Arthur Andersen Settles N.Y. Suit Over WorldCom

Arthur Andersen LLP, the last defendant in the investor lawsuit against the investment banks and accounting firm that provided capital and advice to collapsed telecom giant WorldCom, has agreed to a settlement, according to U.S. District Court Judge Denise Cote. The terms of the settlement are scheduled to be released this morning at a 9 a.m. hearing.

The sole plaintiff in the three-year old suit is the $100 billion New York State Common Retirement Fund, whose trustee is the state comptroller, Alan Hevesi.

The settlement ended a four-week jury trial in which Arthur Andersen claimed that it was also a victim of WorldCom management's fraud.

Once a member of the so-called Big Eight accounting firms, with over 85,000 employees, Arthur Andersen dissolved its partnership in 2003 after its role as an auditor and management consultant in the Enron and WorldCom bankruptcies came to light. The firm was convicted of criminal obstruction of a government investigation in the Enron Corporation fraud case.

The Chicago-based Andersen now has fewer than 200 employees remaining, primarily attorneys and staff involved in running a company-owned corporate retreat center in St. Charles, Ill. In 2001, its profitable corporate consulting division, which had become a lightning rod for conflict-of-interest criticism, was renamed Accenture, sold, and taken public.

An Arthur Andersen spokesman, Patrick Dorton, declined comment. Bernstein Litowitz Berger & Grossmann LLP's lead counsel for the trial, Sean Coffey, did not return a call. A spokesman for plaintiff's counsel Barrack, Rodos & Bacine, Scott Freda, said the judge had forbidden comment prior to today's hearing.

The WorldCom investors claimed that Andersen was too wary of offending the company - then one of the fastest growing and most celebrated in America - during routine audits between 1999-2001, for fear of losing WorldCom's lucrative audit and consulting work.

To support this claim, BLBG's Mr. Coffey introduced evidence during the trial showing that Andersen earned $47.1 million in fees from WorldCom between 1999 and 2001. From June 1999 to the announcement of its bankruptcy in July 2002, WorldCom's stock lost $185 billion of market value.

Potentially more damaging to Arthur Andersen's defense than its lucrative fees, however, were documents introduced by the plaintiffs on April 20, such as a copy of a 1999 internal Andersen memo criticizing WorldCom's practice of shifting expenses off its bottom line.

The memo, which was not shown to WorldCom management, soon proved prophetic, as over a year later, the company began aggressively shifting expenses off its balance sheet to cover up for $3.8 billion in line costs, the fees paid for use of other companies' transmission lines, which was WorldCom's biggest expense.

Moreover, investor lawyers informed the jury that the original document was missing, and that someone had attempted to black out the portion that was critical of WorldCom.

Starting in 2000, WorldCom's management, under the direction of its former chief financial officer, Scott Sullivan, began its inappropriate accounting by shifting cash reserves meant for future expenses to cover increasing line costs in the current quarter, according to court documents. In 2001, after exhausting those reserves, the company began committing outright fraud, as it started to classify line costs as long-term assets in an effort to meet Wall Street's quarterly profit growth projections, according to court documents. In July 2002, prior to its bankruptcy filing, the company acknowledged $11 billion worth of fraud.

Five former WorldCom financial executives, including Mr. Sullivan, have pleaded guilty to conspiracy to commit fraud. Mr. Sullivan cooperated in the government's successful prosecution of WorldCom founder and former chairman, Bernard Ebbers.

Ebbers was found guilty in March on nine counts of conspiracy and securities fraud. He is appealing the verdict.