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After the Enron Trial, Defense Firm Is Stuck With the Tab
"The biggest trial team is a bit like an iceberg," said John Toothman, president of the Devil's Advocate, a Great Falls legal fee review firm. "You have some people at the table, and you have some people in the pews."
Toothman said he asks clients a central question: "Do we really need all this?"
To O'Melveny, faced with millions of documents and other evidence amassed by the government during its five-year investigation and a potential decades-long prison sentence for client Skilling should he be convicted, the answer was a resounding yes.
O'Melveny enlisted five partners, led by Petrocelli, who now bills at $850 per hour but who said that for the Skilling defense, as an "accommodation," he and others capped their rates at the 2004 level -- in his case, closer to $800 an hour. M. Randall Oppenheimer, who leads the firm's entertainment division and who has won major cases for Exxon Mobil Corp., and Mark Holscher, a onetime federal prosecutor who has a bustling white-collar defense practice with such clients as former congressman Randy "Duke" Cunningham, also logged hundreds of hours at similar rates.
On top of that, the team included more than a dozen associates and other counsel: junior lawyers who reviewed documents, scoured databases and investigated witnesses, uncovering e-mails Petrocelli used to impeach government cooperators in aggressive cross-examination. Those younger lawyers billed $200 to $500 per hour, depending upon their level of experience. Some worked "around the clock," Petrocelli said, noting that the partners at times had to order them to sleep. For five months, several partners, none of whom came from Houston, stayed at the Four Seasons Hotel, where they got a special rate on accommodations. Many junior lawyers resided at the Post Rice Lofts, a historic downtown apartment building close to the courthouse and their makeshift trial offices.
To sift through documents from Enron's Internet and retail energy units, the firm hired an outside supplier and purchased 20 computer servers. The firm also employed graphics and projection specialists, as well as a jury consultant and a team of expert witnesses to handle insider-trading and stock-market issues, and accounting and other matters.
Former Securities and Exchange Commission accountant Walter K. Rush testified that he spent 954 hours on the case as an expert witness, at a rate of $600 per hour. University of Chicago law professor Daniel R. Fischel, a specialist in corporations and stock markets, charges $1,000 per hour. The defense decided not to call him to the witness stand as the case dragged on, but he was paid for the hours he logged learning the case, Petrocelli said.
A.B. Culvahouse Jr., a former counsel to President Ronald Reagan and chairman of O'Melveny, said the Skilling case was "an investment we made and were prepared to make."
"There wasn't a lot of second-guessing" among the firm's policy committee, of which Petrocelli is a member, Culvahouse said. "We felt an obligation to our client. . . . .It was the right thing to do for our client and the smart thing to do for our firm."
Culvahouse said any negative financial impact has been spread across the firm, which he said reported profit per partner of $1.65 million last year, $340,000 more than a year before. He said lawyers in other parts of the firm, made up of more than 1,000 lawyers and 240 partners, did not rise up in anger over the mounting costs of the Enron trial, though there were some piercing questions. Most painful was probably the missed opportunities to make money on other clients while some of the firm's best trial lawyers were tied up for months on Enron.
It is not unusual for law firms to discount fees from well-known clients, experts said.
Many law firms build uncollectible debts into their financial projections. Ward Bower, a principal at the Newtown Square, Pa., consulting firm Altman Weil Inc., said law firms typically shave their bills by 10 percent before they send them to clients. Most firms recognize that they will not collect all of their fees, and they pay taxes on the money they actually receive from clients, not on what they bill. That means unpaid legal fees are probably not tax-deductible, but expenses are, Bower said.
The difference in the Skilling case appears to be one of scale. The most recent Altman Weil survey suggests that law firms often eat about 22 percent of their costs -- far less than what O'Melveny may have to absorb.
Other law firms have made similar decisions in recent months, according to Joel F. Henning, head of the Chicago office of legal consulting firm Hildebrandt International.
The Chicago law firm Winston & Strawn LLP recently comped former Illinois governor George H. Ryan for his defense on corruption charges, estimated by the Chicago Sun-Times at more than $10 million. The defense effort, led by Dan K. Webb, a former U.S. attorney who has represented Philip Morris, the New York Stock Exchange and Microsoft Corp., ended in conviction on all 18 counts against Ryan after an intense six-month trial. Ryan's supporters contributed to a legal defense fund that topped $475,000, the paper said.
For O'Melveny, the work is not yet done. Several members of the trial team, with help from Washington-based former acting solicitor general and O'Melveny partner Walter Dellinger, now are gearing up for an appeal.
"We've just got to keep fighting a good fight," said Petrocelli.