Posted 4:59 PM by Robert

Why So Modest?


As noted in a prior post, William Lerach of Milberg Weiss has filed a class action civil complaint on behalf of the University of California as lead plaintiff arising out of the Enron failure. The complaint now names many of the largest investment banks in the country as defendants as well as members of the board of directors and senior officers of Enron and many Andersen operatives. The complaint has many odd features indeed.

The complaint is modest in naming defendants. All those commercial and investment banks named as defendants couldn't have accomplished all the fraud and other evil the complaint says they committed without intimate involvement from their own attorneys. Such attorneys normally have a big role in preparing offering documents and have at least as much influence on deals as company counsel - as Mr. Leach well knows. But Vinson & Elkins and Kirkland & Ellis are the only law firms named as defendants - each of them in connection with their representation of Enron or its related parties. Those firms are described in the complaint as if they prepared all the documentation with no assistance from underwriter or bank counsel. That's not usually the way it happens. Why have the underwriter's or bank's counsel not been also named as defendants? After all, the complaint says the banks were fully aware of the frauds they were committing. If so, their lawyers must have known, too. Is Mr. Lerach wary of taking on a substantial portion of the New York financial bar? Failure to name the underwriter and bank counsel suggests that Mr. Lerach does not have the confidence of his overheated complaint. Indeed, the complaint is almost saturated with the notion that every bank or law firm that works on a deal involving a public company has a "duty" to investors who might take losses in the future that can be linked in any way to the advice given by, or the relationship with, the bank or law firm. So why does the complaint draw the line where it does when it comes to naming defendants?

Similarly, the banks and law firms named can and did only act through their human agents - but those agents are not named, although officers and directors of Enron and other companies are named. For example, the complaint alleges that Robert Rubin, Vice Chairman of Citigroup, and William Harrison, Chairman of JP Morgan, both unsuccessfully tried to "stongarm" the bond rating agency, Moody's - apparently by asking in telephone calls that Enron's debt rating not be downgraded. Mr. Lerach seems to feel that this was a corrupt and fraudulent thing for these two men to have done. If so, why is neither of these men named personally as a defendant? Is it their lack of success?

Further, there is no mention in the complaint of what leverage a bank has to "strongarm" a credit rating agency. What are Messrs. Rubin and Harrison supposed to have said to bring pressure on Moody's. Banks depend on the good will of the credit rating agencies. Would Messrs. Rubin and Harrison casually risk the ire of Moody's through the use of "strongarm" tactics when Moody's might be involved in a future downgrade of Citigroup or JP Morgan?

Oddly, no mention is made of Mr. Rubin's controversial telephone call to his former subordinate in the Treasury Department - a call that was reportedly made for the express purpose of causing the Treasury to intervene with the credit rating agencies. The Treasury Department might have had some power to "strongarm" Moody's if Treasury had been willing to go along with Mr. Rubin's request. Mr. Lerach clearly believes that it was somehow improper for Messrs. Rubin and Harrison to call Moody's - so why is Mr. Rubin's call to Treasury not mentioned?

The complaint also names no individual outside attorneys - not even partners of Vinson & Elkins and Kirkland & Ellis. Are the fraudulent legal opinion letters, documents and advice alleged to have been provided by these firms in the complaint supposed to have materialized with no human actually authorizing them? Surely a modicum of investigation by Mr. Lerach would have yielded the names of the individual Vinson & Elkins and Kirkland & Ellis lawyers involved. Why aren't they identified if Mr. Lerach is so sure they did such bad things?

The current complaint is almost certainly not the last version of this complaint that will be filed. Mr. Lerach will undoubtedly amend it further as discovery progresses. But the odd gaps in the complaint structure are curious in comparison to the sweep of its language. Perhaps deals have been cut already - or are being cut - to exclude influential individuals and law firms from being named. Or perhaps naming everyone the language of the complaint insinuates implicitly or explicitly is culpable would expose the complaint's approach as preposterous. But if the complaint is even mostly accurate, it is hard to see how complete justice can be done without naming a lot more defendants.