Scummery Judgment

Why Enron’s sleazy lawyers walked while their accountants fried.

The recent conviction of Enron’s auditor, Arthur Andersen, for obstructing justice raises a disturbing question: Why isn’t Enron’s outside law firm, Vinson & Elkins, on trial for its conduct, too? While no allegations have been made that V & E obstructed justice, the current class-action complaint contends that the firm did participate in a fraudulent scheme by approving and structuring Enron’s notorious loss-hiding transactions and by drafting and approving Enron’s allegedly false and misleading SEC filings.

These claims open up the possibility of criminal fraud charges against V & E, as well. Yet despite some critical commentary in the business press, Vinson & Elkins has by and large avoided not only an indictment, but any real blame at all for Enron’s collapse. The harsh spotlight under which Andersen has all but shriveled hasn’t seemed to fall on V & E at all. Indeed, V & E was not even named in the initial class-action complaint filed against Enron and Andersen last year in Houston federal court. (This April, in the 500-page amended complaint, V & E was named, among a laundry list of dozens of new defendants. Check out pages 403-432 for the specific allegations relating to V & E.)

Why shouldn’t the law firm be on the hook as well? It is Vinson & Elkins that’s alleged to have given the crucial legal blessing to the dubious accounting transactions that destroyed Enron and, in so doing, destroyed many of its shareholders’ lives. It is also V & E that is alleged to have approved false and misleading Enron disclosures when the truth would have educated shareholders about the company’s misdeeds and kept them from losing their savings.

How can the lawyers who approved the transactions be held blameless while the government takes down the company that merely trusted its lawyers’ advice? Indeed, between the lawyers and accountants, shouldn’t it be the lawyers who are blamed when accounting practices turn out to be illegal, especially if the lawyers specifically opined on those practices? Accountants, after all, are not lawyers.

So the brief against V & E may sound overwhelming, and it may seem that it should be V & E, not Andersen, in the hot seat now. But surprise! From a legal perspective, Vinson and Elkins may not have done much that was wrong. Why? Because Andersen had a responsibility to the public that V & E simply did not have.

Andersen’s audits were meant to, and did, act as a seal of approval, a willingness to put a stamp of good practice on Enron transactions. But V & E’s opinions and investigations—done for Enron and its shareholders, not the public—were not directed outward in the same way. It was to Enron, its shareholders, and the boundary constraints of the law, not the welfare of the public or abstract concepts of justice, that V & E owed its loyalties.

Accountants’ professional ethics rules are very different from lawyers’—with significantly greater emphasis on “independent judgment” that cannot be subordinated to the clients’ tactical needs. Accountants’ ethics rules, for instance, compel them to pull out of situations of dubious legality earlier than a lawyer would have to in a comparable situation—and accountants are duty-bound to report clients to regulators based on less evidence than a lawyer would need to do the same. In short, ethics rules show that accountants prize independence as their central virtue; lawyers, zealousness. Both must keep client confidences, of course, but a lawyer’s duty of loyalty is more extreme.

Still, there is much that V & E seems to have done wrong. For instance, you would think Vinson & Elkins should be accountable because it was the firm retained by Enron to investigate Sherron Watkins’ internal complaints. The law firm’s investigation was inarguably a disaster for the company. But in the end, Enron got what they paid for—and thus it seems Enron, not V & E, should be faulted for the fact that the investigation did not go further than it did, for it was Enron that set its parameters. (Click here to learn why the Watkins investigation was probably not all that improper.)

What about V & E’s approval of the dicey, doomed Enron transactions? Couldn’t that, at least, form the core of a criminal fraud charge—or at least a charge of conspiring to defraud, or aiding and abetting fraud—even if V & E’s main responsibility was to its client and not the public?

Not necessarily. The truth is that while the amended complaint insists the transactions were manipulative schemes, it is possible that they were, instead, simply acts taken on the very brink of legality. V & E was entitled—indeed, arguably it was ethically obligated—to go to that brink, though not over it. And if it made a wrong call as to where the brink was, that may have simply been a misjudgment, not malpractice, and certainly not a crime or fraud. (V & E’s possible conflicts of interest—such as the decision to investigate the very legal structures it had allegedly helped to create—may be another matter, but one probably more appropriate for bar discipline than for a lawsuit.)

