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By Gary Weiss The white-shoe law firm of Milbank, Tweed, Hadley & McCloy recently posted on its Web site a glowing Q&A with its global chairman, Mel M. Immergut. The subject was the firm's financial health, and Milbank had ample reason for pride. Milbank is doing great, thanks largely to its lucrative work for creditors in huge corporate bankruptcies--notably Enron Corp. and Pacific Gas & Electric. "So we have the creditors' committees of the two largest bankruptcies in the history of the U.S. going on at once," Immergut pointed out.
That's terrific news for New York-based Milbank, one of the largest and most prestigious corporate law firms in the country. And it seems benign--except when you consider that PG&E and Enron are on opposite sides of their respective bankruptcies, with Enron trying to wrest money from the troubled California utility, and vice versa. Moreover, Milbank was counsel to investment banks that arranged some of Enron's most controversial financial arrangements, including the Marlin and Osprey deals, some involving offshore entities. Milbank insists it has special mechanisms to prevent conflicts, but critics are dubious. "It looks shockingly bad," says Susan P. Koniak, a Boston University law professor and expert on legal ethics.
Have Enron's bankruptcy lawyers, and the bankruptcy court, turned a blind eye to the conflicts of interest of the firms involved in the Chapter 11 proceedings? Law firms and other professionals hired to work in bankruptcies are required to be "disinterested" to protect the parties--and public confidence in the courts. As one bankruptcy study commission put it, "There must always be vigilance to ensure that the public has confidence in the bankruptcy system's fairness and that it is operating to the public benefit, not just to enrich debtors and their professionals." The passage was quoted in a recent law review article on bankruptcy lawyer conflicts by U.S. Bankruptcy Court Judge Arthur J. Gonzalez--who is presiding over the Enron case.
This high-minded principle seems to have been submerged in the Enron case--sometimes with Gonzalez' approval--despite the public outcry over conflicts of interest by auditors, analysts, and bankers. A glaring example involves Vinson & Elkins, Enron's former attorneys. The firm has been criticized for its work for Enron, such as its recommendation that no action be taken on a whistle-blower's allegations. A Vinson spokesman said the firm believes its work for Enron was perfectly proper.
Court records show that Enron recently sought court permission to retain Vinson as a special counsel--and that several creditors, led by the Florida Board of Administration, swiftly objected. Enron withdrew the application to employ Vinson on Feb. 12, according to court papers. Enron's lead bankruptcy lawyer, Martin J. Bienenstock, says the withdrawal "wasn't really related to the objections," but a Vinson spokesman says the objections triggered Enron's decision and the firm concurred.
Unlike Vinson & Elkins, Milbank's involvement with Enron has received little attention. In a 70-page court filing in mid-January, Milbank detailed its work with investment banks that arranged a number of Enron's financing entities--all of which are under heavy regulatory and law-enforcement scrutiny. Milbank has pledged not to become involved if the creditors' committee decides it has to sue some of Milbank's former banker clients. If that happens, notes Milbank attorney Stephen J. Blauner, the firm will farm out the work to another lawyer--a "conflicts counsel." Milbank also represented Enron in the sale of several Enron Wind Corp. power facilities late in 2001. The firm says it has an "information firewall" between its Enron Wind and bankruptcy lawyers.
Blauner says these arrangements, which Judge Gonzalez has approved, will protect the interests of creditors. Bienenstock agrees. But his firm, Weil, Gotshal & Manges, could hardly object. It represents Enron's embattled accountants, Arthur Andersen & Co., and also is a bankruptcy attorney for PG&E. In court filings, the firm promised to erect an "ethical wall" to prevent conflicts.
All this no doubt meets the letter of the law. And it may be true that Enron was so huge that one would be hard-pressed to find a major law firm that hadn't been involved with the company. But at a time when Enron-linked worries are roiling the nation, the lawyers' conflicts of interest are hardly reassuring to a public weary of ethical astigmatism. Senior Writer Weiss is following the Enron saga from New York.