Andersen Settles Arizona Lawsuit

The troubled Andersen accounting firm agreed to pay $217 million in damages Friday for failing to uncover fraud involving an Arizona-based investment fund it audited.

Andersen’s willingness to reach a settlement with the Arizona attorney general’s office is part of a broad strategy to resolve pending claims as it prepares to deal with the fallout from its failure to report serious financial problems at Enron Corp., analysts said. Trial in the Arizona case had been set to begin Monday.

In its initial discussions with attorneys representing Enron shareholders, the nation’s fifth-largest accounting firm has floated a settlement figure in the $750-million range, including a $250-million payment from insurance and subsequent annual installments, according to an attorney familiar with the discussions.

In the Arizona case, Andersen was accused of ignoring warnings that the Baptist Foundation of Arizona investment fund was using off-balance-sheet ventures to hide losses.

Founded in 1948, the foundation raised money for religious causes by selling notes to churches and private investors. It offered rates that were typically better than savings accounts, and the fund claimed that it would use its share of investment earnings to advance Christian projects.

Soured real estate investments created huge losses for the fund, and Arizona officials said it gradually turned into a giant Ponzi scheme in which 13,000 investors lost nearly $600 million.

The settlement is the largest victim-restitution award obtained by Arizona and the second-largest settlement in the accounting industry unrelated to the savings-and-loan scandals more than a decade ago.

The payment, combined with the $220 million in remaining assets of the foundation and settlements with other parties in the case, will allow investors to recover up to 83% of the money they placed with the fund before its 1999 bankruptcy, Arizona Atty. Gen. Janet Napolitano said.

Andersen partner Jay Ozer and audit engagement manager Ann McGrath, both of whom had primary responsibility over Andersen’s audits of the fund, will relinquish their CPA licenses, Napolitano said. Ozer has retired from the firm.

Though acknowledging that the Baptist Foundation of Arizona was a “massive fraud,” Andersen said in a statement:

“We made a business decision to settle this matter, without admitting or denying any wrongdoing, to enable our firm to move forward without the uncertainty and distraction of costly and protracted litigation in Arizona.”

Attorneys involved in the Enron case said settlement of the Arizona lawsuit represents a strategy by Andersen to try to resolve its biggest claims quickly to restore confidence in the firm and halt the flight of clients and staff.

The investigative report completed by an Enron board special committee determined that Andersen failed to fulfill its audit responsibilities or raise red flags about the energy trader’s questionable practices.

Pharmaceutical firm Merck & Co. said Friday that it would replace Andersen with PricewaterhouseCoopers, ending a three-decade relationship with the accounting firm. Merck said the decision followed “a rigorous selection process.”

Merck was one of two companies in the Dow Jones industrial average audited by Andersen and accounted for $6.3 million in billings.

In the three-month period ended Thursday, Andersen had lost 32 audit clients and gained five, according to Auditor-Trak, a service of Atlanta-based Strafford Publications. During the same period a year ago, Andersen had a net loss of 16 clients.

Mark Cheffers, who operates the AccountingMalpractice.com Web site, said a trial in the case would have created even more negative publicity for the firm, hurting morale and its business prospects and “escalating the problems they are already encountering.”

Andersen is close to another settlement, in which it will pay about $10 million to settle claims arising from its work for fast-food chain Boston Chicken, according to a source involved in the case who said the settlement amount is nearly equal to what the accounting firm would have to spend to defend itself if the matter went to trial.

“Andersen is going to pay out big chunks of money over the next few months,” said Howard Schilit of the Center for Financial Research and Analysis in Rockville, Md. “They really want to this behind them as quickly as they can.”

Attorneys involved in the Enron case said they believe that because the claims were filed in different years, it is unlikely that the Arizona settlement will eat funds available to settle Enron claims.

But they also acknowledged that they had not seen Andersen’s insurance policies and have yet to develop a clear understanding of how much money the company can afford to pay in a settlement and still remain a viable business.

Among accounting industry settlements, only the $335-million payment by Ernst & Young over its work for Cendant Corp. is higher, said Arthur Bowman, editor of trade newsletter Bowman’s Accounting Report, although there is wide consensus that any agreement in the Enron case would dwarf all others.

Andersen has paid large sums previously to settle claims against its auditing work.

The accounting firm agreed to pay $110 million to settle an accounting fraud lawsuit involving appliance maker Sunbeam Corp. in May. A month later, Andersen paid a $7-million fine to settle a landmark fraud lawsuit over the firm’s audits of Houston-based Waste Management Inc.

In a related development Friday, U.S. District Judge Melinda Harmon in Houston signaled her desire to see a speedy resolution to the massive class-action lawsuit against Enron executives and Andersen by scheduling the trial to start Dec. 1, 2003.

“This means there will be a very expedited discovery schedule that will move this case along quickly,” said Charlie S. Parker, a Houston attorney who represents New York City pension funds in the case.

Parker noted that in issuing orders for the trial date, Harmon wrote that the schedule was “firm,” emphasizing her intent not to let the case drag on for years.

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