More than one Enron official warned company about growing crisis

One staff lawyer grew so worried, he secretly hired an outside law firm to review the company's murky business partnerships. Another executive was reassigned after raising alarms.

By Jake Tapper

Jan 18, 2002 | In recent weeks, Enron executives have insisted that their controversial -- and ultimately disastrous -- accounting strategies were legally vetted. But Salon has learned that a law firm hired secretly by one of Enron's own attorneys last year recommended that the huge energy trader stop setting up the financial instruments whose exposure later drove the company into bankruptcy.

At the heart of the Enron scandal are a series of complex partnerships that Enron employed to keep billions of dollars of debt off its books -- thus boosting both its quarterly profits and its credit level. Enron executives participated in these partnerships, earning millions of dollars in management fees and raising major conflict-of-interest issues.

Embattled Enron CEO Ken Lay has attempted to justify the partnerships by noting that Enron's own staff attorneys as well as those at Vinson & Elkins, its powerful outside law firm, signed off on them. Despite this legal advice, it was reported earlier this week that one Enron executive, Sherron S. Watkins, raised serious questions about the propriety of the partnerships in a memo sent to Lay in late August. Salon has now learned of two other major instances in which Enron executives were told by company colleagues that the partnerships were deeply troubling and possibly illegal.

In one case, an Enron staff attorney took the extraordinarily unusual step of secretly retaining another outside law firm to evaluate the legality of the partnerships set up by then-chief financial officer Andrew Fastow.

Last summer, before Enron was forced to reveal the actual state of its finances, Fastow moved to set up more of these partnerships. But Fastow's plan was blocked when an Enron attorney named Jordan Mintz took matters into his own hands. According to sources inside Enron, Mintz, who had just moved from the company's tax department to its finance department, was so concerned about the questionable nature of the partnerships -- and apparently so worried that Enron's attorneys were too close to the business schemes to judge them correctly -- that he sought a second legal opinion.

Without the knowledge of his boss, Enron chief counsel James Derrick Jr., Mintz hired an outside firm far removed from Enron and its Houston-based firm, Vinson & Elkins, to take a fresh look at the questionable deals. After reviewing the partnerships, the respected New York firm hired by Mintz -- Fried Frank Harris Shriver & Jacobson -- recommended to him that Enron stop setting up the shell partnerships. The New York firm's opinion prompted Mintz to write internal memos to company executives urging Enron to halt the practice -- which they apparently did. In October, Enron fired Fastow. Last month, he hired celebrated attorney David Boies, who represented Vice President Al Gore during his Florida recount battles.

Contacted Wednesday night, Mintz declined to comment, citing attorney-client privilege. When asked about the Mintz retention of outside counsel, Mark Palmer, an Enron spokesman, said "this is the first I've heard of that" and declined to comment further. A spokesman for Fried Frank did not return a call for comment.

Without specifically confirming the Mintz episode, House Energy & Commerce Committee spokesman Ken Johnson said that worried Enron executives did go outside the company for legal advice: "(This) happened in a couple instances. There was more than one person who was spooked by these partnerships."

It is unusual for a corporate lawyer to go behind the back of his boss, the chief counsel, and retain an outside firm to do work for a company. And it was against standard operating procedure at Enron, where chief counsel Derrick had to approve of any outside legal work. But Mintz apparently thought that Derrick, who had worked at Vinson & Elkins before joining Enron, was too much a part of the company's closed culture, in which dubious business practices had become the norm.

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