Partners to the End?

Some attorneys point out that limited partners could not have knowingly violated their fiduciary responsibility to Enron's investors — unless they knew a partnership was backed by Enron stock. But the fact is, the SPEs were evaluated by at least one rating agency, and according to an analyst at that agency, the rating specialist took the Enron collateral into account when assessing the partnership.

For his part, Grossman finds it hard to believe that Enron's third-party investors weren't aware of Fastow or Enron's identity. In the case of LJM, Grossman notes, the limited partners had to qualify as sophisticated investors to be eligible to participate in private placements (under federal law, only qualified institutional investors can participate in certain types of private placements). Hence, Grossman argues, they had to know that Fastow was CFO of Enron. And, as qualified institutional buyers, they would be well aware that Fastow was in breach of his fiduciary responsibilities to Enron since he stood to benefit financially from these special purpose entities. Indeed, the Enron CFO ultimately earned more than $30 million from running the SPEs.

Grossman also argues the third-party investors could not have reasonably believed that Fastow could serve both Enron investors and the SPE investors equally well. In addition, he claims the partnership documents pointed out that the limited partners would benefit from Fastow's position as Enron's CFO.

Some attorneys contend, however, that limited partners in an off-balance-sheet partnership can't be liable for fiduciary liability — unless they know that the partnership should have been consolidated. Even then, say these lawyers, the investors' liability would be limited to their investment. In the case of the Fastow-led partnerships, those investments are likely vapor at this point. Grossman's argument "sure sounds like a stretch to me," says Steven Toll, a partner in the law firm of Cohen, Millstein.

But another securities lawyer, Stephan Haimo of Gibson, Dunn & Crutcher, notes that limited partners that exceed their role by acting as promoters of a partnership (or related partnerships) may open themselves up to liability beyond that of a limited partner. "You'd have to prove a vast conspiracy," says Haimo, "and I don't see it going that far, because you're talking about bringing down the entire investment banking community."

Of course, nobody thought one of the world's largest and richest corporations would collapse almost overnight — and all due to a change in the company's accounting practices. In the coming year, concedes Haimo, "we'll be testing all kinds of legal theories."

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