Enron Case Raises the Bar in Texas
Even the lawyers here are hiring lawyers.
The astounding collapse of Enron Corp. has devastated employees, infuriated shareholders, stung creditors and awakened the regulators. Everyone’s upset. And everyone’s headed for court.
“This case is the full employment act for Texas lawyers,” said Richard J. Zook, who was the first to file a class-action lawsuit against the energy company, now operating under Chapter 11 bankruptcy protection.
“There will be civil lawyers, criminal lawyers, securities lawyers, regulatory lawyers, bankruptcy lawyers, employment benefits lawyers and trial lawyers,” Zook said. “Billions and billions have been lost. It’s going be a long, detailed and exhaustive search for the guilty parties.”
So far, 51 lawsuits have been filed in U.S. District Court here naming former Enron Chief Financial Officer Andrew S. Fastow as a defendant. Fifty-six go after former Chief Executive Jeffrey K. Skilling. Fifty-three seek damages from Chairman Kenneth L. Lay. Dozens more suits go after the company itself.
That’s not all. Lawyers for Enron’s 20,000 creditors are seeking restitution, and a group of Enron bondholders is suing the company’s former auditor, Andersen, as well as the bonds’ underwriters.
Samson Investment Co., an oil exploration company that was an Enron partner, sued the auditor last week. Enron itself is making noises about suing Andersen, formerly known as Arthur Andersen. Other lawyers are focusing on the brokers who touted Enron’s once-golden stock. Wendy Gramm, an Enron board member and the wife of Sen. Phil Gramm (R-Texas), has had 14 suits filed against her.
Texans are fond of their superlatives, so few here are resisting the notion that the biggest bankruptcy filing of all time will spur the largest legal quagmire of all time. Yet that opinion is seconded by more distant observers, who nonetheless caution that the case is still unfolding.
Resolution in Courts Likely Will Take Years
“This involves civil actions as well as potentially criminal ones, private as well as public entities,” said Stanford University law professor Deborah Hensler. “And it involves lots of money and has lots of political ramifications. Those are the ingredients you’d need.”
The legal actions are likely to go on awhile.
Given the number of defendants and legal proceedings and “the potential of the criminal cases to delay the civil cases,” said San Diego lawyer William Lerach, “it will take as many as six years to resolve this.”
Lerach, who represents shareholders who claim they lost fortunes because of Enron’s deception, rejects assertions that the only winners will be lawyers.
“Lawyers always do well whenever there’s a disaster,” he said. But he added that class-action lawyers “only get paid if they make a recovery for the class--and they only get paid a percentage of what they recover.”
All the more reason, then, to spread the legal net as wide as possible. The juiciest target could be Andersen, which stands accused of failing to present Enron’s true financial picture. The Chicago-based company has deep pockets and, unlike Enron, is not shielded by U.S. Bankruptcy Court.
Marvin Isgur, a Houston bankruptcy lawyer, estimated that at least 40 Houston firms were involved in the case. Others, like Isgur himself, were talking to potential clients.
“Everyone that touched Enron is going to need legal advice,” he said.
Although Enron lawsuits are being launched all over the country--the bankruptcy case is being heard in New York, and the Samson complaint was filed in Tulsa, Okla.--by far the greatest concentration is here, in the energy company’s hometown.
The cases are so plentiful that questions are starting to be asked about conflicts of interest, and the lawyers themselves are wondering what their own best interests are. Sooner or later, everyone is going to have to take sides.
In the good old days, there was only one side for Houston lawyers. Everyone sat on charity boards with Chairman Lay, shopped at the Galleria, lived in swank River Oaks and dined on the truffle-scented baby hen at Tony’s.
“The royalty of Houston were either Enron bosses or on the board of Enron,” said Gerald Treece, associate dean at South Texas College of Law.
The tight relationships--and Enron’s big footprint in this town--are leading to conflicts. Two of the 18 U.S. District Court judges here, Nancy Atlas and David Hittner, had to recuse themselves from Enron cases. An Atlas assistant said the judge would not comment; an assistant to Hittner said his decision was prompted by his ownership of Enron stock.
Their cases were assigned to U.S. District Judge Lee H. Rosenthal, who disclosed last month that she had “long-standing friendships” with two defense lawyers. One of former CFO Fastow’s lawyers was godfather to one of Rosenthal’s children, the judge said in a court filing. Another lawyer representing Enron defendants was best man at Rosenthal’s wedding. The judge said she was “fully capable of disregarding these relationships.”
Ten days ago, without explanation, Rosenthal recused herself from her 46 Enron cases.
“The problem is Enron is everywhere and Enron executives are everywhere,” said Elizabeth Freeman, a lawyer for Enron creditors. “Most of the judges were practitioners here. They might have represented Enron or an Enron competitor.”
Cases Consolidated Into 3 Categories
Underscoring that point, the U.S. attorney’s office in Houston, which was conducting a criminal investigation of Enron, was recused from the case Jan. 9 by the Justice Department, in part because staffers are related to Enron employees.
For instance, U.S. Atty. Mike Shelby’s brother-in-law worked for the energy company. Because many Enron employees are bitter over the collapse of their company savings plans, there was the possibility the government lawyers would be accused of seeking vengeance instead of justice.
Although the number of lawyers is multiplying, the number of active cases is shrinking for the moment. That’s because they are being consolidated on three tracks: employee benefits, shareholder class actions and so-called derivative suits, in which shareholders sue a corporation’s officers to force them to restore to the company money they allegedly stole from it. The docket sheet for the class-action suit Newby et al vs. Enron Corp. takes 15 pages to list all the lawyers involved.
Yet for all of the frantic legal activity, there’s a sense that this might only be the beginning.
“We haven’t gone to Defcon 1 yet,” said Treece, the law school dean. “When Enron filed for bankruptcy, it scared a lot of lawyers away. They thought the chance of getting big money evaporated.”
Some have a different reason for staying away.
“One thing about Texans, they think loyalty means something,” Treece said.
By spreading its work around, Enron bought a lot of loyalty in the Texas legal world. This is a trick the law firms seem to have learned themselves. When Vinson & Elkins, Enron’s main law firm, was named as a defendant in two of the class-action lawsuits, it promptly sought out Joseph Jamail, the most famous litigator in Texas, to represent it.
Jamail won a $10.5-billion verdict in 1985 against Texaco for his client Pennzoil, a case that was the previous high-water mark for Texas litigators. He did not return a call to comment, but anyone expecting him to take on Enron in similar fashion is likely to be disappointed.
