WorldCom Class-Action Suit Against Andersen to Proceed

In the last few weeks there has been good news and bad news for defunct accounting firm Arthur Andersen LLP as it strives to repair its reputation.

Last month the Supreme Court agreed to hear an appeal of the company's June 2002 obstruction of justice conviction. That's the good news. This week, a federal judge in New York ruled against a motion to dismiss a class action suit brought against Andersen by WorldCom Inc., the Wall Street Journal reported.

The WorldCom suit claims that investors suing Anderson had "identified a host of audit failures," the Journal reported.

New York Southern District Court Judge Denise Cote wrote in a 60-page opinion that those failures "would permit a jury to find that there was an egregious refusal to see the obvious, repeated failures to investigate the doubtful, and a pattern of acquiescence in improper accounting practices." A spokesman for Andersen declined to comment.

The disappointment comes in the wake of a significant win. The 2002 federal investigation obstruction conviction was upheld last June by the federal appeals court so the Supreme Court's decision to hear the case is a victory for Andersen, the Chicago Tribune reported earlier this month.

"The firm is pleased that the Supreme Court has agreed to consider its case given the importance of the legal issues and the potential impact on businesses and individuals in the United States," said an Andersen spokesman at that time.

Andersen had served for nearly two decades as the auditor for WorldCom and its predecessor companies. After WorldCom disclosed accounting irregularities totally billions of dollars in 2002, Andersen withdrew its 2001 opinion on the company's annual report. Since emerging from bankruptcy last year, WorldCom has been known as MCI.

The trial against Andersen, 17 banks and other defendants in the WorldCom case is set to begin Feb. 28, the Journal reported.

Judge Cote said that the lead plaintiff, the New York State Common Retirement Fund, had presented evidence to support its argument "that Andersen acted in willful blindness to the realities at WorldCom and in abrogation of its duty as an auditor." She said, "There is no dispute that Andersen understood that its unqualified certification of the WorldCom financials would carry great weight with investors. This is sufficient to constitute proof of recklessness."

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