Vinson & Elkins and Enron Unplugged

03.11.02
By Brenda Sapino Jeffreys
Published in Texas Lawyer

Deborah McMurray was interviewed as a source for this article.

Firm Takes Steps to Protect Its Rep

As he closed a Feb.l5 letter sent to clients and friends, Vinson & Elkins partner Harry Reasoner slipped in the news that, except for a few lingering matters, his firm has severed its ties with Enron Corp.

The end of the three-decade-long relationship comes after Enron withdrew a motion asking the New York judge presiding over Enron`s bankruptcy to add V&E to the long list of firms working on its bankruptcy. Without elaboration, Enron withdrew the motion in February, after at least two creditors groups filed objections.

"Obviously we aren`t interested in fighting about it," says Reasoner, who ended a 10-year term as managing partner in December 2001.

But 855-lawyer V&E may have to fight for its reputation because of its close ties to Enron, which has become embroiled in a financial scandal that has culminated in the nation`s largest-ever bankruptcy filing. Sweeping far beyond the doors of the company`s corporate headquarters in downtown Houston, the Enron scandal is creeping into the vaunted halls of V&E.

From a start in the early 1970s, Enron grew in importance on V&E`s client list. By the late 1990s, as Enron muscled its way to an energy trading powerhouse, it became V&E`s largest client, accounting for more than 7 percent of the firm`s revenues, and helping fuel growth in the firm`s securities, corporate and project finance practices. The ties between the firm and Enron were close, and the link was cemented as about 20 V&E lawyers, including recently retired general counsel James V. Derrick, left the firm over the years and accepted jobs in Enron`s legal department.

V&E became Enron`s go-to firm, negotiating all sorts of deals ranging from the $632 million purchase of Tenneco Inc.`s natural gas liquids business in 1991, to the $3.2 billion purchase of Portland General Corp. in 1996, to its pending sale four years later. V&E also helped Weil, Gotshal & Manges negotiate Enron`s ultimately unsuccessful last-ditch effort to be acquired by Houston`s Dynegy Inc. last fall.

The loss of Enron as a client is bad enough for V&E from a financial perspective. At 7 percent of the total, Enron work represented about $27 million of V&E`s gross revenue of $386.5 million in 2000, according to Texas Lawyer`s annual report on firm finance. Enron has not only been the firm`s largest client the last two years, but V&E is an unsecured creditor in Enron`s bankruptcy—owed about $5 million in unpaid fees—and stands to recover little of it.

But with Enron`s downfall the subject of congressional investigations and litigation filed by unhappy shareholders and former current employees, V&E`s representation of Enron could turn into a public relations, or even a litigation, problem down the line. A Michigan Democrat involved in the investigation into the Enron scandal, U.S. Rep. John Dingell, wants the House Energy and Commerce Committee to hold a hearing on V&E`s role in Enron`s troubles. Reasoner says, to his knowledge, no one from the firm has been asked to testify, but he says current managing partner Joseph Dilg and partner Max Hendrick III have been interviewed by committee investigators.

V&E has lost big clients before. For many years, V&E had a close relationship with the former First City Bancorporation. James Elkins Sr. founded the firm in 1917 with attorney William Vinson and founded the bank in 1924. But the strong ties between the firm and the bank weakened some after A. Robert Abboud of Chicago took control of the bank in 1988, and ended because of conflicts after the Federal Deposit Insurance Corp. took over 20 troubled First City banks in 1992.

But as First City work dwindled, V&E began to do more Enron work, and the relationship was bolstered after Derrick became the general counsel in 1991. In 2000 and 2001, Enron was the firm`s largest client, says Reasoner. The firm started evaluating its representation of Enron when the bankruptcy was filed in December, Reasoner says. But because the firm was already working on a number of transactions, Enron and its lead bankruptcy counsel, Weil, Gotshal, wanted U .S. Bankruptcy Judge Arthur Gonzalez to approve V&E as a special counsel.

Instead, Reasoner says, "Very soon, we will be out"

Work Grows

When V&E was hired in the early 1970s to do work for Enron predecessor Houston Natural Gas Corp., it was at the expense of Houston`s Fulbright & Jaworski. According to Richard Alsup, who became general counsel of HNG in 1973, his predecessor in the general counsel job, Joe H. Foy, hired V&E as HNG`s primary outside firm after he got upset with Fulbright over a conflict.

