Suit Accuses Halliburton of Fraud in Accounting

By GRETCHEN MORGENSON

The New York Times

August 6, 2004

Four former finance employees at the Halliburton Company contend that a high-level and systemic accounting fraud occurred at the company from 1998 to 2001, according to a new filing in a class-action lawsuit on behalf of investors who bought the company's shares.

The filing accuses the company of accounting improprieties that go far beyond those outlined by the Securities and Exchange Commission in its civil suit against Halliburton, which the company settled on Tuesday, paying $7.5 million.

The charges in the complaint and in the S.E.C.'s action cover the two years when Vice President Dick Cheney was Halliburton's chief executive. But he was not named as a defendant in the new filing nor in the regulatory proceeding. S.E.C. officials said Mr. Cheney provided testimony and willingly cooperated in their inquiry and his lawyer, Terrence O'Donnell, said Mr. Cheney's conduct as chief executive of Halliburton was "proper in all respects." He added that the S.E.C. "investigated this matter very, very thoroughly and did not find any responsibility for nondisclosure at the board level or the C.E.O. level."

According to the new filing, the four former employees, who are not identified in the suit but were managers in financial or accounting positions, say that Kellogg Brown & Root, Halliburton's engineering and construction unit, inflated its financial results by overbilling for services, overstating its accounts receivable due from customers and understating accounts payable owed to vendors. The filing also noted that one former employee in the accounting department said superiors had told her to do "whatever it took" to make projects appear profitable and to meet Wall Street estimates for the company's earnings.

The filing also asserts that executives at Halliburton misled investors in the fall of 2001 about asbestos liabilities faced by the company's subsidiary, Harbison-Walker, which it had acquired in the September 1998 purchase of Dresser Industries. Even though the company had lost a major case in a Texas court and was ordered to pay $130 million to plaintiffs, top Halliburton executives told analysts unaware of the verdict that the news regarding its asbestos obligations was "positive" and that there had been "no adverse developments at all" relating to Harbison-Walker.

Only on Dec. 7, 2001, when the verdict became public, did investors learn of Halliburton's obligations as a result of it, the suit said. The company's stock plummeted, losing 42 percent of its value that day.

The suit names Halliburton as a defendant as well as four executives who it said had control over the company's accounting and the contents of its reports to investors. They are David J. Lesar, Halliburton's chief executive, who took over in that job when Mr. Cheney became vice president; Douglas L. Foshee, a former chief financial officer who is now chief executive officer of the El Paso Corporation; Gary V. Morris, a former chief financial officer who is retired; and Robert Charles Muchmore Jr., former controller of the company.

"What we found to be compelling about this is that there appeared to be a series of schemes designed to bolster Halliburton's financial health that did not allow people to really understand the true financial picture at the company," said David Scott, a lawyer at Scott & Scott in Colchester, Conn. "We found that this was not just one isolated event; it appears to be a course of conduct designed to deceive the public."

Halliburton called the lawsuit abusive and an effort to smear the company and extort money from its shareholders. In a statement, the company said: "On June 7, 2004, the federal court in Dallas preliminarily approved Halliburton's settlement of approximately 20 class-action securities cases (including two filed previously by Scott & Scott) and ordered that no further complaints be filed. Apparently hoping to generate publicity, while violating the spirit but not the letter of that order, Scott & Scott has filed a motion seeking the court's permission to file this latest complaint and attached the complaint to that motion as an exhibit.

"Thus," the statement continued, "they abuse the broad immunity from defamation actions enjoyed by litigants and get their publicity at the same time. It is also noteworthy that this is the third lawsuit arising out of the same general series of events filed by Scott & Scott. Many of their complaints have already been asked and already been answered. It is virtually a recycled lawsuit."

The court filing was made on Tuesday in United States District Court in Dallas, the same day the S.E.C. announced an enforcement action against Halliburton, Mr. Morris and Mr. Muchmore. The S.E.C. contended that the company had misled investors about its financial results in 1998 and 1999 by failing to disclose a change it had made to one of its accounting practices. As a result of the change, Halliburton's earnings were considerably higher than they would have been under the method the company had used previously.

Halliburton and Mr. Muchmore settled with regulators, neither admitting nor denying wrongdoing. The company paid $7.5 million in the settlement. Mr. Morris declined to settle and was sued by the commission in federal court in Houston.

Lawyers for Mr. Muchmore and Mr. Morris did not return phone calls seeking comment; neither did Mr. Foshee.

According to a quarterly filing it also made on Tuesday, Halliburton is under investigation by the Justice Department over possible overbilling on government services work done in the Balkans from 1996 through 2000, when Mr. Cheney was the company's chief executive. The filing also noted that the Justice Department and the S.E.C. were investigating a project in Nigeria in which Halliburton participated and which might involve illegal payments under the Foreign Corrupt Practices Act. The company said it was too early to assess the impact the inquiry might have. The four former finance officials at Halliburton cited in the Texas court document worked at the company from as early as 1989 until 2003 and were interviewed by investigators for Scott & Scott in the course of researching the case. In the complaint, the former employees describe an accounting department that was decidedly lax in its controls, employing an antiquated computer system in which entries were manually entered and that did not provide details of the invoices or payments underlying revenues or expenses. Such details allow outside auditors to test a company's financial statements.

One former employee said that manipulation of monthly profit and loss statements at K.B.R. "was systemic and indeed a matter of policy." The accounting improprieties were necessary, the filing said, because they helped conceal burgeoning problems related to Halliburton's exposure to asbestos claims.

Because customers of Kellogg Brown & Root paid the company over long periods of time for its engineering work, the Halliburton unit used project plans based on the contract price and the schedule for completion. These plans projected costs to be incurred monthly based on a percentage of the job completed and the profit margins expected. If the costs of a project began to exceed estimates associated with the job, the company's finance directors told project accountants to change the books before the entries went into K.B.R.'s accounting information system, according to the complaint.

One former employee cited in the filing said that the company would routinely overbill but not bother to collect. Neither did the company add to reserves for doubtful accounts, the former employee said. She noted that at one point, the company had $20 million in accounts receivable that were more than six months old. The reserve for doubtful accounts, meanwhile, was $700,000.

The filing stated that the alleged accounting fraud also enabled Halliburton executives to sell shares at inflated prices. Mr. Lesar sold shares worth $1.64 million during the period that the profit manipulations were made, the filing said. The complaint noted that Mr. Lesar's stock sales during the period amounted to twice the sales he had made in almost three years prior to 1998.

Mr. Scott, along with a partner, Neil Rothstein, specializes in class-action securities litigation.

As one of three firms appointed to the executive committee in the Halliburton class action, Scott & Scott has objected to the $6 million settlement announced last year by lead counsel for the class. Calling the settlement inadequate, Mr. Scott said: "The importance of the $7.5 million fine by the S.E.C. this week against the $6 million settlement is telling. What I can't understand is why there has not been a greater outcry among shareholders on the terms of this settlement."

David C. Godbey, the judge presiding over the case, is expected to rule later this month on whether the settlement is fair.