different from lawyers'—with significantly greater emphasis on "independent judgment" that cannot be subordinated to the clients' tactical needs. Accountants' ethics rules, for instance, compel them to pull out of situations of dubious legality earlier than a lawyer would have to in a comparable situation—and accountants are duty-bound to report clients to regulators based on less evidence than a lawyer would need to do the same. In short, ethics rules show that accountants prize independence as their central virtue; lawyers, zealousness. Both must keep client confidences, of course, but a lawyer's duty of loyalty is more extreme.

Still, there is much that V & E seems to have done wrong. For instance, you would think Vinson & Elkins should be accountable because it was the firm retained by Enron to investigate Sherron Watkins' internal complaints. The law firm's investigation was inarguably a disaster for the company. But in the end, Enron got what they paid for—and thus it seems Enron, not V & E, should be faulted for the fact that the investigation did not go further than it did, for it was Enron that set its parameters. (Click here to learn why the Watkins investigation was probably not all that improper.)

What about V & E's approval of the dicey, doomed Enron transactions? Couldn't that, at least, form the core of a criminal fraud charge—or at least a charge of conspiring to defraud, or aiding and abetting fraud—even if V & E's main responsibility was to its client and not the public?

Not necessarily. The truth is that while the amended complaint insists the transactions were manipulative schemes, it is possible that they were, instead, simply acts taken on the very brink of legality. V & E was entitled—indeed, arguably it was ethically obligated—to go to that brink, though not over it. And if it made a wrong call as to where the brink was, that may have simply been a misjudgment, not malpractice, and certainly not a crime or fraud. (V & E's possible conflicts of interest—such as the decision to investigate the very legal structures it had allegedly helped to create—may be another matter, but one probably more appropriate for bar discipline than for a lawsuit.)

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