Flood of Fees Draining Enron Funds
$496 Million in Charges Rung Up So Far by Lawyers, Others
washingtonpost.com
By Peter Behr
Washington Post Staff Writer
Saturday, June 28, 2003; Page A01
A year ago, an Atlanta attorney caught a plane for a meeting in Washington to continue his firm's work for the creditors of Enron Corp. As the miles flew by, he sketched out questions and reviewed some of the Houston company's secretive off-book partnership deals.
By the time he arrived for the meeting, Aldo LaFiandra, of the Alston & Bird firm, had added $1,125 to the legal bills charged to Enron in a colossal bankruptcy reorganization that is still slogging forward 19 months after the company's collapse.
One lawyer's charge for thinking time is just another grain in a mountain of fees totaling $496 million through May.
Some experts say the mounting tally is inevitable, given Enron's boundless swamp of financial transactions. To others, the fees are a fitting final chapter to the company's story of greed and excess.
However they are finally judged, the more than 1 million hours worth of fees rung up by lawyers, accountants and advisers in the case, as well as by Enron's caretaker management, make it the most expensive bankruptcy in history.
Waiting for the resolution are the creditors, including banks, suppliers and customers, with more than 20,000 claims for more than $200 billion in the bankruptcy case that began in December 2001. They are scheduled to learn at a bankruptcy court hearing in New York on Monday what the company will offer to pay on its debts. But Enron wants a delay until July 11 before presenting final details.
Interim chief executive Stephen F. Cooper, a specialist in bankruptcy reorganizations, has sold off pieces of Enron's former empire for $3.8 billion so far, and wants to bundle most of the rest into two new companies -- one with the bulk of foreign projects and the other with its pipeline networks. Creditors would get shares in the new ventures, plus cash from the sale of the remaining pieces.
Martin Bienenstock, an Enron bankruptcy attorney, said the company remains determined to win creditors' approval of the plan and complete the reorganization by the end of the year.
But with fees continuing to climb at a rate of $25 million a month, each day drains cash from the pot of funds that remains to pay Enron's debts. "Time is not the creditors' friend," says Nancy B. Rapoport, dean of the University of Houston Law Center.
Separately, Enron employees, whose retirement savings were shattered by the company's fall, are suing it and its executives. And shareholders, who were wiped out by the collapse, have filed another massive lawsuit.
The complexity of the bankruptcy case is daunting. Some 80 Enron divisions and business units are part of the bankruptcy proceeding. Down another layer are 2,400 separate entities, including clandestine partnerships, built on subterfuge to conceal debts and disguise bad investments, federal prosecutors have alleged. The number of legal filings in the bankruptcy case stands at more than 11,000.
The need -- or opportunity -- for legal disputes comes at every turn in this maze, as lawyers and analysts spar over who owns what. Efforts to sell parts of the company have triggered legal disputes. Lawyers have quarreled over the right to represent employees. Even Enron's bid to sell two seats on a New York commodity exchange provoked a legal tussle.
Texas Attorney General Greg Abbott, whose state is a major creditor, complains that attorneys in the case are "lining their pockets. There is a lot of money sloshing around, and the participants are taking it away from the people who really deserve it," he said in an interview.
John W. Toothman, president of the Devil's Advocate, a Northern Virginia company that scrutinizes legal fees, and co-author of a textbook on fees, calls it a "feeding frenzy." Enron "has turned its pockets inside out, and everybody who can get in line gets a piece. The lawyers have been first in line."
The professionals in the case receive 80 percent of their fee and expense claims upfront and the rest when the bankruptcy case ends, subject to the approval of the judge in the case, Arthur J. Gonzalez.
And such fees: In one negotiating session last year, attorneys in the separate shareholders' case lost patience with what they regarded as foot-dragging by attorneys for the creditors. The shareholders' lawyers don't get paid unless their lawsuit against Enron executives and its bankers succeeds. But the creditors' lawyers fees are accumulating at $600 an hour, like clockwork, protested shareholders' lawyer William S. Lerach, according to several participants.
Luc A. Despins, co-head of the bankruptcy practice at Milbank, Tweed, Hadley & McCloy, lead attorneys for the creditors, corrected him: "It's $725 an hour." Despins confirms that is his fee, but said he didn't remember the exchange.
