So just how vulnerable are the lawyers to liability? It's not clear. Like all professionals, lawyers face multiple layers of regulation--by their state bar associations, private lawsuits, and the federal government. So far, there's no hint of action on the self-regulatory front, though it's possible unannounced investigations may be underway.
Some attorneys have been named in private securities-fraud suits, however. Class-action lawyers have named both V&E and Kirkland & Ellis as defendants in the Enron case and are considering adding A&K and perhaps other firms to the list. But to squeeze any money out of corporate attorneys, tort lawyers are going to have to clear unusually high hurdles. In 1994, the U.S. Supreme Court held that outside professionals cannot be held accountable for "aiding and abetting" executives who commit fraud. Instead, they can be attacked only if they're deemed to be primary wrongdoers--a tough standard.
A bigger threat to Enron's attorneys is likely to be malpractice suits. The bankruptcy trustee, acting on behalf of the corporation, has the power to sue V&E and A&K for failing to steer the energy giant away from its disastrous deals. Bankruptcy Examiner Batson may have laid the groundwork in his interim report in October when he wrote that several of the SPE transactions "appear to be, from both an economic and risk-allocation standpoint, a loan rather than a sale of an asset." But a malpractice suit, given all the complexities, wouldn't be a slam dunk. The Enron bankruptcy "far exceeds any other case in history in professional fees," says a lawyer involved with the matter. "Someone is going to have to analyze whether it will be worth it to sue [the attorneys]."
All of this leaves a bit of a regulatory vacuum. That's one reason Congress gave lawyers new whistleblower responsibilities in the Sarbanes-Oxley law--which is now being fleshed out and implemented by the SEC. The act requires attorneys who come across evidence of misconduct by a public company to report it "up the ladder" to top management, such as the general counsel or CEO. If there's no response, the lawyer must alert the board.
Sounds good in theory. But the Enron tale shows how unworkable it might prove in practice. Some Enron attorneys did speak up, but their worries were almost always dismissed. In September, 2000, in-houser Stuart R. Zisman wrote a memo in which he warned that one of the SPE deals ran a high risk of being seen as balance-sheet manipulation. Close review of the transaction, Zisman wrote, "might lead one to believe that the financial books at Enron are being manipulated in order to eliminate the drag on earnings that would otherwise occur."
When he showed it to his supervisor, Mark E. Haedicke, he was told that "he had used unnecessary inflammatory language and editorialized too much in the memo," according to a summary of the interview Zisman gave the special investigative committee. Haedicke declined to respond to BusinessWeek's request for comment. At this point, the new law would have compelled Zisman to take the matter to general counsel James Derrick or CEO Kenneth L. Lay. But it is difficult to imagine that many attorneys, after being shut down by their boss, would then bring their complaints to the top brass. And even if Zisman had done so, would anything have been different? Probably not, considering all of the other warning signs Enron's executive suite overlooked.
The SEC is considering dealing with this problem by requiring lawyers who can't get the board to take them seriously to contact the agency itself. But the American Bar Assn. and other professional organizations are fighting this provision tooth and nail. They argue that it will make clients less likely to trust their lawyers. Perhaps so. But given what happened at Enron, that may be a fair price to pay for restoring the public's faith in the profession.
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