Foy left HNG to go to Bracewell & Patterson, and Alsup was promoted. Foy, now retired, is a former member of Enron`s board of directors who is a defendant in shareholder and securities fraud litigation pending in federal court in Houston. Through his defense attorney, Robin Gibbs, a partner in Houston`s Gibbs & Bruns, Foy declines to comment. But Fulbright confirms it was conflicted out of work for HNG, paving the way for V&E to do the work.

Alsup was HNG`s general counsel from 1973 until early 1985, and he says the company`s 10 in-house lawyers did most of the company`s legal work at that time. V&E was handling mostly litigation for HNG, he says. Alsup, now a partner in Squire, Sanders & Dempsey in Houston, says he recalls Reasoner doing some litigation for HNG and partner J. Evans Attwell handling some Washington, D.C., regulatory matters. Attwell, a retired partner who was the firm`s managing partner from 1982 through 1991, did not return a telephone message left at his home.

Enron was created in the $2.3 billion merger of HNG and InterNorth, of Omaha, Neb., in 1985. Enron grew in importance to V &E over the years. Reasoner says that for many years in the 1980s, First City and Texas Eastern Corp. were the firm`s largest clients. Both were listed, along with Enron, for instance, as the firm`s major representative clients on the Texas Lawyer annual report on firm size published in July 1987. Reasoner says the firm`s Enron work grew dramatically as the company`s revenues ballooned from $10.25 billion in 1985 to $100 billion in 2000.

The firm did mergers and acquisitions for Enron, international project finance, a variety of financings, ERISA work and some litigation.

But Enron didn`t use V&E alone by any stretch. Before the bankruptcy, Enron was the largest client at Bracewell and at Andrews & Kurth, and the company spread work around. On Texas Lawyers most recent "100 Largest Firms in Texas" list, published in July 2001, Enron is included on the client list for V&E, Andrews & Kurth and Bracewell, and King & Spalding, Susman Godfrey, Littler Mendelson and Hays McConn Rice & Picketing.

Still Ahead

But now, the halcyon days of V&E`s relationship with Enron are over.

As Washington lawmakers, plaintiffs lawyers and prosecutors attempt to determine who deserves the blame for lousing up the financial futures of so many Enron investors and employees, V&E might not come out unscathed. In a report issued Feb. 1 by a special committee of Enron`s board, known as the Powers report, the Houston law firm is explicitly named and blamed for failing to provide "objective and critical professional advice."

Unlike Enron`s former accounting firm, Arthur Andersen, V&E isn`t being sued by disgruntled shareholders or employees. V&E was named in two state court suits filed before Enron`s bankruptcy, but the plaintiffs lawyers quickly dropped them after meeting with a lawyer for the firm, the legendary trial lawyer Joseph Jamail of Houston.

That doesn`t mean that congressional investigators don`t want to know more. The recent interviews with Dilg, the contact lawyer on the Enron account, and Hendrick, could indicate Dingell may get his wish for a hearing on V&E`s role in Enron`s problems.

V&E, in fact, is beginning to distance itself from its once prominent client. In his February letter, Reasoner argues the congressional hearings and media reports created "misunderstanding and misinformation" about the nature of the firm`s relationship with Enron.

The firm, Reasoner says in the letter, was "not informed regarding many of Enron`s business dealings with the [off-the-books] partnerships." (Those partnerships are important because Enron had to restate its income for several years once they were unwound.) Reasoner writes that Enron`s in-house legal department of 250 lawyers handled much of the now controversial Securities and Exchange Commission disclosure issues. Reasoner also defends the firm against criticism it has received for conducting a preliminary investigation of whistleblower Sherron Watkins` allegations last August.

But Reasoner says V&E will get past the loss of Enron as a client, and he says the firm is replacing the business.

"Of course the loss of Enron was both a tragedy and an economic loss," he says. "So far this year we are ahead of where we were last year."

Texas Lawyer reporter Miriam Rozen contributed to this article.

The V&E Letter

Feb. 15, 2002

To Our Clients and Friends:

Some of the numerous media reports on the tragic collapse of Enron have contained references to Vinson & Elkins. These accounts and some testimony given in congressional hearings have created a great deal of misunderstanding and misinformation with regard to the nature of our relationship with Enron and the defined, specific role we played in some of the transactions under scrutiny. We would like to be able to give you, our valued clients and colleagues, a complete picture of the situation. As you will appreciate, however, we are limited in our ability to respond by our professional obligations of confidentiality to Enron. Enron has now made some material public, including the report of the Special Investigation Committee of the Enron Board chaired William Powers Jr. (Powers Report), which investigated Enron’s transactions with related party partnerships. It has, thus, become appropriate for us to respond within the limitations of our ethical obligations.

