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Teaching Enron

98 Pages Posted: 9 Nov 2005  

Milton C. C. Regan, Jr.

Georgetown University Law Center


The word "Enron" has become shorthand to refer to corporate wrongdoing in the first years of the twenty-first century. Aside from the dizzying heights from which it fell, Enron was notable for the intricacy of the misbehavior in which it engaged. The company created elaborate organizational structures, often with multiple layers of control, that were intended to use legal form to disguise economic substance.

Such manipulation of form obviously required the services of many lawyers. Transactional lawyers in particular have expertise in fashioning elaborate permutations of form that the law will honor, even if the result is not entirely congruent with underlying economic substance. It's reasonable therefore to assume that lawyers' fingerprints were on Enron's arrangements perhaps more than in any other recent corporate scandal.

Much of the commentary on Enron's attorneys has focused on whether these lawyers violated ethical rules or other legal provisions, and on how the law governing attorney conduct might be strengthened to prevent future transgressions. This commentary generally has been thoughtful and valuable as far as it goes. The application of legal rules, however, is triggered by the existence of certain facts - and the perception that these facts exist is the result of a complicated process. This suggests that we may gain particularly rich insights into the complexity of ethical judgment by trying to understand circumstances as lawyers themselves may have seen them. Proposed transactions don't come labeled as problematic and intricate legal structures rarely are obviously fraudulent. Those characterizations are conclusions that are the product of a complex process of perception that organizes information in particular ways based on factors such as situational cues and personal predilections. Behaving ethically requires cultivating powers of perception that are sensitive to and recognize events that carry ethical significance.

Gaining an appreciation of the circumstances in which a given set of lawyers operated can be difficult, because it requires access to details about the texture of practice that often are unavailable. In the case of Enron, however, the Bankruptcy Court appointed an Examiner to review many of Enron's transactions. Of particular interest, the Examiner's final report contains an Appendix that discusses possible causes of action that Enron might have against its inside and outside legal counsel, along with potential defenses to these claims.

The Examiner's reports constitute one of the most detailed accounts available of the activities of transactional lawyers as they worked on matters that later were deemed fraudulent, in some cases criminally so. This article discusses several transactions that the Examiner scrutinized. These represent only a portion of the transactions that the Examiner analyzed, but constitute a large number of the transactions with respect to which he focused on the conduct of attorneys. My aim is not to evaluate these attorneys' possible liability. Rather, my goal is to try to imagine the world as these lawyers may have seen it at the time the events unfolded. What influences shaped their perception of what was occurring? To what situational cues were they sensitive or blind, and why? How might they have interpreted information that in retrospect seems incriminating? What precisely does it mean, in other words, to say that Enron's lawyers "blessed," "signed off" on, or "approved" the company's transactions? Are these conclusions consistent with how the flow of events unfolded?

Addressing these questions ideally will shed light on broader issues. When are circumstances likely to suggest that an ethical question has arisen? What kinds of factors enhance or obscure the ability to recognize this? What rationalizations tend to be available in what circumstances which provide reassurance that nothing is amiss?

The article suggests that transactional lawyers may face a distinctive ethical challenge because their stock in trade is the creative manipulation of legal form. Law's tolerance of some divergence between legal form and economic substance helps create a background assumption that such divergence is normal and not problematic. At some point the divergence becomes wide enough that the law will treat it as fraud. The working assumption that divergence is normal, however, means that it may take something striking for a transactional lawyer to conclude that this point has been reached. When we add the common tendency to engage in self-serving rationalization to the picture, the perceptual problem becomes even more challenging. My hope is that engaging in a close analysis of the work of Enron's lawyers on specific transactions will suggest how Enron might be used as a case study that makes lawyers and law students more sensitive to the process of exercising judgment in ambiguous situations in which wrongdoing is not apparent on its face.

JEL Classification: K20, K22

Suggested Citation

Regan, Jr., Milton C. mname, Teaching Enron. Fordham Law Review, Vol. 74, December 2005; Georgetown Law and Economics Research Paper No. 844191. Available at SSRN:

Milton C. Regan (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9414 (Phone)
202-662-9408 (Fax)

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