Arthur Andersen settles WorldCom investors lawsuit

Arthur Andersen denied wrongdoing on Monday after reaching a settlement with WorldCom investors who had accused the telecommunications company’s former outside auditor of failing to protect them from WorldCom’s historic $11-billion accounting fraud.

United States District Judge Denise Cote scheduled a preliminary approval hearing on the settlement for Tuesday and banned each side from discussing its details publicly. The deal interrupted a trial in its fifth week on the accusations contained in a class action lawsuit brought after WorldCom’s 2002 collapse, the largest

bankruptcy in US history.

Before the trial, major investment banks agreed to pay more than $6-billion in settlements and a dozen former board members settled the case for $24,75-million, leaving Arthur Andersen LLP as the sole defendant.

Despite the judge’s ban on public comments, Arthur Andersen spokesperson Patrick Dorton issued a statement saying the company “elected to enter this settlement solely to avoid the risks and costs associated with continued litigation and expressly denies any liability or wrongdoing”.

Although he refused to divulge details of the settlement, he said it was “in keeping with Andersen’s strategic objective of satisfactorily resolving its remaining legal matters within reasonable cost parameters”.

Dorton said trial testimony had “demonstrated that Andersen’s auditors were victimised by a carefully designed and executed scheme by WorldCom’s former management to conceal material financial information from Andersen’s auditors as well as from the investing public”.

Dorton later asked that his statement be embargoed until Tuesday and then asked that it be retracted because Andersen didn’t authorise its release before Tuesday’s court hearing.

The lawsuit was led by New York state Comptroller Alan Hevesi, acting as trustee of the state employees’ retirement system. He had no comment about the settlement.

It’s not known where Andersen would get the money for a settlement. But industry expert Mark Cheffers said it likely has funds left over from liquidating its assets or in its reserves for insurance losses.

“There’s probably any number of different sources for that payment,” said Cheffers, CEO of Audit Analytics, a Sutton, Massachussetts-based firm that provides market research for the audit industry.

He said Andersen would closely guard the amount available for a settlement.

The plaintiffs maintained that WorldCom’s annual financial statements for 1999, 2000 and 2001 contained false statements and that Arthur Andersen issued its audit opinions with an “intent to deceive, manipulate or defraud”.

Arthur Andersen insisted through its lawyers that each of its audit opinions from 1999 through 2001 was generated in good faith and with no intent to deceive, manipulate or defraud.

To find against Arthur Andersen, the jury would have had to conclude that the auditor’s conduct was “highly unreasonable” and that WorldCom’s fraud was known to the auditor or was so obvious that it must have been aware of it.

Last month, former WorldCom CEO Bernard Ebbers was convicted of fraud, conspiracy and false regulatory filings in the accounting scandal. He could spend the rest of his life in prison.

Five other former WorldCom executives have pleaded guilty in the fraud and are awaiting sentencing.

WorldCom, which collapsed when the accounting fraud to inflate earnings and hide expenses was revealed, has re-emerged as MCI, based in Ashburn, Virginia.

The class action lawsuit began as many investor suits, eventually consolidated by the judge. – Sapa-AP

  • AP business writer Dave Carpenter in the Chicago bureau contributed to this story.
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