Focus: Linklaters, Making both ends neat



The iconic images of Lehman Brothers’ collapse will have been all too familiar to victims of the decade’s other large corporate failure.

Employees leaving the office ­carrying cardboard boxes, traders shouting into telephones and ­millionaire chief executives being hauled before the US Congress to be rebuked like wayward children were all scenes played out in replica eight years ago when energy giant Enron unexpectedly imploded.

The bigger they come…

Both were US companies deemed too big to fail, both sent shockwaves through the global financial system and both were, at the time, the largest corporate collapses in history.

But the similarities do not end there. Behind closed doors the same elite group of lawyers and accountants were called in to unwind the UK businesses of both Enron and Lehman.

Linklaters and PricewaterhouseCoopers (PwC) first teamed up in 2001 for the insolvency of Enron. It was a job so massive that eight years on the legal work has still not been resolved.

Now, precisely the same individuals – restructuring partners Tony Bugg and Richard Holden for ­Linklaters and Tony Lomas and Steven Pearson at PwC – have been reunited to work on an even bigger insolvency – that of US investment bank Lehman.

“We know each other very well,” says Bugg. “That makes a very ­complicated, difficult job much more manageable.”

The same, but different

Bugg maintains that there are ­significant differences between the two mandates, not least in terms of scale. Enron at its height required some 15 partners from the restructuring, ­corporate, employment and tax departments. Lehman is using at least double that.

However, there are enough ­similarities to suggest that Linklaters’ role in the Enron administration pushed the firm up the pecking order when it came to securing the Lehman ­mandate. “There hadn’t really been an ­insolvency that big before Enron,” says an in-house lawyer who used to work for Enron in the UK. “That gave Linklaters a very good springboard to act on other enormous insolvencies going forward.”

Indeed, there is little doubt as to which firm is at the top of the ­insolvency tree. But back in 2001 it was far from certain that Linklaters would be instructed by the ­administrators of Enron.

The firm did already have a ­relationship with the company in the UK, particularly for finance and ­energy trading regulatory work. One example, Bugg says, is the firm’s advice on a doomed project to set up a vast power station in India, the $2.8bn (£1.69bn) Dabhol Power Plant, which turned into one of Enron’s most costly ­failures.

However, Enron used a number of firms in Europe, notably Allen & Overy and Slaughter and May. “It was by no means a given that it would be Linklaters,” says the former Enron insider.
Also, before it finally imploded, Enron was subject to a bid led from the US by rival power company ­Dynegy, which Linklaters was not involved in.

So how did Linklaters come to be selected for the administration?

Bugg says the firm had been giving Enron’s UK arm “high-level” advice for six weeks before the company ­collapsed amid an accounting ­scandal.

It is now understood that the firm provided advice on director ­protection for the managers of the UK ­business, who would have ­needed legal advice on how to conduct ­themselves in case Enron became insolvent. In similar situations, ­company directors often fear they will be prosecuted after the event for trading while insolvent.

“It was implicitly known that ­Linklaters may have had that role,” confirms the former member of the Enron in-house team.

Again, there are echoes of Lehman. Linklaters enjoyed close links with Lehman for more than a decade, and when the bank realised it was in ­trouble towards the end of last year it called in the firm for preliminary advice.

In both cases, it is not certain whether the law firm or administrator was called on first. But it is clear that providing preparatory advice in the run-up to a major insolvency was
key to getting the mandate when ­administrators took over.

Shock to the system

Bugg says that, despite an insight into the internal woes of the two ­companies, it was still a shock when they went into administration.

“Enron was a huge shock, but less of a shock than Lehman,” he recalls. “With Lehman, it sent a shockwave through the entire financial world.”

The former Enron employee recalls that there were indeed signs that the company was foundering several weeks before it failed. Its share price had fallen to such an extent that it
set off built-in equity triggers for investors in Enron’s numerous special purpose vehicles. Then creditors starting calling in their debts.

“We then had to post huge amounts of collateral in fairly short order,” the lawyer says. “There was money ­flowing out of the door but no money coming in. It was very similar to what’s happened to some of the investment banks in the past few months.”

Bugg recalls that the Enron job stabilised quickly. The energy trading business was sold within days and just over a month after the ­company went into administration Centrica bought a large part of Enron’s ­European retail business.

Lehman, by contrast, took many months to get under control, despite the sale of much of the US business to Barclays and parts of the European business to Nomura.

“It’s not growing any more, but it’s still very intensive,” says Bugg. “It still incorporates a significant majority of the people who were involved a year ago. It’s stable but enormously demanding.”

Linklaters, along with other ­European lawyers acting on the Lehman administration, has already earned more than £60m since the bank’s demise. But the final legal bill will be much more if the firm’s ­previous experience with Enron is anything to go by.

Linklaters lawyers settled a major creditor dispute recently, eight years after Enron’s demise. PwC has ­predicted that Lehman’s total wind-up operation will take more than 10 years, and given how much larger and more complex Lehman’s is ­than Enron’s, it could be a lot longer.

“When something of that size ­collapses you just have to deal with it,” says Bugg, summing up his ­pragmatic approach to some of the most challenging legal work ever undertaken. But then, he has been here before.

The fall of enron: an insider’s view

”Being based in Europe I didn’t have much of a view of what was going on in the US. I first got an inkling that Enron was in trouble about five weeks before it collapsed.

“We got the credit questions. We then had to post huge amounts of collateral in fairly short order. There was money flowing out the door but no money coming in.

“It was similar to what’s happened to some of the investment banks in the past few months.

“Still, none of us believed it was going to happen. After about two weeks Dynegy made a bid for us. It seemed that the problem had gone away.

“We were sitting in our offices working away on counterparty issues. Suddenly at 11am on 2 December 2001 we were told there would be an administration order granted in relation to Enron Europe.

“At about 11.30am the administrators came back from the High Court. On my floor, in legal, there were all these people marching around. The administrators said: ‘The best thing you can do is finish and then go for a long lunch. Within 24 hours we’ll tell you which of you we need to keep.’

“It was chaos. I was retained by the administrators but left shortly afterwards.

“A lot of people who worked there would say the same as me. How does a company with so many very good people end up just going down the pan in six weeks?

“The people I worked with were phenomenally good. It was probably the best place I’ve ever worked in my life.”

Former in-house lawyer at Enron’s London office