Corporate Fraud: See, Lawyers
Koniak, Susan P., Harvard Journal of Law & Public Policy
I. INTRODUCTION II. LAWYERS, LIES AND MARKET-GATE III. THE LAW-FREE ZONE IV. LIES OR CONSEQUENCES V. CONCLUSION POSTSCRIPT: JANUARY 26, 2003
The accounting profession must bear a good deal of responsibility for the current wave of corporate scandals, as must those CEOs whose watchword was greed, lackadaisical directors, projections-for-hire investment analysts, banks selling methods designed to deceive, and institutional investors asleep at the switch. One set of villains, however, have managed thus far to float beneath the radar screen and thus escape the lion-sized portion of blame that should rightly be laid at their door: lawyers.
The hidden dirty secret of corporate scandals is that without lawyers, few corporate scandals would exist and fewer still would succeed long enough to cause any significant damage. No reform directed at other groups or institutions that is enacted by Congress, the SEC, or any other body, private or public, will accomplish its intended result as long as lawyers are allowed to roam in a law-free zone where legal fees know no bounds and the bankruptcy of one firm's corporate client only provides more legal fees to another firm. Some racket: The client disintegrates with its lawyers' assistance and the lawyers need to pay back (at most) a token amount of the huge fees they reaped assisting the fraud that brought the client down. Even better: The lawyers get hired by a client, that some other law firm has helped bring down, to fight the SEC, the Justice Department, or creditors in bankruptcy. Perhaps they are hired by institutions victimized by another firm's client, as counsel, for example, to a creditors committee in a bankruptcy proceeding. Even more shocking: Lawyers can do all this with virtually no risk. There is no real prospect of criminal prosecution, SEC enforcement actions or discipline, or state bar sanctions. And best of all: This almost-to-good-to-be-true world that lawyers inhabit is all but impervious to change. As for everybody else? Well, they just have to live with the consequences, however painful those may be.
II. LAWYERS, LIES AND MARKET-GATE
To take my assertions one at a time: Am I right that lawyers are responsible for much of the present travail? Take Enron. Vinson & Elkins, a prestigious Texas-based law firm, and other law firms representing Enron blessed many of the related-party transactions that played such a large role in Enron's demise. (1) I am certain that many of these transactions were fraudulent--meaning they violated civil and criminal law.
Kirkland & Ellis, a prestigious Chicago-based firm, represented numerous Enron-related partnerships--entities with names like Raptor and Condor, names that all but screamed out, "Fraud is going on here." (2) They too blessed related-party transactions that I believe to be fraudulent. Kirkland & Ellis was surely not the only law firm to sign off on behalf of the entities and their big-time investors. Merrill Lynch, for example, marketed those partnerships to big-time investors based on documents that intimated the partnerships were great investments because partners would be privy to inside information concerning Enron. (3) Some set of lawyers and one or more firms had to have approved those marketing documents. To wit, representatives of Citigroup and J.P. Morgan, banks that also appear to have assisted Enron in its hell-bent quest to cook its books, testified before Congress that the shady and, again in my opinion, illegal transactions between the banks and Enron were approved by Citigroup's, J.P. Morgan's, and Enron's lawyers. (4) Further, the First Interim Report of Neal Batson (the court-appointed examiner for the Enron bankruptcy proceedings) makes clear that the accountants sought out and relied on the guidance of lawyers when trying to determine if certain transactions should be booked as sales or something else. (5) In fact, Enron had to provide Andersen with two legal opinions from its outside counsel in order for Andersen's accountants to sign off on the accounting treatment of the transactions. …