WSJ August 25, 2000
August 25, 2000
SEC Probes Andersen For Conflict of Interest
By MICHAEL SCHROEDER Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Among companies rocked by accounting scandals, Waste Management Inc. stands out. After a board-led probe turned up years of questionable accounting, the company took a $3.5 billion charge in 1998, and since then the trash hauler and its outside auditor, Arthur Andersen LLP, agreed to pay $220 million to settle shareholder litigation in the matter.
Now, Waste Management's accounting headache may turn out to be notable in another way.
At the same time that Arthur Andersen was conducting the audits that failed to halt the questionable accounting, the firm was pocketing big fees for consulting services it provided Waste Management. The Securities and Exchange Commission is currently probing whether the consulting fees may have compromised the independence of Arthur Andersen's auditing work, according to several people familiar with the case.
As a result, the case is shaping up as a possible centerpiece of a campaign by the SEC to demonstrate that conflicts of interest can be caused by the proliferation of consulting and other nonauditing services that numerous accounting firms routinely offer, the knowledgeable people said.
From 1991 to 1997, Arthur Andersen received about $50 million in fees for consulting services at Waste Management sites world-wide, dwarfing the $10 million in audit payments during the same period, according to the knowledgeable people. The SEC, which declines to comment, is trying to determine if auditors looked the other way to keep consulting fees flowing.
David Barrett, an outside attorney for Arthur Andersen, said in an interview, "We're outraged someone leaked highly confidential information. Apparently it's being done to influence the SEC's rule making." He said that gross fee numbers can be highly misleading, but declined to comment further. Waste Management didn't immediately have a comment Thursday.
The general existence of a probe into Arthur Andersen's handling of Waste Management's financial statements has been known since April 1998, when the trash hauler, fresh from adopting more conservative accounting practices that increased truck-depreciation and other income-statement expenses, revealed the inquiry in an SEC filing.
At the time, an Andersen official termed it routine, saying an auditor's work is usually reviewed after a client restates earnings. The SEC, meanwhile, termed it "standard operating procedure in cases of alleged improprieties in financial statements to examine the accounting treatment that the statements received."
But since then, the SEC and some of the nation's biggest accounting firms have locked horns over the potential conflicts of interest that have arisen as revenue from consulting has dramatically run ahead of audit fees for the nation's biggest accounting firms. To the SEC, the desire of accounting firms to keep the consulting fees flowing threatens auditor independence by possibly prompting the accountants to overlook worrisome and too-aggressive bookkeeping practices. In June, the SEC proposed rules to significantly limit consulting services that auditors can offer corporate clients.
But public accountants, led by the American Institute of Certified Public Accountants, Arthur Andersen, KPMG LLP and Deloitte & Touche LLP, have mounted an aggressive counter-attack, arguing that there is no justification for new limits and that the regulation would actually hurt audit quality by reducing an accounting firm's scope of knowledge about client companies.
"There's never been a case where an audit failure in any way related to nonaudit services," said Shaun O'Malley, retired chairman of the former Price Waterhouse LLP, citing a recent audit-effectiveness study sponsored by the Public Oversight Board, an accounting self-regulatory group.
Historically, however, the SEC has steered clear of the high-risk legal strategy of trying to prove an auditor was conflicted by the consulting side of the business. The goal generally has been to establish that the auditors acted recklessly in failing to uncover fraud. Between 1994 and late 1999, the SEC has brought 676 enforcement cases that included alleged accounting violations, ranging from bookkeeping problems to fraud.
"It's very difficult, if not impossible to prove" an independence violation in a blown audit, said SEC Chief Accountant Lynn Turner: "You'd have to get into the auditor's head."
In the Waste Management case, according to one of the knowledgeable people, the SEC believes that it may have "smoking-gun documents." Among particulars of the situation, a big chunk of Arthur Andersen's consulting work was on the trash hauler's centralized computer system, the people familiar with the matter said. Information technology is one of the areas that the SEC has proposed banning as a cross-sold service to audit clients.
While the SEC is assessing the link between the trash hauler's accounting woes and the consulting services, the regulators are pursuing other avenues as well.
