As embattled Andersen faces up to the prospect of years of litigation over its handling of the books of bankrupt Enron Corp., the Chicago-based accounting firm has taken the first steps to try and limit its exposure.
A spokesman for the lead plaintiff in a class-action lawsuit by shareholders confirmed that a New York law firm representing Andersen indicated last week “that Andersen would like to talk settlement.” Some sources say Andersen has offered as much as $800 million to settle all Enron-related claims against it.
Observers say Andersen has plenty of incentive to try to put the claims behind it. The firm is likely to continue to lose both corporate clients and its own staff for as long as the Enron scandal drags on, they say.
Still, it’s far from clear that the lawyers representing pension funds, shareholders and others with claims against Andersen are willing to settle any time soon. Some of the lawyers say such discussions are premature because they have yet to look at much of the evidence against the accounting firm, such as its Enron documents.
Andersen has said it could be months before it is able to recover Enron-related material that its employees have admitted destroying.
Essentially, observers say, the early talk of a settlement is a back-channel attempt by Andersen to move things in that direction. But plaintiffs’ attorneys are so reluctant to talk settlement at this stage that they won’t acknowledge publicly that Andersen’s attorneys have broached a monetary figure.
Trey Davis, spokesman for the University of California Board of Regents, said that Andersen’s attorneys, Davis Polk & Wardwell, raised the possibility of a settlement, but he reiterated Thursday that it is far too early to talk deals.
“We have not as lead plaintiffs had substantive discussions with Andersen about a settlement,” Davis said.
“There has to be a lot of substantive discovery taken in the case. You’re going to have to have depositions of Arthur Andersen’s personnel and find out the full extent of their responsibility and liability,” added Bill Federman, an Oklahoma City attorney representing small investors in the class-action lawsuit filed by Enron shareholders. “You can’t have meaningful settlement discussions until you know all the facts.”
Unusual strategy
Andersen’s willingness to settle early is a far cry from what a plaintiff in a case against a top accounting practice usually can expect, said Mark Cheffers, a former auditor who runs AccountingMalpractice.com, a liability training Web site that caters to 20,000 accountants.
“The typical defense for one of the Big Five is what you might call a scorched earth policy,” he adds. “Usually they look to delay as long and as far as possible, fight every battle, essentially wear the opposition down and take advantage of any kind of financial difficulties they might have.”
But this time it’s different, says Cheffers, because Andersen faces potentially huge damages as a result of its actions at Enron and as much as five years of litigation over the issues.
A good example of how long such cases can take to settle is Waste Management Inc. and Sunbeam Corp., two other Andersen clients hit by accounting scandals. Shareholders waited years to have their legal claims settled and Securities and Exchange Commission actions dragged on.
Tough spot for employees
However, the longer Andersen waits this time, the “more likely it is that they will lose their own people,” Cheffers said.
Accounting firms typically lock in their best people through potentially lucrative partnerships that require them to invest in the firm. Many observers believe a scandal of the magnitude of Enron, with its prolonged and costly legal battles, could lead many of Andersen’s best people to leave in fear of losing much of their investment.
Then there is the limited malpractice liability insurance the Chicago-based firm carries, which is unlikely to extend much beyond $800 million, according to observers. This means Andersen partners, already worried about the post-Enron future, would have to pick up the bill if legal settlements exceed that amount, as many expect.
As a result, it may be a good strategy for Andersen to look to settle early, as more and more plaintiffs attempt to bury the firm under a mountain of legal claims, said Gerald Smith, the trustee acting on behalf of Boston Chicken. Smith is in the middle of his own case against Andersen, after the chain collapsed amid complaints over the quality of its numbers.
All-inclusive deal
Andersen faces potential legal liability in the case on three fronts: Enron shareholders, employees who participated in retirement plans tied to its stock and the bankrupt company’s creditors committee. The first two groups have pending class-action lawsuits against Enron executives and Andersen, while the creditors committee reportedly is considering such a suit.
Given those circumstances, Andersen has every incentive to settle all claims at once rather than risk signing one deal, only to be sued by someone else, attorneys involved said. The pending lawsuits allege that Andersen misrepresented Enron’s financial health.
“They’d be crazy to do a single-shot settlement over the shareholder lawsuit, yet leave themselves totally exposed to the claims of the 401(k)” participants and Enron’s creditors in bankruptcy court, said Richard Hile, an Austin, Texas, attorney representing the Severed Enron Employees Coalition in the 401(k) suit.
