with attorneys outside the firm on the deals and actions they plan to take. The corporate executives hire the outside counsel for the corporation. However, since the lawyers deal nearly exclusively with the executives, they may feel that their attorney-client relationship is with them. The executives are
of the corporation, which is owned by the shareholders, so the corporate
must remember that they really represent the corporation, not the CEO. This may be hard to remember considering that they negotiate their fees and interact with the CEO, not the board of directors or the shareholders. The outside attorneys could be
of the corporation, but they do not always act like they are.
Typically, law firms act as legal enablers for companies. As enablers, they take no position on the wisdom of business decisions. That is, they provide recommendations that are morally neutral and provide the legalese to justify whatever decisions the executives want to make. Consider the predicament that the law firm Vinson & Elkins is in for its work with Enron. Vinson & Elkins did some of the legal work that set up the offshore partnerships (discussed in Chapter 7) that Enron used to hide debt and falsify revenue. The investment banks found investors to fund the partnerships. Included in this process is a legal opinion letter that effectively states that the transaction in question appears legal and proper. The letter (actually more like a ten-page document) is called a true sale opinion. Vinson & Elkins wrote these
We don't want to suggest that Vinson & Elkins was the only law firm involved in the offshore transactions. There were other law firms participating, like Milbank, Tweed, Hadley & McCloy, and Kirkland & Ellis. In truth, none of the outside counsels to Enron and the partnerships seemed to sound a warning.
Just as we argued that the investment banks (in Chapter 7) had to know that Enron was misleading the public and even committing fraud, the outside counsels also had to know. After all, they were in the middle of setting up the legal structures and negotiated the deals that were used in the deception. Yet they did not warn the board of directors or regulators about the situation.
Indeed, Enron's vice president Sherron Watkins
her bosses in August 2001 that the firm could implode from an accounting scandal. In response, Enron hired a law firm to review her allegations and investigate the partnerships. They
Vinson & Elkins. Watkins was upset about hiring Vinson & Elkins because of the conflict of interest it presented. How could the law firm be
in its findings when it was involved in the partnerships
? Indeed, two months later, Vinson & Elkins issued a report.
It showed concern that the deals
bad and would invoke bad publicity if made public, but it stated that the deals were sound and no further investigation was needed. Typical attorney opinion ”it's bad, but it's good. The executives could then decide that the opinion would support whichever decision they made. Enron
just a few weeks later.
Like the credit rating agencies described earlier, law firms enjoy some special privileges that reduce the chance they will be disciplined for wrongdoing. For example, it is
that the law firms will bear much legal responsibility for the recent corporate fraud ”even though outside counsels were an integral part of the process. This is partly due to a 1994 Supreme
that law firms cannot be sued for merely helping companies commit accounting or financial fraud. Then, in 1995, Congress passed a law that made it harder to sue lawyers directly involved in financial fraud. As a consequence, outside counsel may be less worried about moral and ethical issues when
These laws are being challenged in the aftermath of the scandals as investor groups sue the law firms involved. However, successfully suing lawyers is difficult because much of the evidence is not
in court. For example, plaintiffs can subpoena all Enron documents at the accounting firm Arthur Andersen. However, many of the documents shared by Enron and law firms are protected under the attorney-client privilege. Also, the work-product doctrine
lawyers to withhold documents created in anticipation of litigation. It remains to be seen who the courts deem to be the "client" in this case. If the board of directors and shareholders are the clients, plaintiffs should get the documents. If the executives are the
, the plaintiffs probably won't get the documents. These
allow attorneys to develop legal rationalizations for corporate decisions without fear that the work will be reviewed later in court.
Summary of Attorney Problems
In contrast, corporate lawyers could be trusted counselors who prevent clients from committing criminal or immoral acts. As trusted counselors, lawyers would act as officers of the court to protect the stakeholders of a firm. However, this would require a significant shift in the profession. Several things need to change. First, it must be clear that when a company hires attorneys, it is the shareholders (represented by the board) who are the clients. While the lawyers mostly interact with the company's executives, their fiduciary duty is to the shareholders. Second,
of the profession need to be held more accountable for their actions. If attorneys aid a firm in committing financial fraud, they should be held responsible for their role. Once the law firms become focused on the real client, shareholders, and are held accountable for their actions, they are more likely to become trusted counselors instead of legal enablers.