By Gregg Jones

The Dallas Morning News

DALLAS – Halliburton Co. chief executive David Lesar faced an uneasy audience when he convened a Wall Street conference call in late 2001. In the prior five months, his company’s stock price had crumbled by nearly half.

Analysts and investors were anxious about the hit Halliburton might take from a growing number of lawsuits related to asbestos exposure. Questions quickly focused on a company called Harbison-Walker: Halliburton had inherited its liabilities when it acquired Dresser Industries Inc. in 1998.

Not to worry, Lesar assured the group. “There have been no adverse developments at all with respect to the Harbison-Walker situation,” he said.

Actually, just five weeks earlier, a jury in Orange, Texas, had returned a $130 million asbestos verdict against Dresser/Harbison-Walker and a co-defendant.

Halliburton’s decision not to disclose the verdict for nearly three months is at issue in a Dallas federal court lawsuit that accuses the oilfield services and construction giant of defrauding investors. Halliburton denies any wrongdoing.

A judge will hear arguments Thursday on whether to accept a $6 million settlement negotiated by Halliburton and three lead plaintiffs or to allow dissenting plaintiffs to pursue broader fraud allegations outlined earlier this month.

The company has depicted the flurry of lawsuits and government investigations it is facing as efforts to embarrass its former chief executive, Vice President Dick Cheney. Although Cheney led Halliburton from 1995 to 2000, when most of the alleged fraud occurred, he isn’t a defendant in the Dallas suit.

In detail and scope, the latest allegations leveled against Halliburton in the Dallas court filing on Aug. 3 surpass those raised in the 20 related shareholder lawsuits brought against the company over the past two years.

They also paint a more extensive pattern of deception than alleged in a U.S. Securities and Exchange Commission suit that Halliburton settled for $7.5 million in early August. The SEC accused Halliburton of “misleading” investors by not disclosing “significant changes in its accounting practices” that improved reported profits.

The new court document – based in part on information provided by four Halliburton accountants – describes an elaborate effort by the company to appear more profitable than it really was by systematically understating expenses, overstating revenues, issuing sham invoices and delaying payments to vendors. Halliburton accountants who questioned the practices were fired or transferred, the document alleges.

Lesar, who was Halliburton’s chief financial officer and then president before succeeding Cheney as chief executive officer in August 2000, is described in the new document as the architect of the accounting misdeeds.

One of Lesar’s attorneys, Marcos Ronquillo, referred questions to Halliburton. Cheney’s personal lawyer was traveling, his office said, and couldn’t be reached for comment Wednesday.

Halliburton contends the charges are baseless.

“This is lawsuit abuse of the worst variety and serves no purpose but to smear the name of Halliburton and its employees,” said Wendy Hall, a Halliburton spokeswoman, responding to questions by e-mail. “These allegations are completely false.”

As for Halliburton’s willingness to settle the Dallas shareholder lawsuits rather than going to court to clear its name, she wrote: “The company admitted no wrongdoing and settled these cases because the company wanted to resolve this in a timely and cost effective manner and remove uncertainty.”

After 85 years in the oil business, with some of the world’s most difficult construction projects under its belt, Halliburton is no stranger to uncertainty.

Long before the U.S. occupation of Iraq, which has claimed the lives of more than 40 employees of its KBR unit, Halliburton weathered wars and coups and hard times that crippled competitors.

The late 1990s presented new challenges for Halliburton and other publicly traded companies. Stoked by a booming stock market, Wall Street analysts and big investors put extraordinary pressure on companies to push profits – and share prices – ever higher.

In early 1998, as a financial crisis in Asia began to squeeze Halliburton’s overseas business, Cheney announced the sort of bold stroke that made Wall Street buzz: In a deal set in motion on a south Texas quail hunt, Halliburton had agreed to buy one of its chief competitors, Dallas-based Dresser Industries Inc., for $7.7 billion.

Halliburton and Dresser shareholders overwhelmingly approved the merger in June 1998. Federal regulators finalized the deal three months later.

Meanwhile, with oil prices declining, international work slowing and merger costs looming, Halliburton executives privately mulled another major decision.

Under Cheney’s predecessors, Halliburton had taken a conservative approach to reporting revenue resulting from cost overruns on some of its big construction projects: It waited until a customer paid the disputed costs before reporting the amount as revenue and income.

The company quietly discarded that practice in the second quarter of 1998 and began reporting most of the disputed costs as revenue and pretax income.

It was an instant tonic to Halliburton’s sagging bottom line. By using the more aggressive accounting method, Halliburton reduced losses on some large construction projects and boosted its pretax income by $45.4 million, or 24.8 percent, in the second quarter of 1998, according to SEC statements and court filings.

By December 1998, the change had improved Halliburton’s pretax financial performance for the year by $87.9 million, or 26.1 percent, SEC investigators found.

