Andersen Will Settle Suit Over WorldCom

NEW YORK, April 25 -- Defunct accounting firm Arthur Andersen LLP has agreed to pay $65 million to settle its part of a massive WorldCom Inc. class-action shareholder lawsuit, sources familiar with the deal said Monday.

The agreement, to be unveiled at a hearing in federal court on Tuesday, would end a three-week trial in which shareholders argued that Andersen should have uncovered an $11 billion accounting fraud at WorldCom. The fraud pushed the telecommunications company into the largest bankruptcy filing in U.S. history in 2002 and cost investors billions. WorldCom has emerged from bankruptcy protection and now operates as Ashburn, Va.-based MCI Inc.

Plaintiffs in the class action, led by New York State Comptroller Alan G. Hevesi, declined to comment on the Andersen deal on Monday, citing a demand from the federal judge overseeing the case, Denise L. Cote, that they not discuss the agreement before a preliminary approval hearing Tuesday morning.

"On Friday, Judge Cote ordered both parties in the WorldCom litigation not to comment publicly on the proceedings until after a hearing Tuesday morning April 26, since such comments could influence the jury. The New York State Common Retirement Fund is complying with Judge Cote's order," Hevesi said in a statement late Monday afternoon.

Earlier in the day, Arthur Andersen spokesman Patrick Dorton acknowledged the deal in a prepared statement in which he said the firm agreed to settle "solely to avoid the risks and costs associated with continued litigation, and expressly denies any liability or wrongdoing."

Dorton added that testimony in the case indicated that "Andersen's auditors were victimized 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 declined to describe details of the settlement. They were provided by others close to the case.

Later in the day, Dorton issued another statement, saying, "Andersen wishes to retract in its entirety the statement issued earlier today. Andersen did not authorize the release of the statement in advance of tomorrow's court hearing."

Andersen is the lone remaining defendant in the three-year-old class-action case. Plaintiffs previously settled for more than $6 billion with 17 of WorldCom's investment banks. Twelve former WorldCom board members agreed to pay $59.75 million, including $24.75 million of their own money, to settle their part of the case.

All told, the WorldCom settlement is by far the largest of its kind in U.S. history. The largest previous settlement in a similar shareholder class-action case came in 1990, when Cendant Corp. and its accountants agreed to pay $3.2 billion to settle fraud charges.

Sources said that Andersen's settlement was delayed by demands from plaintiffs that the accounting firm disclose all its current holdings. The sources said plaintiffs did not want to settle and later learn that Andersen had more resources than plaintiffs initially believed.

To address those concerns, sources said the settlement includes a provision saying that if Andersen pays out any money to its former partners, the plaintiffs will receive 20 percent of that money.

Under Andersen's former corporate structure, certain employees were invited to use their own capital to buy a share of the firm and become partners. Plaintiffs are worried that Andersen eventually will pay money out to former partners.

In addition, sources said that, under terms of the deal, if Andersen enters into any future settlements worth more than $65 million, plaintiffs in the WorldCom class-action case will receive the difference. That provision appears directed at a possible settlement in a pending class-action case citing Andersen's work as outside auditor for Enron Corp.

Unlike most settlements, in which investors receive pennies on the dollar, WorldCom investors are expected to get as much as half of the damages they are seeking, according to lawyers for the plaintiffs. About $5 billion in settlement money is expected to go to WorldCom bondholders, with the rest going to stockholders.

There are still about three dozen outstanding WorldCom shareholder lawsuits in federal and state courts filed by plaintiffs who declined to join the class-action case before Cote in New York. The judge has urged all the remaining plaintiffs to settle. None of the other suits are expected to generate settlements anywhere near as large as those in the main class-action case.

Andersen, once among the world's biggest and most profitable accounting firms, was convicted in 2002 of obstructing a federal probe into the collapse of Enron. The conviction essentially destroyed the firm, which no longer engages in public accounting or consulting and primarily exists now to deal with legal matters. The firm is appealing its criminal conviction. Oral arguments in the case are scheduled to take place on Wednesday before the U.S. Supreme Court.