First, the Powers Report criticizes Enron for the conflicts of interest created by permitting its Chief Financial Officer, Andrew Fastow, to manage outside related-party partnerships with which Enron dealt. We did not advise Enron to waive its conflict of interest rules to permit Mr. Fastow to manage outside partnerships. We were not called on to review or approve Enron’s overall dealings with the partnerships, and we were not informed regarding many of Enron’s business dealings with the partnerships. The related-party partnerships were represented by an eminent Chicago law firm.

Second, the controversy involving Enron turns on whether it used proper accounting treatment in various transactions with the partnerships. In some instances, the accounting treatment allowed Enron to recognize earnings from certain related-party partnership transactions that were either reported as income or were used to offset losses which would have otherwise appeared on Enron’s books. In other situations, the partnerships incurred debt that was not reflected on Enron’s balance sheet. As the Powers Report recognizes, these results are permissible if accounting standards are met. Report at 5. We did not advise Enron on accounting issues. The Powers Report flatly concludes; “It would be inappropriate to fault Vinson & Elkins for accounting matters, which are not within its expertise.” Report at 26.

Third, we are criticized in the Powers Report for not bringing a “stronger” voice ” to the disclosure process. Neither the powers Report nor the press has described our limited and defined role in Enron’s SEC disclosure process. Unlike our role with many clients where we are fully involved in the disclosure process, our charge from Enron in its SEC disclosures was a limited one.

Enron was represented by an extremely able legal department of some 250 lawyers. Enron in-house lawyers, many of whom were experts in corporate securities law, worked with its Financial Reporting Group in preparing disclosures. Enron was also regularly represented by a number of other major law firms. Enron consulted at least one other law firm for disclosure advice. Enron’s periodic SEC disclosures would often be made with either no review or a limited request for comments by Vinson & Elkins, where we were asked to focus our review only on specific disclosures. Like many large corporate clients, Enron’s policy required that Vinson & Elkins, and all outside counsel, relate with and provide advice through Enron’s legal department. Vinson & Elkins was not called on to interview Enron executives or examine all relevant documents.

When Vinson & Elkins gave advice, Enron made the determination whether it would follow our advice. We are not a liberty, because of professional obligations of confidentiality, to discuss the advice we gave Enron.

Fourth, we have received criticism about our conduct of preliminary investigation of the concerns expressed by an Enron employee, Ms. Sherron Watkins. Her letter that prompted our review focused on two issues. First, she questioned the accounting for the Raptor transactions, where Mr. Fastow’s IJM2 partnership was the general partner. Second, she expressed concern about the conflict of interest presented by Mr. Fastow’s participation in the IJM partnerships while he served as Chief Financial Officer of Enron. We were asked to make a limited, preliminary investigation. We were not to second guess the accounts (which would have required hiring another accounting firm) and not to conduct a detailed review of the third-party partnership transactions. Arthur Anderson was furnished with Ms. Watkins’ complaints and our preliminary report. Arthur Anderson confirmed to us that the accounting was appropriate. The Powers Report does not fault the conclusions that we reached given the limitations of Enron’s instructions.

What is overlooked in many media reports is the context of the events in which our investigation occurred. By the time Ms. Watkins letter was written, Enron’s CFO, Andrew Fastow, had sold his interest in the third-party partnerships, apparently eliminating the conflict of interest issues. After our oral advise to Enron on September 21, 2001, the Raptor partnerships were unwound and terminated on September 28, before we delivered our final written report to Enron on October 15. Enron then took a $544 million charge to earnings in the third quarter, announced on October 16, 2001, because of the termination of the Raptor transactions. Thus, the concerns on which Ms. Watkins had focused had been addressed by the time our report was delivered. Enron’s subsequent restatement of earnings, required by Arthur Anderson in November 2001, was unrelated to any issues raised by Ms. Watkins that Vinson & Elkins was asked to investigate.

At the request of Enron and its bankruptcy counsel, we continued to represent Enron in a limited number of specific transactions where it was felt our withdrawal would have injured Enron by disruption of the transactions. Enron is now generally represented by its bankruptcy counsel, and we have terminated our representation of Enron. We will, of course, assist Enron in any appropriate way in furnishing such information that we may have in the ongoing investigations.

