Enron Investor Lawsuits May Add Defendants

Attorneys suing accounting firm Andersen on behalf of Enron Corp. investors are starting to identify additional targets after concluding that the fading company will be unable to generate enough revenue in coming years to help fund a settlement.

Andersen is bleeding clients and is in talks to transfer its overseas operations to rival KPMG, making it likely that its only sources of settlement money are what is believed to be a $250-million insurance policy, its cash on hand and possibly an assessment on its partners, the attorneys said.

At the same time, the attorneys are exploring how to widen both class-action and pension plan lawsuits against Andersen for its work for Enron, which filed for bankruptcy protection Dec. 2.

Potential targets include the Houston-based energy trader’s legal advisors, bankers and other business partners. The attorneys plan to file a consolidated complaint in Houston federal court April 1 in which they might add new defendants to the case.

With Enron in Chapter 11, Andersen has been seen as the deepest pocket to settle claims by investors and employees who lost billions of dollars in Enron’s collapse.

But attorneys changed their view over the last week, after the federal government unsealed an indictment of Andersen on an obstruction of justice charge for destroying Enron documents sought in the federal probe of the Enron meltdown.

Andersen became the target of the federal investigation after certifying Enron audits that hid losses and debt from investors. Andersen pleaded innocent to the charge in a Houston federal court Wednesday.

The firm has lost about 50 clients since December, however, and on Wednesday, BB&T; Corp. of Winston-Salem, N.C., Andersen’s largest banking client, and BMC Software Inc. of Houston each picked new auditors.

“It is total chaos,” said Vincent Cappucci, who represents Florida pension funds in the class-action shareholders lawsuit against Andersen and Enron’s senior executives. “There is no question that the indictment severely impaired Andersen’s ability to pay a settlement at the levels floated just a month ago.”

Andersen previously discussed paying $750 million over a five-year period to settle its Enron liabilities.

“There is no question that the indictment trumped all other issues and made it extremely difficult for any progress to be made on other discussions and claims,” said Andersen spokesman Patrick Dorton.

Before the indictment was unsealed, Andersen was close to a settlement with the Securities and Exchange Commission in which it would have paid $350 million to $500 million into a compensation fund and agree to a series of operational reforms, according to a source familiar with the talks. The two sides were dickering over the size of the payment--both believing they would reach an accommodation--when the Justice Department stepped in with its indictment, the source said.

People familiar with Andersen settlement efforts said the firm has yet to make a formal offer to attorneys for the University of California Board of Regents, which is acting as the lead plaintiff in the class-action lawsuit.

A spokesman for the university system, which lost about $145 million in pension and endowment funds in the Enron collapse, also said that the indictment will hurt its recovery efforts.

“Given the legal and business difficulties that Andersen reportedly has, any future settlement offers will probably reflect those problems. Stories about Andersen settlement offers at this juncture and in this climate are premature,” said Trey Davis, spokesman for the Regents.

Although it is doubtful Andersen can survive over the long term, Houston attorney Charlie Parker, who represents New York City pension funds in the Enron litigation, said there are still ways to structure deals that will benefit investors and other claimants.

“There is still some value to Andersen’s book of business or else you would not see these other firms trying to figure out it they can acquire some of that business,” Parker said.

Although talks to merge Andersen with rivals such as Deloitte Touche Tohmatsu or Ernst & Young have broken off because of the Enron liability issues, BDO Seidman, the nation’s sixth-largest accounting firm, said Wednesday it is still exploring ways to acquire portions of Andersen’s domestic business. A person familiar with those discussions said BDO could try to use an Andersen bankruptcy filing to protect itself from also acquiring Enron-related claims.

Parker, however, outlined a plan where other firms could bid on that business, paying into a settlement pool in return for court-approved liability releases.

“This must be part of a court-ordered approval of a settlement and all the major parties would have to agree to it,” Parker said. “Otherwise, I can’t imagine any entity merging or acquiring a part of Andersen without assurance that it won’t face years of litigation.”

Meanwhile, Andersen continued to rally support from the 84 member firms that make up the Andersen Worldwide confederation for a deal that would transfer the overseas network to the KPMG accounting firm. The deal may be challenged, however.

“Any transaction or business combination that seeks to shield Andersen or its successor company from its liability in this case is unacceptable. Andersen or any new restructured, corporate entity should not be allowed to insulate itself from the consequences of this fraud or put its assets beyond the reach of the victims,” Davis said.

But other attorneys expect the KPMG deal to move forward.

“There’s really not a heck of a lot we can do judicially to stop them from doing what they’re doing abroad,” said Michael Engelhart, a Houston attorney representing Enron investors and former employees suing Andersen.

If it generates cash from the sale of international affiliates, Engelhart said, Andersen may still position itself to pay off plaintiffs. He downplayed suggestions that the federal indictment would diminish chances for a recovery. “The burden of proof for the government is too high. They will work out a deal that lets Andersen escape and makes the government look good. Five years from now, Andersen will be a going concern.”

Times staff writer Jeff Leeds contributed to this report.