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After the Enron Trial, Defense Firm Is Stuck With the Tab

By Carrie Johnson
Washington Post Staff Writer
Friday, June 16, 2006

To the list of employees, investors and businesses who suffered financial misfortune in Enron Corp.'s demise, add this one: the law firm defending former chief executive Jeffrey K. Skilling.

Los Angeles-based O'Melveny & Myers LLP, which has represented Skilling on both civil and criminal charges since 2001, collected what in a typical case would be a fat payday: $23 million from its client and $17 million more from his insurance policies.

But, true to form, Enron is still destroying financial expectations. Even before the trial began in January, Skilling's team of more than 20 lawyers, paralegals and support staff burned through those funds, leaving the law firm holding the bag for "multiple tens of millions" of dollars in unpaid fees and expenses racked up during the four-month trial, Skilling's lead defense lawyer said. While Daniel M. Petrocelli declined to provide an exact tally, one source put the price tag at more than $25 million on top of the $40 million O'Melveny already collected.

The trial, which culminated in the convictions of Skilling and former chairman Kenneth L. Lay last month, featured 56 witnesses and some of the most sophisticated business deals ever to make their way into a courtroom. The Skilling defense, which experts say may be one of the most expensive in history, is a case study in how high the stakes can rise in white-collar criminal representation.

"This is almost a carte blanche to the lawyers: Do everything you can to keep me out of jail," said John Marquess, president of Legal Cost Control Inc., a New Jersey firm that monitors legal fees in bankruptcies and for Fortune 500 clients. "Very little thought is given to cost. It is not a concern."

In the beginning, O'Melveny did not have to worry about how its high-profile client would pay his bills. Skilling exited the Houston energy trader in August 2001, with enough time to sell more than half of his remaining Enron stock before the company hit bottom and filed for bankruptcy protection that December. But, on the heels of his 2004 indictment, prosecutors put a hold on nearly $60 million in cash, brokerage accounts and other assets, including a $5 million Mediterranean-style Houston mansion and a $350,000 condominium in Dallas that Skilling bought to use when he visited his daughter, then a student at Southern Methodist University. Meanwhile, a settlement by board members depleted the company's insurance policies, closing off that avenue of recovery for lawyers hired by Skilling and Lay.

Within weeks, the government is expected to start legal proceedings to transfer Skilling's assets to its coffers, from which proceeds might be distributed to shareholders and other victims of Enron's collapse -- setting up a fight over the money.

Lay and Skilling's "accumulated money was gained at our expense," said Rod Jordan, chairman of a group of former Enron employees. The assets "should first be used to return money lost by the employees and only then be used for their defense," he said.

Defense lawyers said they will urge U.S. District Judge Simeon T. Lake III to release most of it to Skilling because jurors acquitted him on nine of 10 insider-trading charges. The defense argued in court papers filed this week that "only a very small portion" of the frozen assets is subject to forfeiture under the government's initial analysis.

"Jeff's not trying to get rich off anything," his lawyer Petrocelli said in an interview. "He's got child-support obligations, legal obligations from the sentencing and the appeal, and hundreds of civil lawsuits to defend. . . . He wants to take care of his family and his lawyers."

Justice Department prosecutors on Wednesday reiterated their desire to seek Skilling's assets and said they would file a motion for a money judgment against Skilling by the end of June. Despite his acquittal on most of the insider-trading counts, prosecutors said, the jury convicted Skilling of 19 other charges, including engaging in a conspiracy to prop up Enron's stock price and enrich himself. To win a forfeiture action, prosecutors must prove by a preponderance of evidence that assets are proceeds of the conspiracy.

The single biggest expense in any trial, according to legal experts, is personnel.

"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.

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