“You can only teach ethics to a certain point,” says the high-power attorney and adjunct professor whose  “Lessons of Enron” course has been a sell-out at USC’s Gould School of Law four years running. “Vivid examples are helpful,” he adds.

The best living, breathing example, according to Fairbank, is a “clean-cut guy with a family” named Joseph Shew Jr., who recently pled guilty to securities fraud in the government’s case against Homestore.com, an Internet real-estate sales company.

“I would have liked to bring Joe Shew back to campus,” Fairbank tells students at the beginning of the spring semester. (The disgraced dotcom executive had made a powerful impression speaking at the law school’s “Conversations with the Dean” series last fall.)

Joe Shew would “demonstrate to you, in ways I couldn’t, how realistic it is in a high-flying Internet company to get onto shaky ground,” Fairbank continues. “It is much easier than you think to face the moment of truth and not have the backbone to walk away.”

Unfortunately, Fairbank notes, Shew is currently unavailable: “He is in prison for this class period.”

Open to students from both the USC Gould School of Law and USC Marshall School of Business, “Major Corporate Civil and Criminal Fraud: Lessons of Enron” grows out of a universitywide effort to instill the principles of ethical behavior in all students. As USC President Steven B. Sample said on introducing the Code of Ethics of the University of Southern California in 2004:

“All of us are aware that there have been huge ethical lapses in American business, politics and sometimes even in American higher education. But universities are held to a higher standard than corporations, politicians and political bodies. Why? Because universities last longer than other institutions, and therefore we can have a greater influence on our society.”

At the first class meeting in January, Fairbank warns students: “You may get a great job but that is nothing compared to losing your reputation.” Over the next three months, he gives them case study after case study to drive home the point that “it can happen.”

Since Enron is the centerpiece of Fairbank’s course, he has John Emshwiller, the Wall Street Journal reporter who helped break the story, speak at the first class session and lay out how the fraud developed. Toward the end of his talk, Emshwiller holds up for the students the Houston Chronicle’s blaring headline the day the company’s top executives were convicted.

“GUILTY! GUILTY!”

“That’s how they’ll be remembered,” Emshwiller says. He can’t help thinking that Enron leaders – Skilling, Lay and Fastow – once sat in a class like this.

“I doubt if any of them thought eventually that they were going to become felons,” he muses.

Outside the classroom, Fairbank is on the team of experts advising the University of California Board of Regents in a civil suit against Enron. (UC had heavily invested its pension funds in Enron stock.) A name partner in the Los Angeles law firm of Fairbank & Vincent, the well-connected Fairbank uses his connections to the students’ advantage, inviting a parade of plaintiffs’ counsel, prosecutors, defense counsel and expert witnesses – people he has worked with, or against, in major litigation – to appear in his classroom.

“It’s a team concept,” he says in an interview. “It’s the same way I practice law. I think: ‘If I were a student in the class, what mix of people would I want teaching me all about cutting-edge areas? What kind of people would I like to inspire me?’”

So one week William Lerach, whom Fairbank identifies as one of the country’s leading securities lawyers, stands before the four tiers of students (no one ever sits in the front row) and delivers a tour-de-force history of securities regulation. Senior partner in Lerach Coughlin Stoia Geller Rudman & Robbins, a national firm with 180 lawyers in nine cities, he has represented plaintiffs in the Enron, Dynegy, WorldCom and AOL Time Warner fraud cases.

As Lerach speaks, an assistant illustrates with a PowerPoint slide show. Pictures of 19th-century tycoons, newspaper headlines and court decisions flash on a screen. The development of corporations, he tells the students, offered a “constant potential for abuse” even as it offered the opportunity for terrific legitimate wealth.

The next week Rock Hankin, a plaintiffs’ consultant on the Enron case, walks students through the intricacies of various fraudulent schemes. Along the way, the founder and CEO of Hankin & Co. and Hankin Investment Banking offers some practical advice: “Remember, your e-mail is not your phone. Its contents can come back to haunt you.” Hankin drives home the point by reading aloud e-mails and memos from Merrill Lynch brokers that clearly indicate knowledge of ongoing scams in the Enron case.

Fairbank’s speakers are not only in the middle of current litigation. They are also “the best people at what they do,” says Sven Kaludzinski, a third-year law student who took the class last year.

“You get the most famous plaintiffs’ attorney or the person who authored the bankruptcy code. No two class sessions were ever the same.”

