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An international syndicate of lenders squared off againstPricewaterhouseCoopers in court in Georgia last week, and the accounting firmcame away the winner. Unfortunately for PricewaterhouseCoopers, the Fulton jury’s verdictdoesn’t count, but both sides may benefit if they can agree to asettlement before a scheduled three-month trial this fall. The stakes are huge in the case. The banks say they lost millions ofdollars after making loans that went bad. Those loans, used to finance a$2.1 billion transaction between two environmental cleanup firms,Laidlaw Environmental Services and Safety-Kleen Corp., wouldn’t havebeen made if PricewaterhouseCoopers had fulfilled its responsibility asan auditor, the banks allege. Toronto Dominion v.PricewaterhouseCoopers, No. 00VS012679 (Fult. St. filed Dec. 13, 2000). In a bid to head off a three-month trial, attorneys forPricewaterhouseCoopers and the banks met in Fulton State Court JudgeSusan B. Forsling’s courtroom for four days over the last two weeks andplayed out portions of the dispute before a jury. The rarely usedproceeding, called a summary jury trial, is non-binding, but attorneyson both sides say the run-throughs have helped guide them in theirmediation efforts. “We thought it was very helpful,” said Michael P. Kenny, a partner atAlston & Bird who worked on the PricewaterhouseCoopers team. “It helpedsharpen the issues. It gave both sides a realistic view of what canhappen if these complex issues are tried before a jury.” Forsling said the actual jury trial is scheduled to begin Oct. 18, butshe wants to avoid the three-month setback to her calendar and itsassociated cost to taxpayers. Empanelling a jury of 12 plus twoalternates for a 12-week trial would cost approximately $21,000. Hencethe summary jury trial. Neither side would comment on how close they are to a settlement, but ifthe proceedings are any indication, PricewaterhouseCoopers should feelconfident in its defense. The jury verdicts almost wholly favored theaccounting firm and held the banks equally if not more responsible fortheir losses. BANKS BLAME AUDITOR FOR LOSSES When Columbia, S.C.-based Laidlaw Environmental Services acquiredSafety-Kleen Corp. in 1998, the hostile takeover was financed primarilywith $2.1 billion from a syndicate of lenders led by Toronto DominionBank. Those lenders say they provided the money for the initialtransaction — and subsequently advanced the newly formed company more than$280 million — because they believed Safety-Kleen was financially healthy. Now, more than 90 of the syndicate banks say the company’s auditor,PricewaterhouseCoopers, misled them. Following accounting adjustments ofmore than $500 million from 1997 through 1999 at Safety-Kleen, the banksfiled a suit in Fulton State Court alleging a single count of negligentmisrepresentation against PricewaterhouseCoopers. Safety-Kleen is namedas a third party defendant in the suit. Safety-Kleen is based in Plano, Texas, and none of the alleged actsoccurred in Georgia. But attorneys for the banks said they chose FultonCounty because PricewaterhouseCoopers has an office in Atlanta and someof the financial institutions that participated in the syndicate haveoffices here. Also, Georgia courts did not apply the doctrine of forumnonconveniens at the time the case was filed. FORMER EXECS SANCTIONED The U.S. Securities and Exchange Commission has sanctioned several ofSafety-Kleen’s former executives, including the former chief executiveofficer, Kenneth W. Winger, and the former chief financial officer, PaulR. Humphreys. The SEC found that the executives “engaged in a massive accounting fraudby materially overstating the company’s revenue and earnings in periodicreports filed with the Commission and in press releases issued by thecompany.” Winger and Humphreys were barred permanently from serving as officers ordirectors at any public company. U.S. District Judge Charles S. HaightJr. of the Southern District of New York ordered Winger to pay $440,000in disgorgement, pre-judgment interest and civil penalties. Humphreyswas ordered to pay $150,000. The U.S. Attorney’s Office for the SouthernDistrict of New York filed related criminal charges against Humphreysfor allegedly orchestrating the accounting scheme. He was indicted inDecember 2002. Coincidentally, the Fulton verdicts came one day afterPricewaterhouseCoopers agreed to pay $50 million to settle a federalshareholder class action suit involving similar allegations over itswork for Waltham, Mass.-based defense contractor Raytheon. According topress reports, the auditor was accused of signing off on misleadingfinancial statements for the company. The 90-plus banks in the Safety-Kleen matter do not specify damages in their complaint against PricewaterhouseCoopers. Calculating damagesfor securities losses often depends on several factors, but one attorneyrepresenting the banks, Katherine G. Treistman of Susman Godfrey inHouston, said the Safety-Kleen loans now trade for 30 to 40 cents on thedollar. The Safety-Kleen acquisition began with a 1997 merger between twosmaller companies, Laidlaw Environmental Services and RollinsEnvironmental Services. According to the Fulton suit, Rollins had beenthe largest full-service solid hazardous waste incineration company inNorth America. The combined company was renamed Laidlaw Environmental Services Inc.,and the merger was financed with $650 million in senior secured creditprovided, in part, by the plaintiff banks. Less than a year later, Laidlaw completed the purchase of the muchlarger Safety-Kleen Corp., but not before several of its offers wererejected by the target