At Andersen, ‘Deep Pockets’ Become Target
Executives at Andersen may have to pay hundreds of millions of dollars to settle litigation over the Enron Corp. debacle because the accounting firm probably does not carry enough insurance to satisfy what are expected to be massive claims.
Andersen’s 4,700 top managers, known as partners, may lose some or all of their personal investments in the firm, which range from about $100,000 to more than $5million, said insurance, litigation and accounting experts.
“The [total] claims are likely to be somewhere in excess of $10 billion ... and may be $30 billion,” said Mark Cheffers, chief ex- ecutive of AccountingMalpractice .com, which advises accountants on insurance issues.
Andersen’s insurance coverage “is not remotely close to what the potential exposure is here,” he said. “I’m not sure it’s even enough to pay legal fees.”
Andersen representatives declined to comment about the firm’s insurance arrangements.
“The partners must be furious,” said one former Andersen executive, who asked not to be named. “There are a lot of talented people there who had nothing to do with this.”
Chicago-based Andersen is under fire for its accounting treatment of off-balance-sheet partnerships at Enron. The Houston energy trader, which was forced to restate its earnings and shave $586million off its reported profit over four years, filed for Chapter 11 bankruptcy protection Dec. 2.
Andersen has admitted shredding documents and deleting e-mails related to Enron after the Securities and Exchange Commission launched an investigation of the energy company.
The accounting firm is seen by many attorneys as one of the “deepest pockets” in the Enron debacle--in other words, one of the firms most likely to be able to pay the huge settlements expected in the case. Andersen already has been named in numerous lawsuits filed by shareholders and bondholders.
San Diego attorney William Lerach, who has filed a shareholder lawsuit against Andersen, said the financial cost of the lawsuits may drive the smallest of the Big 5 firms into a buyer’s arms but probably not into Bankruptcy Court.
“It doesn’t do our clients any good to bankrupt Arthur Andersen,” said Lerach, referring to the firm by its former name. Andersen “may have to be acquired by a larger firm, but they will survive.”
Andersen employs 84,000 people worldwide, including 1,500 in its Los Angeles office, where clients include Edison International, Metro-Goldwyn-Mayer Inc. and Hilton Hotels Corp.
The accounting firm reported global revenue of more than $9 billion last year. Andersen is a private company that does not disclose financial details such as its net worth or how much equity its partners have invested.
Andersen and the four other major accounting companies--PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte & Touche--have largely been self- insured since the early 1990s, when huge settlements over savings-and-loan accounting scandals strained their insurance coverage, said Ron Klein, an attorney with Camico, a Redwood City company that provides malpractice insurance for accountants.
Major reinsurance companies, such as Lloyd’s of London, refused to cover further accounting firm losses, leaving the accountants to piece together smaller policies and set aside reserves in case of future settlements.
Accounting firms typically are highly secretive about their insurance arrangements. But insurance experts said large accounting firms usually have liability insurance policies with huge deductibles, which require the firms to pay the first $100 million to $300 million of losses.
Even with big deductibles, the policies don’t cover unlimited losses. The policies may cover the next $300 million to $500 million of claims, for example.
Andersen’s total insurance coverage is unknown but is probably less than $300 million, Cheffers said. Though Andersen’s limited-liability structure would prevent creditors from taking the partners’ personal assets, such as their homes and retirement accounts, their investments in the firm would be fair game in lawsuits, legal experts agree.
Andersen has two tracks for its partners: equity partners who may earn $1 million or more a year and who share in the firm’s profit and loss; and national partners, who typically earn $200,000 to $800,000 annually and whose participation in the company’s profit is more limited. Executives become partners by paying typically about $100,000, often with company- arranged financing, former employees said.
That stake usually grows through the years as the partners contribute a portion of their earnings or profit. A partner who earns $3 million for the firm in a year might be given $2 million in compensation, with the remainder divided between his or her own partnership stake and that of senior partners.
It is unlikely that partners’ stakes have been tapped to pay previous settlements, because the firm probably had enough insurance and cash on hand to cover claims, insurance experts said. Andersen paid $110 million last year to settle fraud allegations arising from its accounting work for Sunbeam Corp., the appliance maker reorganizing under Chapter 11 bankruptcy protection.
Andersen is not the only large accounting firm to face big settlements lately. Two years ago, Ernst & Young agreed to pay $335 million to shareholders in Cendant Corp.; last year, PricewaterhouseCoopers settled a similar suit regarding software firm MicroStrategy Inc. for $55 million.
Even if Andersen partners’ stakes are offered as potential payments in a lawsuit, however, partners may not lose all their investments in the firm. A too-large settlement could drive off many of the star partners who earn the bulk of the firm’s revenue, so plaintiffs’ attorneys may agree to accept less to prevent such fallout, Cheffers said.
Still, partners with smaller stakes may choose to abandon the firm rather than wait to see the outcome of all the litigation, some accountants said.
“If you were a first- or second-year partner with a good client base, you’d need to reassess whether you want to stay,” the former Andersen executive said.
