Andersen, U.S. Meet to Resolve Criminal Charge

After weeks of heated rhetoric between the two warring sides, the Justice Department and accounting firm Andersen’s top attorney met Friday in a stepped-up effort to resolve a criminal indictment that has thrown the firm’s future into jeopardy.

The meeting, the first between Justice and Andersen lawyers since the accounting firm was indicted on a charge of obstruction of justice March 14, signaled the possibility of a settlement even though sources said no deal is expected imminently.

Andersen “requested the meeting, and we said, ‘OK, we’ll hear you out,’” said a Justice Department official who asked not to be identified.

Andersen was represented by its top defense lawyer, Houston-based Rusty Hardin, who did not return calls seeking comment.

Andersen, indicted for shredding documents related to its audit of Enron Corp., also is working to settle claims with Enron shareholders who lost billions of dollars in the company’s collapse.

In recent days, the accounting firm has broached the idea of paying $300 million to Enron shareholders who sued Andersen for its role in auditing Enron’s books, sources said. About $250 million would come from Andersen’s insurance carrier, and $50 million would be funded out of Andersen’s revenue.

The proposed payment is less than half the $750 million that Andersen offered several months ago. The amount has been slashed as doubts have grown about Andersen’s ability to stay in business.

However, there are several stumbling blocks in reaching a deal, sources said.

The plaintiffs worry that an accord with Andersen could limit their ability to collect large sums from other potential legal targets, such as investment banks and law firms, sources said.

If Andersen paid only a fraction of shareholders’ losses, deep-pocketed banks and law firms that worked for Enron could argue that they should not have to pay more than Andersen.

“You lessen what you can threaten the other defendants with,” said one attorney.

The University of California Board of Regents, the lead plaintiff in a class-action lawsuit against Andersen and Enron’s senior management, is expected Monday to name additional defendants, including several big investment banks.

Some shareholders also say a settlement at this point could prevent them from securing a larger amount if Andersen settles its criminal indictment and improves its chances of staying in business.

Additionally, the shareholders fear that Andersen might not make good on the portion to be paid by the insurance carrier. Andersen’s insurer failed to pay $217 million to settle claims arising from the firm’s audit of the Baptist Foundation of Arizona. The insurer said it could not make the payment because Andersen had missed a $100-million premium payment.

“There are serious issues with respect to Andersen’s insurance,” one lawyer said. “You saw what happened with the Baptist case.”

Andersen has called the criminal charge a “death penalty” for the firm and has mounted an aggressive public relations campaign in its defense.

The Justice Department fired back in a court filing last week, calling Andersen’s attack “another in a series of efforts [by Andersen] to manipulate the pace and timing of the government’s investiga- tion.”

Federal authorities have maintained for weeks that they are open to a settlement, so long as the accounting firm meets certain conditions, including meaningful reforms, cooperation in the Enron investigation and full acceptance of responsibility.

Though the Justice Department has been unwilling to say exactly what steps Andersen would have to take to meet those criteria, a representative said Friday that even after the day’s meeting between opposing lawyers, “our position has not changed.”

Such meetings between federal prosecutors and criminal defendants are not unusual, particularly in complex white-collar crime cases, but legal observers said it could signal that the sides are increasingly willing to reach a compromise before a May 6 trial.

“I think both sides are thinking of meeting in the center,” said Columbia Law School professor and legal commentator John C. Coffee, a securities specialist.

Coffee said he thinks the most likely ending in the case will be a “deferred prosecution,” meaning that Andersen would not have to plead guilty to any criminal charges but would essentially be put on probation for a number of years with certain restrictions placed on its conduct. If it meets those conditions, the charges then would be dismissed.

“The great advantage for Arthur Andersen is that because this is a deferral and not a conviction, this would not trigger the automatic disbarment rule” before the Securities and Exchange Commission or states in which Andersen does business, he said.

For the Justice Department, such a deal would allow it to avoid going to trial, while at the same time enable it to use Andersen’s admission of responsibility against the firm should Andersen violate the terms of its probation, he said.

But Paul Fishman, a former Justice Department prosecutor who now specializes in white-collar defense, said he doubts the two sides will be able to work out a deal.

After getting an indictment from a federal grand jury, the Justice Department may not want to look like it is backing down and risk sending the wrong message to future corporate defendants, he said.

Andersen wants the criminal charges thrown out, “and the department has a lot of leverage as to what conditions they could exact,” he said. These could include the imposition of a government auditor--a more severe step than the rescue plan offered by former Federal Reserve Chairman Paul A. Volcker--as well as substantial civil fines and Andersen’s commitment to waive attorney-client privilege and turn over all the information it has in the Enron case, Fishman said.

Such restrictions could prove onerous for Anderson, Fishman said.

“I’m still skeptical the department would be willing to do it for anything less than a fabulous package, but it’s possible,” he said.

In its effort to restructure, Andersen has an agreement to sell about 50% of its tax practice to Deloitte Touche Tohmatsu, though both parties say details still are to be worked out. And it is unclear how Deloitte can structure the transaction to avoid becoming a target of Enron investors and employees who are pursuing claims against Andersen.

Andersen also has signed a memorandum to sell some of its business in the Pacific Northwest to KPMG.

Both accounting firms declined to comment on the KPMG deal, but a source familiar with the discussions said Andersen’s client erosion in the Pacific Northwest has been heavier than in other regions. The sale of offices in the region would give partners a chance to transfer to a new company but to continue to work for their former clients in some cases, the source said.

Other groups of Andersen partners are pursuing different deals within the United States, a process that is threatening to splinter the firm and endanger the efforts by Volcker to keep Andersen in business.

However, many Andersen tax partners, especially those in the tax practice who believed they would be free to join Deloitte & Touche or craft their own deals, were frustrated by the recent moves of several insurers who are plaintiffs in the class-action lawsuits to block any deals.

Galveston-based American National Insurance Co., and several other insurers will go to federal court in Houston Monday asking U.S. District Judge Melinda Harmon to issue a temporary injunction to prohibit Andersen from selling assets or transferring them to foreign subsidiaries or affiliates.

The insurers fear these series of transactions will dissipate Andersen’s assets without putting money in a pot to pay claims resulting from its work for Enron.

Attorney’s involved in the class action lawsuits plan to filed an amended and consolidated complaint in Harmon’s court Monday. This new complaint will expand the case to include other parties who did work for Enron, including J.P. Morgan Chase & Co., Citigroup’s Salomon Smith Barney and Credit Suisse First Boston.

Spokesman for J.P. Morgan and CSFB refused comment. A Salomon spokesman could not be reached on Friday.

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Hamilton and Hirsch reported from Los Angeles, and Lichtblau reported from Washington.