updated 4/26/2005 12:51:33 PM ET 2005-04-26T16:51:33

A federal judge gave preliminary approval Tuesday to a deal under which auditor Arthur Andersen LLP will pay $65 million to settle allegations it failed to protect investors from WorldCom’s historic accounting fraud.

“Congratulations are in order,” Judge Denise Cote told lawyers just before giving her approval.

The settlement brings to a close a class-action lawsuit by investors that also laid blame on major investment banks that underwrote WorldCom securities and 12 former directors of WorldCom itself.

The banks settled before trial for more than $6 billion, and the directors agreed to pay nearly $25 million out of their own pockets.

Andersen was the only defendant left when the case went to trial last month. In a statement Monday, when the settlement was announced, Andersen denied wrongdoing.

New York state Comptroller Alan Hevesi, the lead plaintiff in the suit, called that assertion “laughable” on Tuesday and said only fools would believe the settlement exonerated Andersen.

“We will have zero tolerance for the kind of behavior that was exposed at trial here and elsewhere regarding misbehavior on the part of corporate leaders,” Hevesi told reporters outside court.

The judge excused jurors in the case, which was likely to end with closing arguments next week had a settlement not been reached.

The lawsuit accused Andersen of failing to sniff out the $11 billion fraud that sank WorldCom in 2002. Andersen contended it was duped by WorldCom executives.

Former WorldCom CEO Bernard Ebbers was convicted last month of orchestrating that fraud and will be sentenced this summer. He could spend the rest of his life in prison.

Ebbers and three other WorldCom executives also face similar civil suits brought by investors. Cote said she would schedule a hearing to discuss those soon.

The deal announced Tuesday interrupted a trial in its fifth week on the accusations contained in a class action lawsuit brought after WorldCom’s 2002 collapse, the largest bankruptcy in U.S. history.

It’s not known where Andersen would get the money for a settlement. But industry expert Mark Cheffers said Monday it likely has funds left over from liquidating its assets or in its reserves for insurance losses.

“There’s probably any number of different sources for that payment,” said Cheffers, CEO of Audit Analytics, a Sutton, Mass.-based firm that provides market research for the audit industry.

He said Andersen would closely guard the amount available for a settlement.

The plaintiffs maintained that WorldCom’s annual financial statements for 1999, 2000 and 2001 contained false statements and that Arthur Andersen issued its audit opinions with an “intent to deceive, manipulate or defraud.”

Arthur Andersen insisted through its lawyers that each of its audit opinions from 1999 through 2001 was generated in good faith and with no intent to deceive, manipulate or defraud.

To find against Arthur Andersen, the jury would have had to conclude that the auditor’s conduct was “highly unreasonable” and that WorldCom’s fraud was known to the auditor or was so obvious that it must have been aware of it.

WorldCom, which collapsed when the accounting fraud to inflate earnings and hide expenses was revealed, has re-emerged as MCI Inc., based in Ashburn, Va.

The class action lawsuit began as many investor suits, eventually consolidated by the judge. Arthur Andersen has reached a settlement with WorldCom investors who had accused the company's former outside auditor of violating securities laws by failing to protect them from WorldCom's historic $11 billion accounting fraud.

Details of the settlement were not immediately released. U.S. District Judge Denise Cote indicated that an expedited preliminary approval hearing on the settlement would occur Tuesday. The deal interrupted a trial in its fifth week on the accusations contained in a class action lawsuit brought after WorldCom's 2002 collapse, the largest bankruptcy in U.S. history.

Before the trial, major investment banks agreed to pay more than $6 billion in settlements and a dozen former board members settled the case for $24.75 million, leaving Arthur Andersen as the sole defendant.

A message left Monday with a lawyer for Arthur Andersen was not returned.

The lawsuit was led by New York state Comptroller Alan Hevesi, acting as trustee of the state employees' retirement system.

John Chartier, a spokesman for Hevesi, said he had no immediate comment.

The plaintiffs maintained that WorldCom's annual financial statements for 1999, 2000 and 2001 contained false statements and that Arthur Andersen issued its audit opinions with an "intent to deceive, manipulate or defraud."

Arthur Andersen insisted through its lawyers that each of its audit opinions from 1999 through 2001 was generated in good faith and with no intent to deceive, manipulate or defraud.

To find against Arthur Andersen, the jury would have had to conclude that Arthur Andersen's conduct was "highly unreasonable" and that WorldCom's fraud was known to the auditor or was so obvious that Arthur Andersen must have been aware of it.

Last month, former WorldCom CEO Bernard Ebbers was convicted of fraud, conspiracy and false regulatory filings in the accounting scandal. He could spend the rest of his life in prison.

WorldCom, which collapsed when the accounting fraud to inflate earnings and hide expenses was revealed, has re-emerged as MCI Inc., based in Ashburn, Va.

The class action lawsuit began as many investor suits, eventually consolidated by the judge.

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