02/23 00:01
Arthur Andersen Plaintiffs Face Challenge in Proving Liability
By Patrick Oster
New York, Feb. 23 (Bloomberg) -- Investors and creditors suing Arthur Andersen LLP over its role in the collapse of Enron Corp. face difficult obstacles in winning damages from the accounting firm, legal experts say.
Any apparent edge for the victims of Enron's alleged deceit must be weighed against rules that favor defendants in securities cases, they said. They include anti-plaintiff pretrial procedures and a high standard of proof for winning at trial, said Robert Prentice, a University of Texas business law professor.
A 1995 federal law designed to discourage securities suits ``made things lots harder for plaintiffs,'' he said, referring to the Private Securities Litigation Reform Act.
That reality may bolster Andersen's effort, begun two weeks ago, to persuade plaintiffs to settle for a portion of what Andersen might owe. The Big Five accounting firm, with annual revenue in the billions, is accused of helping Enron hide debt and inflate earnings. It hasn't announced a settlement offer.
Under the 1995 securities act, plaintiffs must be specific about what they think a defendant did to violate securities laws, which include anti-fraud provisions. Most complaints get dismissed before trial because they don't have adequate information about why a stock went down, the most common reason the suits are filed, said Prentice.
In addition, the law says if a defendant such as Andersen files a motion to dismiss a securities suit, that automatically bars plaintiffs from getting any more information from a defendant.
``Tons of cases get kicked out of court because the plaintiffs can't get enough evidence,'' said Prentice.
The Facts
The Andersen plaintiffs have more help than usual in getting information, said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
Congressional hearings on Enron and a report that the Enron board commissioned on the events that led to Enron's bankruptcy last December are full of helpful details, he said.
If the Andersen case gets to trial, plaintiffs must show that Andersen was ``reckless,'' not just negligent, or that it committed fraud, said Thomas W. Hyland, a New York lawyer who defends accounting firms in malpractice cases.
``You have to show an accounting firm intended to defraud or was really, really sloppy,'' said Elson, who said that would not be the case if Andersen could prove it followed normal accounting practices.
Accepted Principles
Whether Andersen observed generally accepted accounting principles or stepped over the line is likely to be decided in a battle of expert witnesses, said Hyland.
``Andersen may be in complete compliance,'' he said.
Prentice said that even if the firm followed all the technical rules, it might still be found liable.
``If the overall picture is misleading, you are not supposed to certify'' the results of an audit, he said. The report commissioned by Enron's board said the company overstated earnings by more than $1 billion by creating partnerships that hid debts and poor-performing assets.
Another Andersen defense may be that it was an unwitting dupe of Enron executives who hid the truth of any financial fraud, said Prentice. To establish that defense, Andersen would need to explain to a jury why it destroyed some of its Enron documents as a federal investigation of Enron got under way.
Proving fraud might be a double-edged sword for the plaintiffs, Hyland said. Establishing liability entitles the claimants to damages but there would be less money to collect because accountants' insurance doesn't usually cover fraud or intentional acts, he said.
Insurance
Andersen lawyers have told some plaintiffs' attorneys that Andersen has about $250 million in insurance, said Charles Parker, a Houston attorney who represents New York City and Florida pension funds that are major Enron shareholders.
Any verdict at trial, notwithstanding the obstacles, would still have to be enforced. Vince Cappucci, another lawyer who represents the New York and Florida funds, estimates that Enron damages could run into the tens of billions.
As a private accounting firm, Andersen doesn't disclose its assets. Its revenue for the fiscal year that ended Aug. 31 was $9.3 billion. Whatever partnership assets Andersen's partners have, all would be available to satisfy an Enron-related judgment, said Prentice, as would the personal assets of any Andersen partners who worked on Enron audits.
Personal assets of other Andersen partners would be shielded as they would if the company were a standard or general partnership.
Andersen, which has 1,650 partners in the United States, is set up as a limited liability partnership, a status created about a decade ago to protect personal assets of noninvolved partners.
``In the old days, every boat and luxury car of a partner would be on the hook,'' said Prentice. ``Now you can no longer ask all partners to reach into their own pockets and pay up.''
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