In addition to those named elsewhere, Fairbank’s regular guest speakers include Judge Lawrence Irving, defense lawyers Marshall Grossman and Ken Klee, and prosecutors Doug Fuchs and Mike Wilner.

Sometimes Fairbank interjects a footnote from his own experiences with the national law firm of Gibson, Dunn & Crutcher, and later, his boutique practice in West Los Angeles.

“Be home and be available,” he advises the students, recalling the night Joseph Shew called him out of the blue. The chief financial officer of Homestore.com needed an attorney fast: he was scheduled to be interviewed by Homestore.com investigators the next day. (During the dotcom boom, the company had inflated revenues by millions of dollars, using so-called “round-trip” transactions to flow cash through a network of vendors and third-party advertisers.)

Fairbank drove across town that same night to meet with his new client. He ended up handling much of Shew’s defense, teaming with white-collar criminal attorney Terry Bird of the specialty litigation firm Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg. (A former federal prosecutor, Bird also speaks to the “Lessons of Enron” class.)

Shew cooperated with prosecutors and only got a six-month sentence.

One of those prosecutors was Jessica Rigley Puathasnanon, an attorney with the Securities and Exchange Commission. She, too, regularly makes an appearance in Fairbank’s class – in part to prove that appearances are deceiving.

Unlike the other speakers, Puathasnanon could pass for a student. It’s good for the class to hear from someone closer to their own age, Fairbank believes. Seeing the young litigator shatters any illusions they may harbor about “cowboy” prosecutors.

She describes her experience as she sat through the sentencing hearings in the Homestore.com case not as vindication but as a painful duty. “It’s a sobering thing,” she says of sending someone to prison. “It teaches you to be careful, and be cautious and be human.”

Stereotypes don’t fit defendants any more readily than they do prosecutors.

Accounting frauds, Puathasnanon tells the class, are often committed by smart, highly educated people. “They are people you’d have dinner with. You’re looking at people who are very similar to yourself, and that’s hard.”

Other classes in the law and business schools, and elsewhere across USC’s two campuses, also seek to give students a moral compass to guide their footsteps through the corporate wilderness. Cecil Jackson of the USC Leventhal School of Accounting offers a course on detecting fraudulent financial reporting. C. Kerry Fields, associate professor of business law and ethics in the USC Marshall School, includes an ethics case study in virtually every period of his class – “whether it’s business law, employment law or real estate law.”

Professional ethics isn’t only about knowing what conduct to avoid. It’s also about actively pursuing the common good – the literal meaning of pro bono.

Marshall School associate professor Sandra J. Chrystal, who teaches advanced writing for business, places more emphasis on ethics than just one major term paper on the subject – although that is required. She has her students learn first-hand about corporate responsibility by assigning them to work in teams with local non-profits. The business students help the community organizations prepare press kits or write grant proposals, and Chrystal expects each student to write a persuasive argument soliciting the financial support of a Los Angeles business.

In the eight years she has taught the course, 50 organizations have benefited. “Students are learning and helping at the same time,” Chrystal says.

“To some extent, I’m a believer that everything you need to know you learned in kindergarten,” says Kenneth Merchant, who holds the Deloitte & Touche LLP Chair of Accountancy in the Leventhal School and teaches about corporate governance and ethics. “So if you catch students early, you can change their lives” by teaching them the ethical way.

The purpose of teaching ethics “is not to encourage good behavior,” adds Stephen Gillers of New York University, who is a nationally recognized expert on legal ethics.

“People know that to lie to a judge or to cheat somebody is wrong,” he says. “The value of these courses is to explain how intricately subtle the issues are, that you can easily cross the line without intending to.”

Summing it up in a single word, Gillers says, “what you are trying to teach is mindfulness – just being conscious of the detail that goes into life as a lawyer.”

In addition to questioning the experts, student teams in Fairbank’s Enron course dive into the minutiae of a major fraud case – be it Lincoln Savings & Loan, HealthSouth, AOL Time Warner, WorldCom, Cendant, Equity Funding or some other corporate scandal ripped from the financial headlines.

At the end of the semester, each group makes a formal presentation reporting on what happened and making recommendations to mitigate damage. Dressed in business attire for the occasion, the teams address the class, which sits as a corporate board of directors. Fairbank, as board chairman, strictly controls the time clock (“to teach them to be concise,” he says).

For his presentation, Sean Kundu, a third-year law student who enrolled in the Enron course last year, dissected the business accounting side of HealthSouth.