Despins's firm billed Enron $43 million through May. Squire, Sanders & Dempsey, which takes over for the creditors when Milbank has a conflict of interest, had tallied $32 million. Atlanta's Alston & Bird, hired by the court-appointed bankruptcy examiner, R. Neal Batson, added $65 million. Topping the list is Weil, Gotshal & Manges, the company's lead bankruptcy counsel, at $93 million.
Cooper's contract to run Enron is $1.3 million a year. He gave up the right to collect an additional "success" fee after parties in the bankruptcy case protested. But he is allowed to hire 30 people from his firm, Kroll Zolfo Cooper, to help out -- at $864,000 each annually.
When the fees began to soar last year, Gonzalez created a committee headed by a former federal judge in Ohio, Joseph "Jerry" Patchan, to review the claims. He and his team -- which itself is billing Enron as much as $200,000 a month -- have pored over thousands of pages of fee claims, but is still months behind.
He has challenged claims by lawyers who charged for meetings and conversations that may not have occurred, and by firms that charged at partners' rates for work that associates normally do and at associates' rates for secretarial work. One firm charged for the services of four summer interns at an hourly rate of $185.
But Patchan has barely chipped at the mountain. Of $60.6 million in fees he has reviewed so far this year, he recommended knocking off $2 million, a 3 percent reduction. "They are not challenging any more than a tiny fraction of the bills. They are nitpicking," said Toothman.
"This is an enormously complex case, and it takes an enormous effort to try to unwind this skein of transactions," Patchan said in an interview. "It's a bit early to assess what the outcome will be."
Another expensive, but potentially lucrative, avenue of recovery for the creditors is the work of Batson, whom Gonzalez appointed in May 2002 to dig into financial transactions for property the creditors should get.
Batson, who Rapoport said is highly respected for his work in complex cases, has produced two huge investigative reports, the latest running more than 2,000 pages. He concluded that creditors might recover as much as $5 billion more if Enron's suspect transactions were successfully challenged in court. But he warned creditors not to count on winning.
His investigation continues, focusing on some of Enron's lenders. His bills continue as well.
Batson, a senior partner at Alston & Bird, hired his law firm as his counsel. In March, as it was preparing to interrogate former Enron executives, Alston & Bird logged more than 24,000 hours on the case, later submitting bills for $6.2 million covering work by 52 partners, 102 associates, nine contract attorneys and 39 paralegal aides and specialists.
Some critics brand the trip Batson's colleague LaFiandra and other Alston & Bird lawyers took to Washington last year as an example of legal overkill. The meeting was with lawyers from the Wilmer, Cutler & Pickering firm, whose report for the Enron board of directors earlier in the year had exposed accounting violations and deceptive financial reports.
Two Wilmer Cutler partners attended the briefing. Alston & Bird sent 11 partners. Their combined fees for the seven-hour meeting on June 17 and a four-hour meeting the next day came to $46,689, according to their fee request.
Texas Attorney General Abbott called this "a ridiculous example" of overstaffing by lawyers and other professionals. "This is probably the most complicated case that has ever existed. That doesn't justify putting an exorbitant number of lawyers from each firm on the case," Abbott said.
Alston & Bird partner Dennis J. Connolly, a lead attorney on the Enron case, said court-imposed confidentiality requirements forbid the firm's lawyers from responding to such criticism.
There may be no way to decide how much legal work is required to fathom Enron's "diabolical complexity," in the words of Houston securities analyst John Olson.
Stephen Gillers, professor of legal ethics at New York University, said, "It may be that the complexity of the mess the Enron officials left us does require the kind of sophisticated legal talent that is at the high end of the expense chart." It is in the nature of the legal profession to turn over every stone, he added.
"You don't want to be criticized -- or possibly sued -- for doing a sloppy job. They do more work than you might say would have been absolutely necessary, looking back. But you don't know what that last hour will produce. It's impossible to say it's too much or too little."
A lawyer's client can influence the size of legal bills, but a monster bankruptcy case like Enron's can overwhelm oversight, Toothman said. "The incentives are to throw as many bodies at it for as much time as possible. . . . Nobody will have the stamina to unravel it."
Researcher Richard S. Drezen contributed to this report.
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