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Look Who's Left Standing
Legal Penalties in Frauds Are Seldom Paid by Legal Advisers

By Carrie Johnson
Washington Post Staff Writer
Thursday, August 31, 2006

Four years after regulators launched a task force to stamp out business corruption, numerous chief executives are on their way to prison, two of the nation's biggest accounting firms are defunct or on probation, and investment banks have shelled out billions of dollars in settlements.

But lawyers serving fraud-ridden companies have emerged relatively unscathed.

Unlike the accounting profession, forced by the Sarbanes-Oxley Act in 2002 to submit to independent oversight, lawyers have generally ducked proposals that would have forced them to blow the whistle to outsiders.

On an individual level, law firms that dispensed bad advice or failed to act on red flags mostly have avoided prosecution, in contrast to their brethren in the accounting industry. Arthur Andersen LLP met its demise after a 2002 conviction, later overturned, of obstructing justice in the Enron Corp. case. Rival KPMG LLP operates under a form of probation for selling abusive tax shelters.

Nor have securities regulators pursued sweeping civil cases against groups of law firms, seeking to determine if they may have performed shoddy work or ignored fraud under their noses. Compare that with a group of leading investment banks, including Merrill Lynch & Co. and J.P. Morgan Chase, that handed over $1.4 billion in 2002 to settle accusations that their analysts produced overly optimistic research reports to help win business for the banks. Several banks later ponied up billions of dollars more to resolve shareholder accusations that they had helped companies disguise financial problems.

"There's every reason why lawyers acting as gatekeepers ought to be held responsible for failures to carry out clear legal mandates," said Harvey J. Goldschmid, a former member of the Securities and Exchange Commission who now teaches at Columbia University School of Law.

Lawyers, of course, enjoy broad privileges that prevent them from sharing client confidences. But courts have held that exceptions can be made in cases where fraud or other crimes have taken place. And the legal privilege would give little cover to attorneys if they broke the law by actively covering up accounting schemes, funneling money to themselves and their bosses or tampering with documents.

To hear many lawyers tell it, the regulatory environment has grown far more harsh in recent years. Indeed, the former general counsel of Computer Associates International Inc. pleaded guilty in 2004 to conspiracy and obstruction of justice in part for misleading investigators, and the former top lawyer at Rite Aid Corp. was convicted by a jury in 2003 for helping his boss backdate compensation documents. Onetime lawyers at General Re Corp. and Hollinger International Inc. are awaiting trial on charges that they failed to blow the whistle on problems that came to their attention.

"The trend line evident in the last 12 months is that both SEC regulatory sanctions and criminal prosecution of inside counsel are increasing sharply," John K. Villa, a defense lawyer at Washington's Williams & Connolly LLP, wrote in a recent trade journal article.

Yet compared with the treatment of accountants, investment bankers and corporate leaders, very few lawyers have been sanctioned, and they have been among the last to be called to account.

For example, Villa compiled statistics showing that the SEC's enforcement unit pursued civil charges against 34 lawyers between 2002 and mid-2006, and prosecutors filed criminal charges against 13 in-house lawyers during the same period.

In comparison, nearly three dozen executives, accountants and bankers have faced charges in connection with the Enron case alone since the Houston energy trader collapsed in December 2001.

To date, no high-ranking internal lawyers and none of Enron's outside legal advisers have faced either civil or criminal charges. The lawyers' actions drew the interest of a bankruptcy trustee, however. The trustee concluded in 2003 that Enron could bring a case against five attorneys who likely had violated their professional responsibilities and failed to sound alarms about improper business practices. One of the lawyers, Kristina Mordaunt, personally profited by nearly $1 million after investing in questionable deals arranged by Enron's finance chief.

Former general counsel James V. Derrick Jr., testifying for his former bosses Kenneth L. Lay and Jeffrey K. Skilling this year, told a jury he had done nothing wrong during his tenure at the company and said he was proud of his service. Derrick, who has been dismissed as a defendant from most of the shareholder lawsuits filed against Enron executives, also said he had been questioned under oath by SEC lawyers earlier this year, a signal that regulators still may be reviewing the conduct of lawyers who worked at Enron and those who acted as outside advisers.

Separately, Vinson & Elkins LLP, a law firm that Derrick hired to vet many of Enron's deals, is facing a lawsuit alleging that it whitewashed the internal investigation into claims by former executive Sherron Watkins, who warned Lay that the company could "implode in a wave of accounting scandals."

Between 1997 and 2001, Vinson & Elkins earned $162 million in fees from Enron, according to trial testimony. Vinson lawyers privately expressed concerns about some of the Enron deals they reviewed, according to e-mail and voice mail messages cited in the shareholder lawsuit. Earlier this year, without admitting wrongdoing, Vinson agreed to pay Enron a total of $30 million to avert another lawsuit over its past work for the company.

Several lawyers employed by or doing work for these companies declined to comment through their own attorneys or other representatives, preferring to remain silent or let the public record speak for them.

Experts say there are significant obstacles to bringing charges against a lawyer or a law firm. First among them: Lawyers often are a layer or two removed from the decision-making roles in striking deals, dictating accounting policy or preparing corporate financial statements, said Michael J. Missal, a partner at Kirkpatrick & Lockhart Nicholson Graham LLP in Washington.

Moreover, at companies engaging in fraud, there may be a push to conceal information from lawyers so as to avoid detection. Lawyers also can defend themselves by saying that they relied on the word of top executives in collecting bonuses and other payments, as former Tyco International Ltd. general counsel Mark A. Belnick successfully argued to a New York jury that acquitted him of larceny two years ago.

The law itself poses complications. In order to protect communications between lawyers and their clients and to preserve the flow of information, attorneys enjoy broad protection from claims that they gave bad advice so long as they offered it honestly. That means prosecutors usually must seek cases with evidence of clear criminal intent: ones when lawyers personally profited, destroyed documents or misled auditors (as court papers say in the case of former Comverse Technology Inc. general counsel William F. Sorin, who was charged this month in a criminal complaint).

"People perceive the law as being certain and precise and mathematical, but it's really not," said Deborah J. Jeffrey, a defense lawyer at Zuckerman Spaeder LLP in Washington who also serves on a local disciplinary board for attorneys.

Moreover, federal authorities often defer to the states, which regulate attorney conduct, said Lawrence Byrne, a defense lawyer at White & Case LLP in New York. The local authorities, in turn, tend to focus on cases in which impoverished or elderly clients complain about poor service or inflated fees.

The only large law firm to face criminal charges in recent years, New York-based Milberg Weiss Bershad & Schulman LLP, is not under fire for its legal advice, but rather for a system in which it allegedly paid a small group of people to serve as plaintiffs. Milberg is fighting the charges, even as many of its lawyers have fled to other firms.

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