We trust that you appreciate that our professional obligations and loyalty, which we owe to all our clients, limit our response to the issues that have been raised. Please call me or your contacts at the firm if you have any concerns that we may address. We value our relationship with you greatly. Thank you for your consideration.

Very truly yours,
Vinson & Elkins
Harry M. Reasoner

Letter A Savvy Marketing Move

The letter from Harry Reasoner to clients and friends of Vinson & Elkins attempts to explain the nature of the firm’s relationship with Enron Corp. and mitigate “misunderstanding and misinformation” about the firm’s role in the collapse of Enron. “We would like to be able to give you, our valued clients and colleagues, a complete picture of the situation,” Reasoner, the firm’s former managing partner, writes in the letter that was sent out in February.

It’s a savvy move on V&E’s part, say three marketing consultants in Texas who help firms project an image. A fourth consultant agrees, but she says the letter could have been written differently to make it more effective.

“It sounded a little finger-pointy,” says Deborah McMurray, of Deborah McMurray Associates of Dallas.

Rob Allyn says V&E is wise to tell its story before someone else tells it.

“The worst thing a law firm could do in this situation is put their head in the sand and hope it goes away. I think V&E could be commended for dealing with this forthrightly,” says Allyn, of Allyn & Co. of Dallas.

Allyn says V&E is taking a bold, counterintuitive step because lawyers usually hate to talk about their clients. But from a marketing perspective, it’s the right way to handle the extraordinary Enron situation. He says the firm should be more concerned with its brand identity than with potential liability. “Even in the case of Arthur Anderson [Enron’s former accounting firm] their legal liability is the worst of their problems, because it’s a one-time problem. The potential damage to the brand could be fatale,” Allyn says.

William J. Flannery Jr., of WJF Institute in Austin, says the letter could help clients feel sympathy for V&E.

“If you put yourself in the position of the client of a firm like V&E, it’s reassuring to see a letter from them. If I were a client, I’d feel sorry for V&E, too,” says Flannery, who says he admires Reasoner.

David Margulies, of Margulies Communications Group in Dallas, says Reasoner’s letter provides a means for V&E to not only control the message but also impress on clients how valued they are to the firm. The letter is effective as long as the firm’s lawyers already have been making personal contacts with their key clients, Margulies says.

“That should have happened the second this [the Enron scandal] broke,” McMurray says in agreement.

While saying it’s a good idea, McMurray says the letter should have been addressed personally to clients. She also would have preferred a less defensive tone and “more Harry in the letter” to signal to clients how the firm feels about the tragedy.

Because of privilege, Reasoner writes in the letter, he can’t talk about the advice V&E lawyers gave Enron. But he says he can talk about matters discussed in some documents Enron has made public, including the Report of the Special Investigation Committee of the Enron Board, known as the Powers Report.

The letter details some of what V&E lawyers didn’t do: They didn’t advise Enron to waive conflict of interest rules to permit former chief financial officer Andrew Faslow to manage outside partnerships. They weren’t asked to review or approve Enron’s overall dealings with the partnerships. They didn’t advise Enron on accounting issues.

Reasoner also points out V&E had only a limited role in Enron’s disclosure statement, and stresses the investigation the firm handled for Enron in the wake of the allegations by whistleblower Sherron Watkins was limited and preliminary.

And the kicker—Reasoner writes that except for a limited number of transactions already in the works, the firm has terminated its relationship with Enron.

Reasoner says a number of clients have responded favorably to the letter, which puts a different spin on some of the information presented in Congressional hearings.

“There have been so many passing references to us and I think … many of the congressmen either don’t understand or don’t care what the role of the lawyer is,” he says.

The three-page letter from Reasoner may be unusual, but it’s not the first time V&E has met a crisis head-on with a letter. Reasoner sent out a similar letter to clients and friends in 1994 after the firm was hit with a $21.7 million verdict in state court in Houston in Moran, et al. v. Vinson & Elkins. In that suit, heirs of Houston oilman William T. Moran alleged the firm did not disclose serious conflicts of interest when representing Moran’s estate. V&E and the plaintiffs agreed to a confidential settlement in 1998 after years of appeals.

Deborah McMurray is a strategic marketing consultant to the legal industry. She can be reached at 214.351.9690 or mcmurray@contentpilot.net.

Contribute

Have an article to recommend?

We invite clients and friends to contribute to the
CP Press Room by sharing their favorite articles,
blogs or books. To contribute to the CP Press Room,
contact Blake Davis or send an email to pressroom@contentpilot.net.