The Andersen accounting firm is in settlement talks with the Securities and Exchange Commission that could lead to establishment of a restitution fund for Enron Corp. shareholders, people familiar with the discussions said Tuesday.
The negotiations are aimed at resolving the civil probe of the company. At the same time, Andersen is continuing to meet with the Justice Department to settle a possible obstruction-of-justice charge, the sources said.
Andersen has admitted destroying documents sought by federal investigators from Andersen's audit of Enron.
Andersen's strategy is to settle its civil and criminal issues quickly so that it can stay in business, either as an independent firm or until it can arrange a merger or other deal with one of its larger rivals. Andersen has talked to Deloitte Touche Tohmatsu and Ernst & Young about a business combination, according to sources familiar with the talks. Andersen also is in talks with accounting firm KPMG, the New York Times reported.
It would be the second major settlement between the SEC and Andersen, which last year paid a $7-million SEC fine over its audit for Waste Management Inc.
But an individual with knowledge of the talks said the SEC probably would not levy a large fine against the accounting firm, fearing that it would eat into restitution funds available to Enron shareholders. Those shareholders lost billions of dollars in the company's collapse and have filed a class-action lawsuit against Andersen.
Although the government agency is not in the business of collecting money for shareholders, the circumstances of the Enron meltdown and Andersen's involvement in the case are so extraordinary that the SEC has decided on this approach, one source said.
Representatives of the federal agencies and Andersen declined to comment.
With each new development, however, attorneys involved in the lawsuit against Andersen say the outlook for the firm gets grimmer.
"These are extremely delicate discussions, and there is a big question mark as to whether Andersen will be able to navigate a way through the various civil and criminal hurdles," said Vincent R. Cappucci, a New York attorney who represents several public pension funds in the class-action case.
"I think that bankruptcy seems to be the most likely scenario for the firm, and that is unfortunate because it means there will be less money available for a settlement," Cappucci said.
Andersen is believed to have an insurance fund of up to $250 million. In previous talks, Andersen had discussed paying as much as $750 million to settle Enron claims.
However, payments were to be made into a fund over several years, allowing the accounting firm to use its earnings power in the future to help close the case.
Meanwhile, the defections of major clients continue. On Tuesday, oil and gas concern Kerr-McGee Corp. switched to Ernst & Young.
Andersen has lost about $120million in revenue since Enron's Dec. 2 bankruptcy filing and is expected to have more client defections over the next six weeks, when most large firms determine their auditors for the coming year.
Andersen also is starting to lose key staff. Lynn Turner, the former chief accountant for the Securities and Exchange Commission and an accounting expert at Colorado State University, said one of the other top accounting firms in the United States has been approached by 200 Andersen partners looking to switch firms.
"There are just not a lot of hard assets at Andersen that would be available for a settlement," Cappucci said. "The staff leaves, the clients follow and soon there's nothing left. We don't have much hope for Andersen as a business entity."
The University of California Board of Regents, the lead plaintiff in the lawsuit, is watching the developments carefully.
"Without seeing details of the deals, it would be hard to know how it would affect our litigation," said Trey Davis, a spokesman for the regents.
However, Davis said the UC system would object to any settlement that "does not allow the victims appropriate restitution."