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PricewaterhouseCoopers has paid $87.5 million to settle a negligent misrepresentation claim involving more than $1 billion in loan losses. The settlement with an international syndicate of 90 lenders was confidential, but details were revealed in a recent Fulton County State Court filing. The banks sued the Big Four firm in 2000, alleging the accounting giant did not fulfill its responsibility as an auditor, and as a result, the banks lost millions of dollars on bad loans. The case settled on the eve of trial last October. The syndicate of lenders, led by Toronto Dominion Bank, provided $2.1 billion to Columbia, S.C.-based Laidlaw Environmental Services to fund the takeover of another environmental services firm, Elgin, Ill.-based Safety-Kleen Corp., and to refinance $650 million in senior secured debt from an earlier acquisition. The banks later advanced the newly formed company another $280 million. The banks alleged that the loans — used in part to help finance the hostile takeover of Safety-Kleen in 1998 — wouldn’t have been made if PricewaterhouseCoopers had not provided audit reports indicating the target company was financially healthy. The business later filed for bankruptcy protection. Toronto Dominion v. PricewaterhouseCoopers, No. 00VS012679 (Fult. St. filed Dec. 13, 2000). The case appeared headed for an estimated three-month trial beginning Oct. 18, 2004, before Fulton Superior Court Judge Susan B. Forsling. Just before trial, the lawyers signed a memorandum of understanding to settle the case. Terms of the settlement were confidential at the time. However, a dispute involving two of the plaintiffs led to the filing of the memorandum of understanding into the case record. An exhibit attached to the memorandum states that each plaintiff would receive a percentage of the $87.5 million. A list included with the exhibit breaks down those percentages. The dispute that led to the filing of the settlement’s terms involves plaintiffs Oak Hill Securities Fund and AIG Annuity Insurance Co. The companies disapproved of the release language included in the individual settlement agreements offered by PricewaterhouseCoopers. Both plaintiffs want to protect potential claims concerning their bond investment in Safety-Kleen. They say the release language proposed by PricewaterhouseCoopers may compromise those rights, according to the motion to enforce settlement agreements with Oak Hill and American General. To protect their interests, Oak Hill and American General signed two versions of the settlement agreement, one with PricewaterhouseCoopers’ proposed release language and one with release language sought by the two plaintiffs. It’s now up to Forsling to decide which agreement will be enforced. Stephen D. Susman, a partner at Susman Godfrey in Houston who led the plaintiffs legal team, said the motion to enforce the agreements sought by the plaintiffs is the last item left to be resolved in the case. “Whichever agreement the judge chooses, we’ll live with,” he said. “This thing is finished.” In a letter posted on Susman’s Web site, Peter S. Spielman, a former Toronto Dominion Securities managing director who was chairman of the litigation steering committee for the plaintiffs, said all of the banks were “looking forward” to a trial. But with a wide range of possible outcomes, “everyone should be very happy with where we ended up,” Spielman wrote. He went on to tell Susman: “I believe that the settlement came very close to the maximum that PwC would ever be willing to pay without going to trial and was amazingly close to what you predicted almost two years ago.” A PricewaterhouseCoopers spokesman said: “The settlement of this action was without an admission of liability. The decision to settle was based on a desire to avoid the substantial costs and uncertainty inherent in a litigation of this complexity. All parties were able to reach an acceptable resolution in part through the efforts of the court.” RARE PROCEEDING USED In a bid to head off the three-month trial, attorneys for PricewaterhouseCoopers and the banks met in Forsling’s courtroom last May to play out portions of the dispute before a jury. The rarely used proceeding, called a summary jury trial, was non-binding, but attorneys on both sides said the run-throughs helped guide their mediation efforts. During the proceedings, Katherine G. Treistman, a partner with Susman Godfrey in Houston, said the banks relied on PricewaterhouseCoopers’ 1998 report as independent verification of Safety-Kleen’s financial performance. Had the banks known about the financial problems in 1998, when the transaction took place, they might have been able to minimize their exposure by selling the loans for up to 91 cents on the dollar, seeking refinancing through high-yield securities, placing new management in charge of the company or liquidating company assets, she said. The Safety-Kleen loans trade for 30 cents to 40 cents on the dollar, Treistman said in a follow-up interview last June. In addition, Safety-Kleen and Laidlaw “would have been in default under the terms of the loan agreements and the plaintiffs would not have made subsequent extensions of credit and instead could and would have taken action to eliminate or materially reduce the amount of their losses,” according to the original complaint. The jury did not seem to agree. While bank representatives said in videotaped depositions that they relied on PricewaterhouseCoopers’ audits in deciding to extend credit, attorneys for the accounting firm told the jury that in some instances bank officials had little knowledge of the accounting firm’s reports, and instead used other sources to assess Safety-Kleen’s finances. THE PATH TO BANKRUPTCY Laidlaw purchased Safety-Kleen through a stock tender offer in April 1998. It was not Laidlaw’s first attempt to buy Safety-Kleen. The target company rebuffed Laidlaw’s initial overtures. But Laidlaw managed to sweeten the deal and induce the approval of Safety-Kleen’s board. During the subsequent tender offer, Laidlaw proposed exchanging 2.8 shares of its own stock plus $18.30 in cash for each Safety-Kleen share. Safety-Kleen’s shareholders approved the deal, and Laidlaw acquired approximately 94 percent of Safety-Kleen’s outstanding common shares. The newly formed company became known as Safety-Kleen Services. The honeymoon came to a halt on March 6, 2000, when Safety-Kleen Services announced an internal investigation of its previously reported financial results. A few days later, PricewaterhouseCoopers withdrew its previously issued reports concerning Safety-Kleen’s financial statements. Three months later, the new Safety-Kleen and 73 of its subsidiaries filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. Following accounting adjustments of more than $500 million from 1997 through 1999 at Safety-Kleen, the banks filed suit in Fulton State Court alleging a single count of negligent misrepresentation against PricewaterhouseCoopers. The accounting firm filed a third-party claim on Jan. 23, 2002, against Safety-Kleen and three of the company’s former officers. The U.S. Securities and Exchange Commission sanctioned several former Safety-Kleen executives, including former Chief Executive Officer Kenneth W. Winger and Paul R. Humphreys, the former chief financial officer. The SEC found that the executives “engaged in a massive accounting fraud by materially overstating the company’s revenue and earnings in periodic reports filed with the Commission and in press releases issued by the company.” Winger and Humphreys were barred permanently from serving as officers or directors at any public company. U.S. District Judge Charles S. Haight Jr. of the Southern District of New York ordered Winger to pay $440,000 in disgorgement, pre-judgment interest and civil penalties. Humphreys was ordered to pay $150,000. The U.S. attorney’s office for the Southern District of New York filed related criminal charges against Humphreys for allegedly orchestrating the accounting scheme. He was indicted in December 2002. At the end of 2003, Safety-Kleen emerged from Chapter 11 bankruptcy as a private company with a total senior secured financing package worth $295 million. The company has approximately 4,500 employees and generated $850 million in revenue in 2003.

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