company. Laidlaw managed to sweeten the dealenough to induce the approval of Safety-Kleen’s board and completed thetender offer in April 1998. The purchase was financed partially through $2.1 billion in seniorsecured credit facilities and other securities provided by the syndicatebanks. Those securities also were used to refinance the $650 million insenior secured credit from the Rollins Environmental deal. During the tender offer, Laidlaw exchanged 2.8 shares of its own stockplus $18.30 in cash for each Safety-Kleen share. Safety-Kleen’sshareholders approved the deal, and Laidlaw acquired approximately 94percent of Safety-Kleen’s outstanding common shares. The newly formedcompany became known as Safety-Kleen Services. MERGER ENDS IN BANKRUPTCY On March 6, 2000, things began to unravel. Safety-Kleen Servicesannounced an internal investigation of its previously reported financialresults. A few days later, PricewaterhouseCoopers withdrew all itspreviously issued reports concerning Safety-Kleen’s financialstatements. Three months later, the new Safety-Kleen and 73 of itssubsidiaries filed for Chapter 11 bankruptcy protection in the U.S.Bankruptcy Court for the District of Delaware. Last December, Safety Kleen emerged from Chapter 11 bankruptcy as aprivate company with a total senior secured financing package worth $295million. The company has approximately 5,000 employees and generated$850 million in revenue last year. Treistman, the Texas attorney working for the banks, said her clientsrelied on PricewaterhouseCoopers’ 1998 report as independentverification of Safety-Kleen’s financial performance. Had the banksknown about the financial problems in 1998, when the transaction tookplace, they might have been able to minimize their exposure by sellingthe loans for up to 91 cents on the dollar, seeking refinancing throughhigh-yield securities, placing new management in charge of the companyor liquidating company assets, she said. In addition, Safety-Kleen and Laidlaw “would have been in default underthe terms of the loan agreements and the plaintiffs would not have madesubsequent extensions of credit and instead could and would have takenaction to eliminate or materially reduce the amount of their losses,”according to the original complaint. But last week’s jury did not seem to agree. While bank representativessaid in videotaped depositions that they relied onPricewaterhouseCoopers’ audits in deciding to extend credit, lawyers forthe accounting firm showed that in some instances bank officials hadlittle knowledge of the accounting firm’s reports, and instead usedother sources to assess Safety-Kleen’s finances. In any event, the defense lawyers said the banks knew that the dealwould be high risk. “These banks went in with their eyes wide open,” said John R. Crews, anattorney with Gibson, Dunn & Crutcher in Dallas, who acted as leadcounsel during the Fulton summary jury trial. A RARE METHOD Forsling said that the summary jury trial, while rare, has been used byother judges to avoid full-fledged trials. She noted that it works bestfor certain types of cases. “In my judgment, a summary jury trial is best utilized in complex casesthat will not only require an extensive amount of trial time, but alsoinvolve numerous claims with potentially high exposure in damages,” shesaid. She added that the parties must have the resources to allow theirattorneys to spend the time and money necessary for this type ofalternative dispute resolution, and the lawyers have to “honestly wantto do this and participate in it with one goal in mind; that is tosettle the case.” To expedite the proceedings, the judge and lawyers modified severalparts of the trial process. The jury of 12 was split into two six-memberpanels. The questions to the jury were structured in lay terms, and thejudge charged them only on burden of proof and credibility of thewitnesses and evidence. Forsling said the jury received a glossary of acronyms that wererelevant to the litigation, such as “LESI” for Laidlaw EnvironmentalServices Inc. and “GAAP” for generally accepted accounting principles.Also, the men and women on the panel received a sheet listing thechronology of events in the case. There were no live witnesses, so lawyers had to make their cases withdeposition or affidavit testimony, and discovery documents. In a further concession to expediency, Forsling allowed the lawyers tointertwine legal argument with the presentation of the evidence, asopposed to having opening and closing statements. “We’re hoping this summary jury trial process will result in an amicableresolution of the claims so as to alleviate the need for a jury trial,”Forsling said. The trial would be — by more than two months — the longest trial Forslinghas presided over. In addition to the taxpayer expense, a three-month trial involving anegligent misrepresentation claim would probably cost each side between$1.5 million and $2 million in legal fees, according to Thomas S.Richey, the chair of Powell, Goldstein, Frazer & Murphy’s securities,corporate and financial institutions litigation practice group. Those costs must be balanced with what the lawyers and their clients seeas the potential risk of a trial, he said. Even if there is a 60 percentchance of winning a case, he said, the lawyers must decide what a 40percent chance of losing a staggering verdict would be worth. Another mediation session is scheduled for this month. But, if the sidesdo not reach a settlement, they will undoubtedly begin weighing therisks and costs of a lengthy, expensive trial with hundreds ofmillions — if not billions — of dollars at stake.

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