Houston law firm probed for role in fall of Enron
By JULIE MASON
March 13, 2002, 10:04PM
Houston Chronicle Washington Bureau
WASHINGTON -- The chairman of a powerful House subcommittee investigating Vinson &
Elkins' work for Enron Corp. said Wednesday he wants to learn what role advice from the
firm played in the company's devastating nose-dive.
The oversight and investigations subcommittee of the House Energy and Commerce
Committee today opens hearings on the conduct of lawyers in Enron's collapse, notably
Enron's chief outside counsel, Houston-based Vinson & Elkins.
"Our specific goal is to find out what legal advice was provided by internal and external
attorneys," said subcommittee Chairman James Greenwood, R-Pa. "Obviously, this fall did
not occur in a vacuum of advice."
Harry Reasoner, a V&E partner, said the firm is cooperating with congressional
investigators in part to clear its name in connection with Enron.
"Our belief is that when the facts are on the table, it will be seen that we fulfilled our
professional obligations," Reasoner said.
In recent weeks, ongoing investigations into Enron's troubled fall have increasingly
focused on V&E, a powerhouse law firm with influential ties to business, government and
politics.
"It was a great personal loss to many of us, it was a great tragedy for many people. It
obviously has subjected us to a lot of unpleasant articles that have suggested, we think
wrongly, that we were responsible," Reasoner said.
Testifying before lawmakers is part of a larger V&E damage control effort that also has
required partners to reassure alarmed clients and thwart headhunters trying to lure
away the firm's lawyers, according to Reasoner.
Among the issues under scrutiny in today's congressional hearing is the role Vinson &
Elkins played in setting up some of the 3,000 off-the-books partnerships that ultimately
led the company to financial disaster.
Also at issue is the conduct of Enron's own, sizable in-house legal staff, which at one time
numbered 245 lawyers, including 145 in Houston.
Lawmakers want to know whether there was stringent enough legal review of
questionable Enron practices -- notably in Vinson & Elkins' probe of allegations raised by
Enron Vice President Sherron Watkins.
Witnesses scheduled to testify include Joseph Dilg, managing partner of V&E, and Ronald
Astin, a partner at the firm.
Former Enron lawyers James Derrick Jr., Scott Sefton and Carol St. Clair also are to
appear, in addition to Rex Rogers, current vice president and associate general counsel
for Enron.
Larry Doherty, a Houston attorney who specializes in legal malpractice, said V&E has
little to gain and possibly much to lose in cooperating with congressional investigators.
"Depending on what they say, they very easily could shoot themselves in the foot,"
Doherty said. "The upside for them might be to point the finger back the other way."
The firm could help themselves through testifying if lawyers can "dissuade the popular
notion they put all those deals together in conjunction with the other firms for Enron to
keep the debt off their books."
So far, Vinson & Elkins' public relations strategy has been similar to that of some former
Enron executives, in placing a substantial portion of the blame on bad advice from
accountants at Arthur Andersen.
In public statements in recent months, V&E has taken the stance that the firm handled
only certain legal matters, not accounting.
Reasoner, however, disagreed that there is an effort under way to deflect responsibility
for Enron's collapse, blaming instead misconceptions about the law firm's role in advising
the company.
"We are not trying to shift any blame to anybody," Reasoner said. "We take responsibility
for what we did and what our role was, and we would like it to be understood what we
did."
Greenwood, who has presided over several high-profile Enron hearings in the past several
months, said he is not convinced that accounting problems alone caused Enron's troubles.
"We will see what they say" at the hearing, Greenwood said. "There are facts they needed
to explore that were not just accounting facts, particularly with regard to the
partnerships."
The work done by lawyers in assessing conflicts of interest between Enron employees and
their lucrative outside partnerships is key to the investigation into V&E, Greenwood said.
"These related partnerships led to the fall of Enron, which also resulted in large measure
from conflicts of interest," he said. "Advising your clients on conflicts of interest is very
much a legal responsibility."
Last month, Vinson & Elkins received a critical appraisal from the in-house probe of
Enron's collapse conducted by William Powers, dean of the University of Texas School of
Law.
Among five dozen citations, the report noted that "Vinson & Elkins should have brought a
stronger, more objective and more critical voice to the disclosure process" at Enron.
As Enron's chief outside counsel, V&E billed Enron for $36 million last year, about 7
percent of the law firm's revenue.
In addition to testifying before House lawmakers, Vinson & Elkins has been subpoenaed by
the Securities and Exchange Commission, which also is investigating Enron.
For several weeks, lawmakers in both House and Senate committees have criticized as
inadequate the firm's review of allegations Watkins raised last year.
Vinson & Elkins was tapped by Derrick, former Enron general counsel, and former
Chairman Ken Lay, to conduct a limited investigation of Watkins' allegations of
questionable accounting and conflicts of interest in Enron financial practices.
Watkins maintained that because V&E had worked on some of the company's problematic
off-the-books partnerships, another firm should investigate the practice.
Nevertheless, Enron opted to stick with V&E for the inquiry. On Oct. 15, the law firm
reported that the practices caused concern "because of the bad cosmetics" and could
result in adverse publicity and litigation, but warranted no "further widespread
investigation by independent counsel and auditors."
The Powers report subsequently concluded the firm applied "less skepticism than was
needed" in conducting the review, which concluded that no further inquiry was
warranted.
Watkins recently told lawmakers she was disappointed when she saw the lawyers' final
report on her allegations. Her lawyer, Philip Hilder, called it a whitewash.
The Powers report also said Vinson & Elkins gave legal advice on the formation or funding
of several off-the-book partnerships, including Chewco, LJM2, Jedi and the Raptor
transactions.
The partnerships, at the heart of investigations into Enron's collapse, are blamed for
wrongfully enriching top executives and hiding the company's debt while inflating Enron's
bottom line.
Vinson & Elkins reviewed portions of the Enron's proxy disclosures, which the report
stated "were fundamentally inadequate."
Vinson & Elkins has hired the Washington-based firm of Williams & Connelly, experts in
legal ethics law, to assist them with the congressional probe.
The in-house lawyers called to testify include those whose responsibilities included
financial trading, business transactions and securities.
Before it went bankrupt, Enron employed about 245 lawyers worldwide, advising the
company on the legal aspects of business. With about 145 lawyers in Houston, if it were a
private firm it would have been the city's sixth-largest. Vinson & Elkins has 390 lawyers
in Houston and 860 worldwide.
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