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A buyer of Arthur Andersen will have a tough time shielding itself from litigation related to the Enron Corp. case, raising the likelihood that a deal would require putting the Chicago-based accounting and consulting firm into bankruptcy, legal experts said. Separately, former Federal Reserve Chairman Paul Volcker recommended Monday that Andersen split its auditing and consulting work, rotate auditors every five years and establish a public review body to oversee the firm, wire services reported. Andersen has asked Volcker to lead a revamping of its practices in the wake of Enron. Rival firms interested in Andersen would have several options, ranging from acquiring the firm outright to poaching its top talent. But because of the enormous litigation risk facing Andersen, a deal for the firm is most likely to be a pre-packaged bankruptcy, even though that could all but obliterate the firm’s equity value. “[Bankruptcy] is probably the way in which a buyer would sleep easiest,” said Joseph Basile, a partner at the Boston-based firm Bingham Dana. Andersen was Enron’s auditor and reportedly helped design many of the limited partnerships that triggered the Houston-based energy company’s demise. Enron shareholders have filed suit against the firm for approving financial statements that did not disclose the partnerships, and the firm faces billions of dollars in potential liability — far more than it is insured against, industry observers have said. The firm also faces a possible indictment for allegedly shredding documents related to the case. Meanwhile, several Andersen clients have announced they would no longer retain the firm to audit their books, further raising the likelihood that Andersen will have to sell itself. On Monday, Memphis, Tenn.-based FedEx Corp. and Washington, D.C.-based Riggs National Corp. said they were dropping Andersen. The situation led to newspaper reports Monday that Andersen has held talks with rival Deloitte & Touche about a merger. Andersen has said only that the firm is considering “many options” to serve clients and to promote the careers of its employees. A spokesman did not return a request for additional comment. Arthur Andersen is the accounting arm of Andersen Worldwide, the umbrella organization that also includes its overseas, legal and consulting operations. Because it is a limited liability partnership, most partners bear little risk personally for any Enron-related misconduct. The firm as a whole, however, faces substantial liability. Exactly how much will depend on how the courts interpret statutes passed in several jurisdictions — including Texas, the state in which the shareholder suit is being tried and the wrongdoing is alleged to have taken place; Illinois, the state in which Andersen is organized; and Oregon, Enron’s state of incorporation. But regardless of the size, the risk is great enough that it is unlikely that a buyer would acquire Andersen as a whole. Rather, a buyer would probably try to buy its key assets, leaving only the parts of Andersen most compromised by Enron. “When you take over a firm, you take over their liabilities as well as their assets,” said Stephen Presser, a law professor at Northwestern University. “I don’t see any way anybody taking over Andersen would be able to avoid that.” This strategy would have to be well-designed, since courts have frequently ruled that mergers cannot be used to avoid a lawsuit — a legal doctrine known as “successor liability.” “If you have a transaction that destroys the case of claimants, then the successor would be held liable,” said Kenneth Klee, a bankruptcy law professor at UCLA School of Law. The best way to avoid this would be to put Andersen into bankruptcy. Under bankruptcy law, Enron’s shareholders would have one of the weakest claims on Andersen’s assets, behind the firm’s bondholders and vendors. That situation would give Andersen or a potential buyer more leverage to negotiate a settlement. But even a pre-packaged bankruptcy has risks. A judge would have to review the arrangement, opening the door for another firm to scoop up Andersen’s prized assets. And a filing is likely to hasten the exodus of Andersen clients and top employees. “If I were Andersen, I wouldn’t want to declare bankruptcy,” Presser said. “I don’t know that the firm would be able to recover.” Copyright (c)2002 TDD, LLC. All rights reserved.

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