TOP STORIES--MARCH 24-29

Andersen Partners Back Volcker’s Reforms

Accounting firm Andersen launched a full-court press to persuade the Justice Department to drop an indictment that charges the Big Five firm with obstruction of justice for shredding documents related to Enron Corp. And the company’s chief executive, Joseph F. Berardino, resigned.

The firm’s 1,700 U.S. partners adopted a reform package proposed by Paul A. Volcker, the former Federal Reserve chairman who is overseeing the restructuring of the company. The proposal includes separating the firm’s auditing business from its lucrative but conflict-ridden consulting operations.

But the reform plan is conditioned on the Justice Department agreeing to open talks with Andersen about dropping the charges. So far, there has been no indication the government has any interest in negotiating.

Berardino stepped down after concluding that he’d become “an impediment” to Volcker’s efforts to save the firm.

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Hewlett Sues HP Alleging Improper Vote

Dissident Hewlett-Packard Co. director Walter Hewlett, determined to stop the company’s acquisition of Compaq Computer Corp., filed a lawsuit accusing HP management of improperly steering business to a major shareholder to win the investor’s votes in the closely fought proxy battle.

Hewlett’s lawsuit asks a Delaware business court to throw out the votes of Deutsche Asset Management, which could be enough to kill the $20-billion deal.

HP Chief Executive Carly Fiorina says the company narrowly won the proxy fight. Hewlett has refused to concede, saying the results are too close to call.

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AOL Time Warner to Take $54-Billion Charge

AOL Time Warner Inc. said it is taking a record $54-billion write-down in the first quarter, reflecting the steep decline in the value of assets the Internet service provider acquired last year when it bought the world’s largest entertainment company.

The company, whose shares have declined nearly 50% in the last year, warned Wall Street in January that it would take a noncash charge against earnings of $40billion to $60 billion because of new accounting rules governing merger deals.

AOL Time Warner’s write-off is the largest in corporate history, surpassing telecom equipment firm JDS Uniphase Corp.’s record $50.1-billion charge in fiscal 2001.*

Slatkin Agrees to Plead Guilty

Santa Barbara money manager Reed Slatkin, who built an illusory investment empire using money collected from Hollywood celebrities, Internet moguls and fellow Scientologists, agreed to plead guilty to 15 counts of fraud, money laundering and conspiracy for masterminding one of the largest Ponzi schemes in history.

Slatkin, who collected $593 million from 800 investors, could face up to 105 years in prison, although his sentence probably will be far less, federal prosecutors said.

The sentence could be further reduced by a few years if Slatkin, 53, cooperates fully with investigators, who are trying to determine what happened to investors’ money.

Slatkin has acknowledged that at least $255million is missing in the scheme, in which new investors’ money was used to pay bogus returns to earlier investors.

A co-founder of Internet service provider EarthLink Inc., Slatkin also faces a $3.75-million fine and has been ordered to make restitution to his victims, although it is unclear how much money will be recovered.

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Will Customers Go for Scion or ION?

Although light trucks comprise more than half of the U.S. auto market and their share is growing, auto makers are slugging it out even more fiercely in the passenger car segment.

At the New York International auto show, Toyota Motor Co. introduced a new brand called Scion, aimed at the Gen-X and Gen-Y customers with whom the company hasn’t connected. The model will go on sale in June 2003, initially in California only.

Meanwhile, General Motors Co.’s Saturn division unveiled the ION, a compact car with interchangeable trim panels, also aimed at the youth market.

Ford Motor Co. announced it will build a new sedan called the Five Hundred that’s bigger than the mid-size Taurus but smaller than the full-size Crown Victoria.

Nissan Motor Co. showed its Murano “crossover” that’s part sport utility vehicle, part station wagon, and Nissan’s luxury Infiniti division took the wraps off a sleek G35 coupe and all-new M45 sedan, priced around $40,000.

Tipping the scales for about the same price is the Lincoln Aviator, a luxury SUV built off the Ford Explorer that Lincoln, the top-selling luxury brand in 1998, hopes will help pull it up from the No. 6 spot to which it has fallen.

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Adelphia Shares Hit by Off-Sheet Debt Report

Adelphia Communications Corp. took investors by surprise when it acknowledged that it has $2.3 billion in debt not included on its balance sheet.

The company also reported a larger-than-expected fourth-quarter loss as a result of a $1.5-billion write-down on the value of a former telephone venture, Adelphia Business Solutions, which filed for bankruptcy protection last week.

Wall Street has been wary of any company using off-balance-sheet financing practices after the December bankruptcy filing of Enron Corp., which used private partnerships to shift debt off its books.

In the case of Adelphia, the sixth-largest cable operator, the controlling Rigas family has been borrowing money through a privately held partnership. The family in effect shifted debt from Adelphia Communications to the off-balance-sheet partnership, called Highland Holdings, whose loans were guaranteed by the public company.

The practice is not illegal, but investors say it is inappropriate and undermines the company’s credibility on Wall Street. By week’s end, Adelphia shares were at $14.90, down 29% since Monday.

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Court Ruling Keeps Napster Offline

Online music company Napster Inc. had an eventful week in the courts.

A federal appeals court Monday upheld an order by U.S. District Judge Marilyn Hall Patel shutting down Napster’s free service until it improved its ability to block piracy.

The next day, Patel gave Napster 10 months to gather evidence that the major record labels misused their copyrights.

Meanwhile, a battle for control of Napster’s board broke out in Delaware Chancery Court, with original investor John Fanning--the uncle of wunderkind programmer Shawn Fanning--suing to oust representatives of venture capital firm Hummer Winblad.

John Fanning is trying to ensure that Hummer Winblad won’t walk away with all the proceeds if Napster is sold to European media conglomerate Bertelsmann.

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SEC Accuses Former Waste Execs of Fraud

The Securities and Exchange Commission sued six former executives of Waste Management Inc., the largest U.S. trash hauler, accusing them of inflating profit by $1.7 billion in a “massive financial fraud” the agency said was aided by accounting firm Andersen.

By deferring or eliminating expenses, among other techniques, the company, from 1992 to 1997, was able to meet Wall Street profit expectations and boost its stock price, enriching the defendants by more than $28 million in performance-based bonuses and other compensation, the agency said.

Ordinary investors, however, lost $6 billion, as the company’s stock plunged after the firm recorded a $1.7-billion earnings restatement in 1998, the SEC said.

The case is an extension of an SEC investigation that resulted in a settlement last June with Andersen, the company’s former auditor. Andersen paid $7 million in fines to settle charges that it had filed false Waste Management audit reports for 1993 through 1996.

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U.S. Sues Union-Backed Firm Over Lost Funds

The Labor Department has sued a major union-backed financial services company, Union Labor Life Insurance Co., alleging it broke pension laws by making a $10-million investment of retirement funds in a shaky Las Vegas real estate venture.

The suit alleges that the company, through its investment subsidiary Trust Fund Advisors Inc., used Laborers’ International Union pension funds to buy 120 acres of land that was to be developed into residential building sites. No work was done, and the land was sold in 1999 to Newport Beach-based developer Capital Pacific Holdings Inc. at a loss of nearly $1 million.

The Labor Department contends that because the $10 million could have generated substantial earnings during the booming mid-1990s, the actual loss is far higher than $1 million. The company says it acted appropriately.

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For a preview of this week’s business and economic news, please see Monday’s Business section.