Houston law firm under fire
V&E attorneys testify they didn't know Enron facts
By JULIE MASON
Houston Chronicle Washington Bureau
March 15, 2002, 12:53AM
WASHINGTON -- Attorneys for Vinson & Elkins told skeptical lawmakers Thursday they didn't know all the facts about Enron Corp. when they discouraged company executives in October from investigating allegations of financial wrongdoing.
During a contentious hearing on Capitol Hill, members of a powerful House subcommittee investigating Enron's collapse repeatedly upbraided the Houston-based firm, saying V&E had a responsibility to know what was happening at Enron.
"The accountants have come in and told us that it didn't fail because of anything they have done. No one from the company's management has said it's failed because of anything that they have done wrong. And none of you have indicated today that the company failed because of anything that you have done wrong," said Rep. James Greenwood, R-Pa., chairman of the oversight and investigations subcommittee of the House Energy and Commerce Committee.
"Once again the commentary from the witnesses is that the company failed because of loss of confidence of the investors, which sounds an awful lot to me like blaming the victims," Greenwood said.
Testifying before the panel were 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 appeared, in addition to Rex Rogers, current vice president and associate general counsel for Enron.
In five hours of often contentious testimony, Dilg and Astin repeatedly claimed V&E's work as chief outside counsel for Enron was thorough and ethical.
The six attorneys largely disclaimed detailed knowledge of many of the financial issues at the heart of Enron's devastating financial collapse.
"Vinson & Elkins and other outside attorneys were employed by and directed to interface with Enron's legal department, not Enron's executives," Dilg said.
The powerhouse law firm was chief outside counsel for Enron, which was its biggest client.
Lawmakers were critical, however, accusing the lawyers of participating in a cover-up to hide what was going on at Enron, which paid V&E $36 million last year.
"The closeness, the coziness of this relationship, is what's bothering many of us on this committee," said Rep. Bart Stupak, D-Mich.
The firm's lawyers were grilled at length about their work investigating allegations raised by Enron Vice President Sherron Watkins in an Aug. 15 memo to former Chairman Ken Lay, warning the company could "implode in a wave of accounting scandals."
In addition to numerous accounting issues, Watkins' portentous memo warned about conflicts of interest and questionable dealmaking that threatened to topple the company.
Derrick, a former partner at V&E who recently retired from Enron, asked the firm to conduct a limited probe of Watkins' concerns.
Under sharp questioning from lawmakers, the V&E lawyers said they never talked to many of the potential witnesses named by Watkins.
They also did not pursue Watkins' claim that bankers may have been pressured to invest in questionable deals with Enron as a condition of future business with the company.
Instead, the firm talked to accountants at Arthur Andersen and executives at Enron, who assured them that issues raised by Watkins were well-known and being managed, the lawyers said.
On Oct. 15, the law firm reported that Enron's 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 next day, Enron posted a devastating third-quarter earnings report that included a $638 million third-quarter loss and a $1.2 billion reduction in shareholder equity.
The losses were attributed in large part to a complex series of partnerships undertaken by Enron executives to hide the company's massive debt. The disclosure sent Enron into a financial spiral from which it could not recover.
For months, V&E has been defending its work on the Watkins probe, saying the firm was not asked to look at Enron's accounting practices.
"If a transaction is not legal and it's been approved by the appropriate levels of a corporation's management, lawyers ... may appropriately provide the requisite legal advice," Dilg said. "In doing so, the lawyers are not approving of the business decisions that were made by their clients. Likewise, lawyers are not passing on the accounting treatment of the transactions."
Greenwood took the firm to task for apparently accepting the assurances of former Chief Financial Officer Andrew Fastow regarding the partnerships and his own conflicts of interest.
"I don't understand why you didn't feel responsible for Enron and its stockholders and make those calls right away," Greenwood said. "You just took Andy Fastow's word for it."
Fastow collected an estimated $30 million in fees from the partnerships, which internal investigators and lawmakes have concluded were fraught with conflicts of interest.
Rep. Edward Markey, D-Mass., said the V&E probe was more Inspector Clouseau than Columbo.
"If you had not conducted this phony investigation, it might have been possible we would not have seen the collapse of Enron," Markey said.
Several members of the subcommittee complained that V&E's probe amounted to the law firm investigating its own work, since the firm had done work on some of the partnerships.
The $60,000 that V&E charged Enron for the investigation also drew scoffs from lawmakers, who said the relatively minor sum illustrates that neither Enron nor V&E took the investigation seriously.
"Mr Dilg, your preliminary investigation was not a cover-up, was it?" Greenwood asked.
"It was definitely not a cover-up," Dilg replied.
Responded Greenwood: "OK, in what ways would a cover-up look different than your preliminary investigation?"
Amid laughter in the hearing room, Dilg replied that he wouldn't know, he had never participated in a cover-up.
Rep. Billy Tauzin, R-La., chairman of the House committee, noted that in previous testimony, former Enron CEO Jeff Skilling said V&E was aware of certain conflicts of interest now under investigation.
Asked by Tauzin why such conflicts were not probed by lawyers, Derrick responded that Enron's code of conduct requires employees with conflicts of interest to come forward and obtain a waiver.
"You've got to be kidding, Mr. Derrick," Tauzin said. "Any employee could go negotiate against the company, and it was up to them to come and get a waiver?"
Derrick and others responded that the specific conflict Tauzin was referring to was not cited in Watkins' memo, and therefore not within the scope of their probe.
"Had I been blessed with the gift of clairvoyance, had I been permitted to gaze into the future and foresee the events that would unfold in respect of Andersen, I would have advocated the choosing of another path back in August," Derrick said.
Based on the facts they knew about Enron's dealings at the time, Dilg said, the firm stands by its conclusions about Watkins' allegations.
Had they known about conflicts of interest, alleged self-dealing and financial improprieties, the firm would have made a different recommendation, according to Dilg. |