In 2002 CEO Richard Scrushy sold $75 million in stock several days before the healthcare services company posted a large loss. The FBI accused Scrushy of directing employees to falsely report grossly exaggerated earnings. He was acquitted on all 36 of the accounting fraud counts, but was convicted on bribery charges in 2006. “There was blatant lying going on,” says Kundu, summarizing his team’s findings.

“It was exciting to learn from start to finish how these cases come together,” he adds. “There was a big picture aspect. You don’t get a lot of that in law school. You tend to have tunnel vision.”

In the spring 2007 class, almost two-thirds of the students are women. Fairbank invites the students to speculate why. Are women more ethical? Are they more likely to be whistleblowers?

Few are willing to venture a guess during the class, but in an interview afterwards, Fairbank conjectures that whistleblowers Sherron Watkins of Enron and Cynthia Cooper of WorldCom, both of whom Time magazine named as 2002’s “People of the Year,” have served as important role models.

Second-year law student Tracey Chenoweth isn’t so sure.

“Ms. Watkins actually sold tens of thousands of shares of Enron stock just before the bankruptcy,” she says. “I’ve always wondered why she was never prosecuted for insider trading.”

Chenoweth, who worked for a global consulting firm after college and is now a law clerk at an investment research and management company, thinks “the real reason we haven’t seen many corporate scandals involving companies with female leaders is that there just aren’t that many companies run by women.”

Many of the major fraud investigations Fairbank covers are still in litigation, including Enron. While the criminal trials against the defunct energy company are completed, the civil portion “is very much alive.”

Three of the largest banks that financed Enron with questionable deals have already settled for $6.6 billion with the UC Regents. But several others had not done so and appealed the class action certification by a lower court, arguing the class is too broad and represents too many issues. In March, a federal appeals court in New Orleans ruled in the banks’ favor, finding that “they owed no duty to Enron’s shareholders.” William Lerach, who represents the plaintiffs, said he planned to appeal the decision to the U.S. Supreme Court.

Another case evolving as the “Lessons of Enron” class met in the spring was the Homestore.com fraud – the one in which Joseph Shew had cooperated. CEO Stuart Wolff had been tried and convicted during last year’s class: he drew a 15-year prison sentence. In February 2006 Joseph Cotchett (also on the class speaker’s list and considered one of the nation’s best trial attorneys) had represented the lead plaintiff in a Ninth Circuit appeal.

The complaint comes from the California State Teachers’ Retirement System: it challenges a lower court decision limiting liability of companies that had done business with Homestore.com, such as AOL Time Warner. The litigation involves a complex argument called “scheme liability,” which might end up before the U.S. Supreme Court; two appellate courts have already made conflicting decisions.

A third pending case involves the backdating of stock options – an issue Fairbank didn’t cover last year because it had not yet surfaced. Apple Computer founder and CEO Steve Jobs has since publicly apologized to stockholders for turning a blind eye to the practice. Meanwhile, federal prosecutors and the SEC have filed criminal and civil complaints involving backdating against former officials of two technology companies, Brocade Communications Systems and Comverse Technology.

Fairbank’s class grew out of a conversation with Rock Hankin about the joys of teaching. Hankin had been an adjunct professor in UCLA’s Graduate School of Management; Fairbank, the son of a Stanford physicist, had always dreamed of trying his hand at teaching.

“Being a full-time academic wasn’t for me,” he says. “But I thought I could find a subject I knew about and could teach students. This is truly a labor of love.” 

Hankin and Fairbank team-taught the course at USC in 2004 and 2005; Fairbank has taught it solo ever since.

The idea was to enroll students from both the business and the law school; they would bring different but complementary knowledge bases and experiences that would make the class richer. “One [group] can teach the principles of the law to the other,” Hankin says. “The other side can explain how business works.”

John Shenk, who is in the third year of a four-year JD/MBA program, had taken courses at USC Marshall in which accounting schemes and problems were discussed. He signed up for Fairbank’s class this spring because he wanted to study the issues from a legal perspective – “given that I might be in situations like these,” he says, “so I’ll know what to avoid.” He also wanted to understand the bigger political and economic issues that possibly drive companies to be less than scrupulous.

Third-year law student Sven Kaludzinski, who took Fairbank’s class last year, brought with him a fair amount of real-world experience. He had worked on Wall Street for eight years and “understood the cynicism of the business community,” says Fairbank.

Yet even Kaludzinski was taken aback by what he learned.

“Before taking this class – before Enron – I probably would not have asked some of the questions I would now,” says the 1994 Tufts graduate who did graduate work in economics and international relations at Columbia before entering USC’s JD program.