In some quarters, the additional income enabled Halliburton to erase a loss and report a profit.

For six quarters after making the change, in financial filings and public comments by Halliburton executives, the company didn’t disclose the positive contributions of the cost overruns it was claiming as income. In March 2000, the company partially disclosed the source of the income in its 1999 annual report to the SEC. But the company still misled investors by not disclosing another $34 million in unapproved claims from joint venture projects that it added to its bottom line, the SEC concluded.

The shareholder lawsuits accuse Halliburton of deliberately hiding the impact of the change, then burying a three-sentence disclosure in a 40,000-word filing.

In fact, nearly four years passed before Halliburton’s accounting change became common knowledge. In late May 2002, six days after The New York Times ran a story on the change, Halliburton announced that the SEC was investigating the matter.

The company settled the SEC case on Aug. 3, agreeing to pay a $7.5 million fine without admitting any wrongdoing. Halliburton executives have said they didn’t disclose the change earlier because it “was not a significant issue.”

The SEC recently disagreed. It ruled that the accounting change was legal, but faulted Halliburton for failing to disclose a “significant departure” from its longstanding accounting practices. The SEC also accused Halliburton of obstructing the investigation by “delaying the production of information and documentation.”

Just days after Halliburton revealed the SEC investigation in mid-2002, a Halliburton shareholder filed a class-action lawsuit in U.S. District Court in Dallas accusing the company of defrauding investors by failing to disclose the change. Eventually, 20 cases making similar allegations would be consolidated in the case.

Thursday’s court hearing could determine whether this case ends, or whether a new chapter begins.

Last June, a federal judge gave preliminary approval to the $6 million settlement negotiated by Halliburton and the lead plaintiffs’ law firm, Schiffrin & Barroway of Philadelphia. Three of the four lead plaintiffs agreed to the settlement.

But the fourth lead plaintiff – the nonprofit Archdiocese of Milwaukee Supporting Fund – has asked the court to reject the settlement as too low. Its law firm, Scott & Scott of Colchester, Conn., contends that Schiffrin didn’t adequately investigate the case before agreeing to settle.

Scott & Scott also says the settlement amount is too small. The firm has asked Judge Barbara Lynn to allow the firm to pursue its broader case.

Schiffrin & Barroway attorneys didn’t return calls for comment.

David Scott of Scott & Scott says his firm has spent more than $100,000 investigating Halliburton’s accounting practices and has uncovered systematic fraud. The results of that investigation are contained in the court documents his firm filed earlier this month, which Scott said are necessary for the judge to make an informed decision on whether the $6 million settlement is adequate.

Hall, the Halliburton spokeswoman, dismissed the latest Scott & Scott filing as a publicity stunt.

“No one will benefit from this action other than Scott & Scott, including their own clients,” she said. “Many of their complaints have already been asked and already been answered. It is virtually a recycled lawsuit.”

In its latest allegations, Scott & Scott accuses Halliburton of engaging in five “accounting schemes” to conceal its true financial performance from investors: manipulation of project-level accounting; reporting false revenues; using a “cookie jar” of cash set aside for Dresser merger expenses to fraudulently increase profits; dipping into Dresser’s reserve accounts to pad its income and selling off pieces of Dresser to generate badly needed cash, in violation of the tax-beneficial accounting method it applied to the merger.

The firm further accuses Halliburton of concealing from investors the extent of the company’s asbestos liabilities, including the $130 million verdict, the 13th-largest civil court award in the United States in 2001, according to the National Law Journal.

Halliburton’s asbestos liabilities have soared since its merger with Dresser. The company says it is close to finalizing a $4.2 billion settlement for its asbestos liabilities.

Halliburton didn’t immediately disclose the $130 million asbestos judgment because it wasn’t final until late November, Hall said, a month after Lesar’s conference call.

“We believed it would be reversed by the court of appeals,” Hall said.

She added: “The more important reason was that these claims were insured and therefore the actual exposure of Halliburton was not material.”

In addition to the four current and former Halliburton accountants, Scott & Scott cites two former Dresser executives and company documents as the basis for its latest allegations. The accountants are identified by code names to protect them from reprisals “by defendants that have demonstrated a willingness to hold themselves above the law,” the document alleges.

The Scott & Scott filing – like previous allegations in the suit – says Halliburton’s actions defrauded investors by artificially inflating its stock price.

Investors who bought Halliburton shares between Sept. 29, 1998 and June 15, 2001 – the period the lawsuit covers – paid an average of $40 a share, only to see the price plummet to about $12 a share in December 2001, after the disclosure of the asbestos verdicts, the Scott & Scott filing states.

Halliburton shares closed Wednesday at $28.40, up 20 cents.

(c) 2004, The Dallas Morning News.

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