The off-the-balance-sheet partnerships Enron employed seem, in retrospect, fairly obviously sketchy. But the law can get extremely technical at times, relying on hair-thin distinctions about sketchiness. It’s the job of the lawyers, inevitably, to torture those hair-thin distinctions to death. Simply ignoring them, to the clients’ detriment, would only let competitors achieve the business advantages such distinctions can provide. For instance, a company or person is entitled to take the most aggressive tax-law options that the law supports—not to pay the amount lawyers might feel it, or she, morally owes the government.

And before you go wild at the ethical sleaziness that allows accountants to be deemed criminals while lawyers are exonerated as “cautious,” it’s worth noting that there’s an important reason zealousness is the ethical rule and that lawyers are asked to go right up to the edge of that cliff. Think how frightening it would be if your lawyer were also, in effect, the police officer, judge, and jury of the actions about which he or she is advising you. Any slight doubt of your credibility might cause him to refuse to put you, or some other helpful witness, on the stand. His feeling that a plausible legal argument had only a modest chance of success might compel the lawyer to simply drop the argument. The person meant to be your advocate and protector would have taken it upon himself to reign you in, based not on the limits of the law, but on subjective perceptions as to what’s at the safe center of its universe.

Distinguishing what’s over the brink from what’s at the precipice is one of the hardest lines a lawyer draws, and it’s often best drawn only in hindsight. Remember the ex-convict Robert De Niro played in the 1991 remake of the classic 1962 movie Cape Fear? He stalked a lawyer and his family because years ago, the lawyer had failed to “zealously” represent him in his case, declining to present exculpatory evidence because of a personal belief in his client’s guilt. That character—the one whose thumb Juliette Lewis famously sucked—had a good point (but an unfortunate appellate mechanism). The ethical obligation to vigorously represent the client marches right up the very brink of what is legal, although it does not go beyond it.

By itself, the uneasy intuition that a client might have done something wrong, or could be guilty of the crime charged, should not be enough to dilute the quality of representation. The alternative is to create a lawyer torn between the impulse to punish his client and to advocate for him. Sometimes client conduct can smell like days-old fish but still be technically legal; the lawyer must hold his nose and adhere to his obligation of zealousness anyway, proceeding to defend it. The accountant, on the other hand, with different duties to the client, can simply walk away.

Judged in this light, it becomes much more understandable why Andersen might be in deep trouble while V & E is not. And some supposedly incriminating tidbits in the V & E opinion letters, reportedly approving Enron’s transactions, become yawn-worthy. For instance, Business Week reports—and the amended complaint gleefully parrots—that an Enron executive claimed that employees went to the lawyers and said, “This thing needs to work. How do we make it work?” And a former employee charged that Enron “opinion-shopped for what it needed. If it hadn’t gotten the opinion letters, it couldn’t have done the deals.”

So what? In legal practice, comments like these are made everyday. Clients consult lawyers to expedite their transactions, not impede them. If a conservative-minded law firm feels a deal goes too far, then a more aggressive one may be willing to bless it. Nor is opinion shopping a big business anomaly; it’s a common feature of the profession. Expert witnesses are “shopped for,” too: An expert who doesn’t see medical malpractice is swapped for one who does. And if 10 experts must be consulted before one concurs with your side, so be it. The truth is that different lawyers, like different doctors, have different good-faith views of where the brink of good practice lies.

Where was the brink that should have guided V & E? It probably lurks within a web of subtle corporate law and accounting law cases, which intersects with another web of criminal and civil fraud cases—with some legal ethics principles thrown in for good measure. These webs can only be unspun at trial, so until then, it is difficult to gauge whether V & E’s conduct was aggressive lawyering or what can sometimes be its kissing cousin: fraud.

If V & E acted in good faith, it should have nothing to fear. On the other hand, if it can be shown that the firm made knowingly false statements regarding the law or facts in its opinion letters, in its investigation memo, or elsewhere, that may be a very different story, and V & E may fall victim to a plausible legal malpractice case filed by Enron.

In addition, if it can be proven that V & E set even one toe over the brink, Enron’s shareholders may still have a meritorious civil fraud claim against them—and prosecutors might, if the civil case is strong enough, also consider a parallel indictment. The standard for fraud, however, is tough to meet—and that is as it should be, for lawyers even more than for other professionals. If your lawyer draws back from the edge because of her fear of the consequences, it may be you who is someday left hanging.