“If you’re 23, 24, and the job market is tight and, say, your boss tells you not to worry about something you’ve asked about – that ‘it’s taken care of’ or ‘the managers have discussed that.’” Once upon a time Kaludzinski might not have pursued the question further. Now, he says, “an answer such as that is not going to be good enough.”

“I like to think that because of Fairbank’s class, I’d make the right call. But there are a lot of gray areas.”

Will the lessons from “Lessons of Enron” last 20 years out, when graduates are in a position to commit high-level fraud? Accounting professor Cecil Jackson believes they will.

“You don’t suddenly wake up 20 years down the line and commit a crime,” he says. Misconduct crops up early in a professional’s career.

“Crime, especially white-collar crime, always begins with small steps down the slippery slope,” Jackson notes. “And those small steps begin in the first job, if they’re going to be there at all.”

He offers a tip to entry-level professionals: The best time to resist a dubious instruction is the first time the boss gives you one.

“You’re not compromised at all then,” Jackson explains. Once you submit, it’s harder to say no the next time: the boss can argue you’re already involved.

Fairbank supplements a required USC course on legal ethics, which prepares law students for a professional responsibility exam. “That course tends to be pretty dry,” notes law dean Edward J. McCaffery, and can have the unintended consequence of making students skeptical whether ethical issues really will come up in their practices. “Lessons of Enron” shows them that it really does happen to flesh-and-blood human beings.

Like Joseph Shew.

Fairbank’s involvement in the ongoing Enron and Homestore cases “gives you an idea of the currency, the contemporaneousness of the course,” McCaffery says. “We’re seeing important law being made right in front of us – and some of the participants are speaking to his class.”

You’d think it would be hard to get top prosecutors and defense attorneys to take the time to speak to a group of USC law students. But you’d be wrong.

“I think the great lawyers all want to give back to the legal profession,” says Fairbank, adding that “100 percent of the people I have asked have said yes.” They come at their own expense. “When you are practicing law, it’s fun to do something different than practice.”

In the spring of 2006, at the height of the criminal trial of Enron chiefs Jeff Skilling and Kenneth Lay, lead prosecutor John Hueston made a successful presentation to a Houston jury leading to their convictions. In February of 2007, Hueston’s talking about Enron again, this time in Fairbank’s class.

With the trial over, he can talk about courtroom strategy: The case hadn’t been about accounting, he tells them – as he had told the Enron jury last year. “It’s about lies and choices.” Afterwards, students expressed their appreciation of how Hueston – now a private attorney with Irell & Manella – had simplified the case, both for the jury and for them.

 “I like speaking with students,” says Lerach, the plaintiffs’ attorney in class action suits against Enron and Dynegy and a regular in Fairbank’s class. “When they’re in law school, they can’t appreciate how the craft will be wed with economic realities. That’s what they’ll face.”

Not only does Lerach talk about the history and practice of securities law. He also makes a prediction about the future:

“I guarantee you’ll spend a lot of your professional life on this,” he tells the students, pausing for effect. This turns out to be “the impending collapse of worldwide and private pension systems.”

In the Great Bull Market of the 1990s, companies curtailed their contributions to pension funds and took money out of the plans. Those plans were fully funded as long as the stock price stayed up. Businesses had assumed that equity gains would keep going. They were “robbing the plans to boost current corporate earnings,” Lerach says.

As 77 million baby boomers are about to retire, those pension promises are coming due. But most corporate pension plans are underfunded by billions of dollars. There are not enough workers to pay into the system.

Lerach predicts a “generational war” fueled by the demands made on younger people to fund the retirements of older people. “How much are you going to be willing to sacrifice to provide three cars and two-home retirements for baby boomers?” he asks. “A lot of retirement promises are going to be broken.”

Yet CEOs have received gigantic pensions immune from bankruptcy proceedings, he notes.

“Fairbank and I are going to play golf together and you guys are going to have to deal with this problem,” he tells the students. “There will be a hell of a lot of litigation before it’s over.”

Fairbank laughs at Lerach’s comment.

The idea of this hard-driving lawyer leaving the stage seems unthinkable.

“I can’t imagine either Bill Lerach or me retiring,” he says. “We’ll outlast some of the students.”

If you have questions or comments on this article, please send them to magazines@usc.edu.

Kay Mills is a Santa Monica-based freelance writer and author of Changing Channels: The Civil Rights Case That Transformed Television (2004) and This Little Light of Mine: The Life of Fannie Lou Hamer (1994).