PricewaterhouseCoopers LLP yesterday agreed to pay $50 million to settle allegations by Raytheon Co. shareholders that the auditor helped the Waltham defense contractor hide cost overruns five years ago.
The proposed deal cut short a trial that was likely to air some lingering conflict-of-interest complaints arising between accounting firms and their corporate clients.
The New York firm known as PwC denied any wrongdoing in settling the case. "We stand behind our work and would note there have not been any restatements pertaining to the litigation," said PwC spokesman Steven Silber. "We recognize that lawsuits of this nature, and the need to settle them in order to avoid the costs and distractions of protracted litigation, are unfortunate realities of today's business environment.
Raytheon shareholders as a class sued the company and its auditor in late 1999, alleging it failed to disclose quickly enough a host of delays and difficulties it was having on Pentagon and heavy construction projects. When it eventually described all the charges it needed to take, its stock fell 44 percent in a single day.
Earlier this month, Raytheon agreed to pay $410 million in cash and securities to settle the allegations. The company denied wrongdoing but said it paid the settlement to avoid the risk of an even larger damages award.
Raytheon investors alleged that PwC approved misleading financial statements.
Both settlements still require final approval from Boston federal district court judge Patti B. Saris. Together they would represent the fifth-largest recoveries in such shareholder litigation, according to figures from Stanford University law school.
Plaintiffs in the case were led by New York state comptroller Alan G. Hevesi, who oversees pension funds that held Raytheon shares. Hevesi and others were represented by the New York firm of Milberg Weiss, which will get 9 percent of the settlements, or $41.4 million, according to Hevesi's office.
"This settlement [with PwC] sends a strong message to auditors and other gatekeepers that they will be held to a high level of accountability and integrity in matters that impact the investing public," Hevesi said in a statement yesterday. He added that "auditors must be independent," and noted the suit's claims PwC was compromised by its desire for a consulting contract with Raytheon.
Plaintiffs' attorneys had begun to focus attention on the role of Raytheon chief financial officer Edward S. Pliner, who was PwC's lead partner on its work for Raytheon before leaving to join the defense contractor as its controller in April 2000. Two years later, he was named chief financial officer.
While Pliner was still at PwC, it pushed to win tens of millions of dollars in consulting fees not related to audit work, according to court filings. To argue that PwC's independence was compromised, plaintiffs attorneys cited, among other evidence, a memo that Pliner wrote in October 1998.
His memo noted that to achieve goals such as the consulting contracts, the firm must focus on "improving our relationships with senior management at Raytheon . . . to be viewed as their primary adviser on these issues and win significant work," according to a court filing.
PwC denied all wrongdoing. PwC's attorneys at the Boston law firm of Foley, Hoag LLP argued in court filings that lower-level PwC auditors who directly oversaw Raytheon's construction unit weren't even aware of the attempts to obtain the consulting work. They also noted Pliner wasn't contacted by Raytheon about a job offer until February 2000 and therefore wouldn't have been influenced by such an incentive earlier. On Friday, PwC's counsel filed a motion seeking to prevent the plaintiffs' attorneys from mentioning Pliner's job switch to Raytheon in 2000, calling the facts irrelevant and "highly prejudicial."
A Raytheon spokesman said neither Pliner nor the company would comment on the matter.
The civil trial's outcome could have turned on technical interpretations of accounting rules, but some outsiders expected the trial would also raise the close ties audit firms once kept with the firms whose books they oversaw.
"Independence is the key buzzword," said Timothy Hoeffner, a Philadelphia attorney whose clients have included Enron Corp. and audit firms facing similar litigation. He had expected the plaintiffs attorneys to focus on Pliner's job switch because it could raise the suggestion he wasn't always pressing as hard as possible on Raytheon.
"Plaintiffs counsel will harp for eternity on the conflict that would be created by an audit partner flipping over and becoming an insider," Hoeffner said in an interview Monday, before the settlement.
Rules adopted by the SEC following the Sarbanes-Oxley securities reform act of 2002 barred auditors from reviewing the books of companies whose chief financial officers or controllers had been at the audit firm reviewing the same books in the past year. The act also barred accounting firms from offering nonaudit services such as information systems design and implementation, legal services or expert services unrelated to the audit. Even before they were fully implemented, PwC spun off its consulting arm to IBM Corp.
The rules were adopted at a time of public anger over the collapse of firms like Enron and Tyco International Ltd. These cases also reflected badly on their auditors such as PwC, which oversaw Tyco's books. In addition, former Tyco chief executive L. Dennis Kozlowski once headed Raytheon's audit committee before he resigned to face criminal charges of looting Tyco. That case ended in a mistrial this year. Even the mention of Kozlowski's name was so symbolically powerful that Raytheon's attorneys sought, unsuccessfully, to bar the plaintiffs attorneys from mentioning it to jurors.
The settlement allows Raytheon and PwC to put the dark days of 1999 behind them. But the biggest winners in the case may be the jurors who faced the prospect of sifting through complex and highly technical evidence for six weeks or longer. Instead, just after the jury was led in yesterday morning, Judge Saris disclosed the settlement before lightheartedly admonishing the jurors: "Don't look so happy!"
Ross Kerber can be reached at firstname.lastname@example.org.