Earlier this month, for instance, Pinnacle Holdings Inc., a fledgling real-estate investment trust that owns and operates antenna towers, revealed in an SEC filing that the agency is probing allegations that its auditor may have violated independence rules. In a recent conference call with Wall Street analysts, Steven Day, the company's chief operating officer, said the SEC was given a tip that it examine Pinnacle's accounting last year for its $254 million acquisition of an antenna business from Motorola Corp.
The inquiry is in preliminary stages and the SEC has alleged no wrongdoing; an SEC spokesman declined to comment. A spokesman for PricewaterhouseCoopers, the Pinnacle auditors, said: "Our independence with respect to Pinnacle has never been impaired. All of the services provided to Pinnacle were appropriate and allowable under existing SEC standards." Pinnacle's Mr. Day added: "We're no criminals here. There are no accounting issues. We've done our accounting appropriately."
In Pinnacle's case, the SEC is looking at whether Pinnacle can justify how it valued the Motorola assets, as well as how it tallied acquisition-related expenses, according to a person with knowledge of the probe. According to an SEC filing, Pinnacle recorded the unit's current assets at $271.7 million. The SEC also is examining Pinnacle's $28 million in acquisition expenses: such things as legal, consulting and accounting fees, the person familiar with the probe said. If some of the figures of that type are on the high side, they could work to increase earnings going forward, accounting experts said.
In addition to auditing, PricewaterhouseCoopers has advised Pinnacle on possible deals, including "due diligence" work on possible targets -- about $3.7 million alone in consulting fees for work on the Motorola deal -- and it has consulted for the board on executive compensation, according to company executives. "We pay a lot of fees to our auditor's consulting side," Mr. Day said in the conference call, but declined to provide details.
The SEC, he said, "looked at that relationship and said, 'If you're paying a lot of fees, maybe [the auditors] let you have your way on accounting and maybe you can do whatever you want do.' That's their position and their fear."
Pinnacle has other close ties to its auditor. Mr. Day was a PricewaterhouseCoopers partner in the mergers-and-acquisitions group from 1986 until he joined Pinnacle as chief financial officer in 1997. When Mr. Day became Pinnacle's chief operating officer in July, he was replaced by Jeffrey Card, who had worked as a PricewaterhouseCoopers acquisitions partner since 1991.
The SEC's aggressiveness on the auditor-independence front follows years in which it spotted disturbing circumstantial evidence of fraudulent financials that might have been approved by a conflicted auditor. An example: the $500 million accounting fraud at Phar-Mor Inc., Youngstown, Ohio, which led the drugstore chain to seek bankruptcy-court protection in 1992. (It emerged from the bankruptcy proceedings in 1995.) In 1996, a federal jury in Pittsburgh hearing a shareholder suit found Coopers & Lybrand LLP liable under a fraud claim for signing off on financials recklessly without regard to whether they were true or false.
The audit partner viewed Phar-Mor as a "constant source of new business," plaintiff's attorneys argued in the case.
For their part, the accounting firms say the AICPA is an effective regulatory body. In addition to a policy-making role, it has a disciplinary panel and a full-time staff of 14 to investigate alleged violations. The SEC is "scratching in the mud everywhere they can to find an example, as if a single case would prove there's a significant risk to the economy," said Robert Elliott, AICPA chairman.
But the panel doesn't have the tools or authority to police the industry aggressively. It probes allegations made in SEC cases and in civil-shareholder lawsuits. But the panel has authority to investigate only its own members and doesn't have subpoena power to demand documents.
The AICPA has or is investigating 117 of the 676 SEC cases, so far resulting in 31 violations. Penalties range from public-auditing suspensions to reprimand letters. The big accounting firms note that board audit committees also exist to identify and handle potential problems.
Write to Michael Schroeder at mike.schroeder@wsj.com1
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UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
____________________________________
FLORENCE FOSTER, on behalf of )
herself and all others similarly situated, )
)
Plaintiff, )
)
v. )
PINNACLE HOLDINGS INC., STEVEN )
R. DAY, JEFFREY J. CARD, and )
ROBERT WOLSEY )
Defendants. )
___________________________________ )
Plaintiff makes the following allegations, except as to allegations specifically
plaintiff and her counsel, based upon the investigation undertaken by plaintiff's counsel, which
investigation included analysis of publicly-available news articles and reports, public filings,
releases and other matters of public record.
