Andersen settles case with fund's creditors

Auditor agrees to pay $217 million but payment hinges on several factors

May 07, 2002|By BLOOMBERG NEWS

PHOENIX - Arthur Andersen LLP agreed yesterday to pay $217 million to settle lawsuits filed by creditors of the Baptist Foundation of Arizona, as well as claims filed by the Arizona Corporation Commission and state accountancy board.

The foundation's creditors claim that auditors at Andersen ignored repeated warnings of fraud at the nonprofit fund.

More than 11,000 investors lost $570 million when the foundation filed the largest nonprofit bankruptcy case in 1999.

Maricopa County Superior Court Judge Edward Burke in Phoenix approved the agreement yesterday.

Andersen has lost more than 240 clients and hundreds of employees who have fled the firm since dozens of claims from shareholders and creditors were filed stemming from its work as auditor and consultant for Enron Corp., which in December filed the largest bankruptcy in history.

Criminal trial opens

Andersen went on trial yesterday in Houston on a criminal charge of obstructing justice, allegedly for shreddng documents at Enron after the firm came under federal investigation.

"This is one less significant litigation out there for them," said Charlie Drott, an accounting expert and former partner at Touche & Ross, the predecessor to Deloitte & Touche.

"If they can't get this behind them, then they're finished."

Andersen claimed its auditors were misled by executives and board members of the Baptist Foundation. Three executives of the foundation or related affiliates have pleaded guilty to fraud charges, while five others still face criminal charges.

"Investors were the victims of a massive fraud perpetrated by Baptist Foundation of Arizona leadership," Andersen said in a statement.

Andersen claimed foundation executives engaged in a "conspiracy of silence" to keep the fraud from its auditors.

June 4 deadline

Under terms of the agreement reached yesterday, Andersen agreed to pay $217 million by June 4.

Andersen's insurance company, owned by its parent, Andersen Worldwide, is expected to pay the settlement, Andersen lawyer Ed Novak said.

Andersen had agreed to settle the case in March for $217 million, and then withdrew its offer, claiming its insurer couldn't pay.

"Our hope is the insurance company will re-capitalize and fund the settlement," Novak said.

A pair of Andersen auditors, Jay Ozer and Ann McGrath, will forfeit their accounting licenses in Arizona as part of the settlement, the firm said.

Plaintiffs claimed that Andersen auditors, led by Phoenix partner Ozer, ignored allegations of fraud at the foundation, beginning in 1996 when a former foundation finance employee, Karen Paetz, met with McGrath, telling her that foundation executives were hiding millions in real estate losses.

Ozer retired in 2000. McGrath remains a principal at Andersen, Novak said. Another partner, Al Hague, whose license the Arizona accountancy board sought to suspend, will be spared.

Any payments could be halted if Andersen files for bankruptcy reorganization, lawyers say.

"If Andersen files for bankruptcy before the $217 [million] is paid, then all of this is in the hands of the bankruptcy court," Novak said.

Andersen has no plans to file for bankruptcy at this time, he said.

Andersen executives in Phoenix and Chicago also ignored warnings from executives at two Dallas charitable organizations who warned Andersen partners of possible fraud at the foundation, plaintiffs' lawyers said.

Andersen also agreed yesterday to sell offices in Detroit and three other Midwest cities to Ernst & Young LLP.

The deal includes 14 Andersen partners and 159 employees in Detroit, Ann Arbor and Grand Rapids in Michigan and Toledo, Ohio, said Ernst & Young in a statement. Financial terms weren't disclosed.

Andersen clients in the Detroit area include Lear Corp., the largest maker of automotive seats and interiors, and Comerica Inc., Michigan's largest bank.

Others are CMS Energy Corp., of Dearborn, owner of Michigan's largest utility, and Domino's Pizza, of Ann Arbor, the largest pizza delivery chain.

Clients served by Andersen's Grand Rapids office include home-improvement supplies seller Universal Forest Products Inc. and office-furniture maker Herman Miller Inc.

"Even during the uncertainty of the past few months, Andersen's Grand Rapids clients remained loyal to us," David Hoogendoorn, managing partner of Andersen's office there, said in the statement.

Arthur Andersen spokesman Patrick Dorton said that the sales were in keeping with Andersen's plan to "move forward as a smaller firm aligned with the reforms we've outlined."

"The firm's going to separate parts of its business not consistent with the reform model and will engage in transactions involving portions hardest hit by client losses," Dorton said.

Andersen "will look at geographic options more consistent with a middle market client base."

2 midsize buyers

Andersen is in talks to sell its middle-market practice, which audits clients with up to $1 billion in revenue, to Grant Thornton LLP, the No. 7 accounting firm by revenue, and BDO Seidman LLP, the sixth-largest firm.

Andersen has signed preliminary agreements to sell operations with 900 of its 1,300 audit partners as the firm's hopes for survival fade.

Andersen has lost almost 300 audit clients this year, including 52 companies in the Standard & Poor's 500 index.

"The majority of Andersen partners have decided that their best future lies with other firms," said Joseph Carcello, accounting professor at the University of Tennessee.

"Andersen's rivals are picking off the offices, and even the parts of offices, that they want."

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