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In the second-largest securities settlement ever paid by an accounting firm, Arthur Andersen has agreed to pay $110 million to investors in Sunbeam Corp. stock who said the accountants turned a blind eye to Sunbeam’s blatant inflation of its earning figures. According to the suit, Sunbeam’s cooking of its books caused stock prices to soar to a high of $53. But when the truth was revealed, the stock quickly plunged to just about $10 and continued to slide for several months before reaching a low of about $7 per share. Although Boca Raton, Fla.-based Sunbeam is currently in bankruptcy, the investors are still pursuing claims against the company’s former CEO, Albert Dunlap. The proposed settlement with Arthur Andersen, which served as Sunbeam’s independent auditor for many years, was disclosed in court papers filed late Friday in U.S. District Court in the Southern District of Florida. In a “memorandum of understanding,” lawyers for the investors and for Arthur Andersen promised that they will file a more detailed settlement proposal by May 3 that will then await approval by U.S. District Judge Donald M. Middlebrooks. The four firms serving as co-lead counsel for the plaintiffs include two firms from Philadelphia and two from New York. Attorneys Merrill Davidoff, Lawrence Deutsch and Robin Switzenbaum of Berger & Montague in Philadelphia were joined by M. Richard Komins, Gerald J. Rodos and Jeffrey A. Barrack of Barrack Rodos & Bacine in Philadelphia; Abraham Rappaport, Maya Saxena and Robert R. Adler of Milberg Weiss Bershad Hynes & Lerach in New York; and Robert M. Kornreich, Chet B. Waldman and Carl L. Stine of Wolf Popper in New York. Arthur Andersen is represented by attorney Elliot Lauer of Curtis Mallet-Prevost Colt & Mosle in New York. The suit was filed on behalf of investors who purchased Sunbeam stock between April 1997 and June 1998. The suit alleged that Sunbeam set out to create the false public perception that after Dunlap was hired as CEO, he had successfully effected a dramatic “turnaround.” In fact, the suit said, Dunlap generated a slew of problems by slashing the company’s workforce in half — from 12,000 to 6,000 — and installing a new management team at the same time that the company was trying to merge its various computer systems into one. Despite the problems, the suit said, Sunbeam “touted a phenomenal three-year plan of growth through 1999″ in an effort to hide the fact that Dunlap’s rescue plan wasn’t working. The suit alleged that the company overstated income and understated expenses “to create the illusion that Sunbeam was a growth company that had experienced a turnaround” and was enjoying healthy operating profit margins and increasing earnings. To do so, the suit said, Sunbeam used “improper accounting” to distort its actual sales, profits and inventories. The truth began to leak out in May 1998 when Sunbeam announced that its first quarter had “started slowly” and that retailers were “continuing to manage down their inventories.” Dunlap was fired on June 15, 1998, the suit said, and just 10 days later, the company announced that it was under investigation by the Securities and Exchange Commission over its accounting practices. The suit alleged that Arthur Andersen issued an “unqualified audit opinion” on Sunbeam’s 1997 financial statements that recklessly vouched for the company’s accounting practices. “This unqualified opinion helped to prop up the price of the company’s securities,” the suit said. Investors alleged that Arthur Andersen had a motive to act recklessly since it was concerned that it might lose Sunbeam’s business due to Dunlap’s close relationship with another accounting firm, Coopers & Lybrand. The suit also said that since Dunlap had slashed Arthur Andersen’s fees from $1 million to just $700,000, the accountants had “little motivation … to do the kind of full-scale audit required in 1997.” One of the accountants is quoted in the suit as commenting that there was no way to perform the audit and make a profit. The suit alleged that the accountants “knowingly or recklessly disregarded numerous red flags evidencing that [Sunbeam's] internal controls were virtually non-existent in critical areas and that certain financial data was inaccurate and unreliable.” In November 1998, the suit said, Sunbeam’s new management team fired Arthur Andersen and disclosed that the accountants had sent a letter the month before that confirmed Sunbeam had inadequate internal controls. In statements issued after the close of the markets on Friday, both Arthur Andersen and the plaintiffs’ lawyers said they were pleased to have settled the case. “Even though we believe we had very strong defenses to the claims asserted by the class, the firm made this business decision to allow us to apply resources and management time to our core business of providing value to our clients,” said Andrew Pincus, Arthur Andersen’s general counsel. In a joint statement, plaintiffs’ attorneys Davidoff, Komins, Kornreich and Rappaport said the settlement “represents an excellent result for the class” and that the litigation continues against former management of Sunbeam, including Dunlap with a trial currently scheduled for January 2002.

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