NATURE OF THE ACTION
1. This is a class action on behalf of all purchasers of the common stock of
Holdings Inc., ("Pinnacle" or the "Company") between January 18, 2000 and March 17, 2001,
inclusive, (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of
(the "Exchange Act").
2. During the Class Period defendants issued press releases and filed public
with the Securities and Exchange Commission ("SEC"), touting the Company's increasing financial
strength through numerous acquisitions of wireless tower sites, as well as its recent acquisition
F:\POSSIBLE\dar00789.wpd - March 23, 2001 (3:42PM)
assets from Motorola, Inc. In response, the price of Pinnacle securities traded at over $75 per
March, 2000.
SNIPPETS:
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Pinnacle Bank - All The Usual Suspects
From Here:
"The oil kick-backs were funneled through the Chicago branch of Italy's largest bank, Banca Nazionale del Lavoro [BNL], owned in part by the Vatican. According to Congressional documents, BNL was the twin and interlocked with Bank of Credit and Commerce International [BCCI]. BCCI has been a worldwide crime, political murder, and espionage operation that became, supposedly, defunct in 1991. Actually, BCCI has continued on through its successor and alter ego, Pinnacle Banc Group, whose flag-ship is First National Bank of Cicero (Chicago mafia enclave suburb).
...Starting in the early 1980s, BNL and BCCI set up branches in major cities in the U.S., including Chicago. This was arranged by partners in the Rose Law Firm in Little Rock and through their client, Stephens & Co., largest bond brokers worldwide, outside of Wall Street. Forming the branches required greasing the palms of state and federal bank regulators and others, around the country. Facilitating this corruption were two of the Rose Law Firm partners, Hillary Rodham Clinton and her law partner/lover, Vincent W. Foster, Jr."
"Who Is David Edwards?"
"While at Stephens, Mr. Edwards also played an important role in securing an offshore drilling contract in Bahrain for Harken Energy Corp., on whose board sat George W. Bush, presidential son and current governor of Texas."
The Jackson Stephens Empire - Death, Money Laundering, Spying and the Octopus
The Lippo Group and BCCI
September 10, 1996
Letter to the Editors:
Lippo Group is one of the largest contributors to the Democratic Party, via one Arief Wiriandinata, eh? According to your editorial "The November Stall", 9/6/96, Wiriandinata is married to the daughter of Hashim Ning, a co-investor of the Lippo Group.
Ah yes, Lippo Group, right? They own Lippo Bank of California. You know Lippo Bank. It's run by James Riady who attended the pre-inaugeral economic summit in Little Rock [representing Lippo Bank, the only foreign company at the affair], the Asian-Pacific Economic conference in Seattle in Nov. 1993 [where he shared a breakfast table with then WH Chief of Staff Mack McLarty], a June 1994 salute to Vice President Al Gore in Washington, and was on hand for Clinton's November 1994 visit to Indonesia.
You know James Riady, right? Mochtar Riady's son, and former President of Worthen Bank of Arkansas. You know Mochtar Riady, right? The right hand man of General Suharto of Indonesia, also a major investor of Lippo Group, and formerly a major shareholder in Worthen Bank. You know Worthen Bank, right? Jackson Stephens of Stephens, Inc. of Little Rock and Riady garnered controlling interest in Worthen 1984, through Lippo Group. Later, Lippo Group and Stephens tried to buy BCCI Hong Kong when it was put on the auction block after the Bank of Credit and Commerce imploded in global scandal.
You know BCCI, right? The bank that illegally entered the American banking system when they secretly bought control of Financial General Bankshares...You know Financial General Bankshares, right? The bank that Stephens tried to takeover on behalf of BCCI principals? In April, 1981 the Federal Reserve was assured by the influential Washingtonians that the Arab backers were merely passive investors, and FBG's takeover was given the green light. Director of that Federal Reserve Board was Jack Ryan.
You know Jack Ryan, right? Ryan ran the RTC without the benefit of Congressional vetting after Roger Altman resigned in shame for giving the White House a series of "heads-ups' regarding the RTC/ Whitewater referrals. [Who exactly was April Breslaw referring to when she told RTC investigator Jean Lewis that higher-ups would like the Whitewater referrals to disappear?] Jack Ryan conveniently "forgot" to include in his public resume that he worked for Arky, Fried, etc. from February 1985 to September 1986. Arky, Fried tied into the S&L scandals of the 1980's. Stephen Arky, the "Arky" of Arky Fried, committed suicide in July 1985. Ryan has declined to be interviewed regarding this period of his life. Curious name that: Arky. That's the same name of the mysterious $53 million account found at BCCI's commodities unit that no one could ever account for. It operated from October 1984 to September 1985.
Which brings us back to BCCI. You know, the bank controlled by Arabs who used D.C. insiders Clark Clifford and Robert Altman as front men? You know, Altman and Clifford, right? They were indicted on the BCCI scandals and represented at various times by the lawyers, Robert Fiske, Robert Bennett, and Jamie Gorelick in BCCI related litigation. You know this trio of Fiske, Bennett and Gorelick, right? Fiske was the first Independent Counsel assigned to investigate Whitewater, and who's only released finding was that Vincent Foster commit suicide in Fort Marcy Park; Bennett is now the Clinton's personal lawyer, and Jamie Gorelick is #2 at the Department of Justice.
Ah, the Department of Justice. Webb Hubbell used to be #3 at the DOJ and was very much involved when they gave BCCI principal Swaleh Naqvi a most gracious "sweetheart" deal.
You recall Nagvi? Not only was he #2 at BCCI, but he was also a defendant with Arkansas' Jackson Stephens in the 1978 lawsuit that resulted from Stephens' first attempt to secretly gain control of FGB for the Arab backers. Systematics was also a defendant. You know Systematics, right? Stephens controlled Systematics at the time. Their defense brief in the BCCI litigation was signed by Hillary Rodham [Clinton] and Webb Hubbell.
You know, Webb Hubbell...the guy who was "employed" by Lippo Group between the time he resigned from the Department of Justice in disgrace and the time he plead guilty to federal charges which landed him in jail for a couple of years.
Which brings us back to Lippo Group. Even though to this day neither the White house nor Commerce departments will release the list of people who went on the infamous junket to Jakarta in 1994 [litigation is in progress], Lippo Group was one of the contract recipients. You know Jakarta, right? That's where Mochtar Riady came from before he suddenly decided to move to Little Rock, Arkansas. That's where Dwight Harlan lives and serves as a "consultant". You know Dwight Harlan, right? Dwight Harlan served as the President of Jim Guy Tucker's Castle Sewer & Water...the utility that Tucker bought in a $1.2 million dollar deal that the Government says was fraudulent. You know Tucker, right? He was found guilty and was supposed to serve 4 years behind bars but got paroled before going to jail, and still faces charges regarding his cable company and dealings in Plantation, Florida. You know Tucker's cable company, right? The one whose former general manager was Dwight Harlan. You remember the indictment, right? Both Jim Guy Tucker and John Haley are defendants. You know John Haley? He's the former husband of Maria Haley. You know Maria Haley? When she served under then Governor Clinton in Arkansas she was in charge of international business development. Now she's a director of the Export-Import Bank. You know Ex-Im Bank, right? They signed the $40 billion of commercial transactions that were negotiated on Clinton's Jakarta trip in 1994.
But this has nothing to do with Bill Clinton.
Just because Jackson Stephens and Worthen Bank saved his career when the Bevill, Bresler scandal broke and Clinton was facing state losses of $52 million which threatened his career; just because Worthen saved his candidacy in 1992 with an "unusual" $3 million line of credit when his campaign was broke; just because Clinton's wife was involved in BCCI litigation, just because so many of the BCCI cast of characters have been appointed by President Clinton to serve him in a myriad of positions; just because the Jim Guy Tucker charges weave in and out of Bill's financial dealings, business partners and close friends; just because Vincent Foster's brother-in-law Beryl Anthony is the lobbyist for the Hong Kong Trade Development Council, where Lippo runs the show, and Foster's sister serves as a high ranking DOJ attorney; just because Webb Hubbell was working for Lippo Group, and in the office next to Michael Cardozo at G. Wm. Miller; just 'cause Cardozo and Hubbell were the guys who "coincidentally" met Foster at the Eastern shore the last weekend of his life; just 'cause Clinton anointed Tucker his successor as Governor of Arkansas, well, heck folks...This has nothing to do with Bill Clinton.
Sincerely,
Missy Kelly