Professional Services Insurance Co. Ltd, a Bermuda based company partially owned by Andersen, reached settlement in the case with the Arizona attorney general's office on March 1, in what appeared to be an effort to clean up numerous shareholder lawsuits that had been filed against the firm.

"For Andersen, this seems to be business as usual," said Arizona Attorney General Janet Napolitano. "The victims have been fleeced once again. They have no desire to do what is right; their behavior is despicable. I will bring to bear the full force of the attorney general's office to resolve this."

Separately Friday, former Federal Reserve chairman Paul Volcker, recruited by Andersen to help salvage the firm by recommending changes in the way it does business, named two senior Andersen partners to head a transition team as he prepares to replace the firm's management. Volcker said he thought his plan to reform Andersen could still save it, although in a much-diminished capacity, stripped of its consulting practices.

Some observers say Andersen's decision backing away from its settlement agreement in the Arizona case might make sense for a company contemplating bankruptcy.

"What it means is that they are thinking smart," said Bill Brandt, president and chief executive of Development Specialists Inc., a renowned Chicago-based turnaround firm. "If you are anticipating bankruptcy, cash is king and this is a vast amount. In bankruptcy - without cash - they could only borrow under onerous terms. The next three weeks will tell the tale whether they make it - or they don't make it."

Brandt also noted that circumstances had changed since Andersen made the agreement. "At that time, they had not yet been indicted. The indictment changed everything."

Just two weeks after signing the settlement agreement in the Baptist Foundation case, Andersen (March 14) was indicted and charged with obstruction of justice in connection with the shredding of thousands of documents related to its audit of Enron Corp., the bankrupt energy trading firm.

Patrick Dorton, a spokesman for Andersen, said the agreement had been negotiated in "100 percent good faith," and was contingent on the insurance company's agreement. "Arthur Andersen's attorneys are evaluating the situation to determine their next course of action."

By signing the Baptist Foundation settlement, Andersen had put a stop to a plethora of legal actions against the firm, most of which were quickly reinstituted on Friday.

The foundation began in 1948 with a stated mission to raise money for religious causes by selling notes to churches and private investors. Bad real estate deals led to big losses for the fund, with 11,000 investors losing almost $600 million in what Arizona officials said became nothing more than a Ponzi scheme.

Napolitano vowed to seek "the administrative equivalent of the death penalty," against Andersen, saying her office would ask the Arizona Board of Accountancy, which licenses and disciplines accounting firms and accountants, to revoke Andersen's registration. Such an action would put Andersen, the state's largest accounting firm, out of business in Arizona.

In addition, three Andersen partners in Arizona who had been allowed to temporarily relinquish their licenses will now face revocation of their licenses, Napolitano said.

The unraveling of the settlement sent attorneys back to court Friday to seek the first immediate trial date - April 29 - to reopen court cases that had been filed to recover damages from investors.

Sean Coffey, an attorney for the Baptist Foundation said: "We are going to ask the mediator to issue a ruling requiring Andersen to abide by it. If Andersen is permitted to walk away from the deal, we will commence the trial four weeks from Monday."

He also said that Andersen had repeatedly said its insurance company was "a captive owned by Andersen that did not need to participate in the mediation and would do Andersen's bidding. The notion that this was a major contingency by Andersen that would allow Andersen to walk away from the deal is just bogus," Coffey said.

Napolitano accused Andersen of dealing in "bad faith" and suggested that Andersen might only have made the agreement as a stalling tactic.

"The tragedy here is that these victims are all senior citizens, many of whom have lost their homes, their retirement incomes and have been on an emotional roller coaster as a result of Andersen's actions," Napolitano said.

Investors cheated in the Baptist Foundation scandal said they were stunned by the settlement collapse.

"It's just rotten, rotten, rotten to the core," said Forrest Bomar, a 73-year-old from Palestine, Texas, who invested $217,000.

He said a few weeks ago he his wife, Lee, were rejoicing at news of a settlement. Now, they fear Andersen will file bankruptcy, and the matter will take years to be resolved. "Some of us will be dead by that time," he said.

Darrel Srader, 54, an Arizona businessman who invested $4 million, said the settlement collapse is yet another Andersen failure.

"These people are pathological. It's one misstep after another," he said. "Obviously, these are not honorable people. When's a deal a deal?"

Many of the victims of the scandal were retirees and small-time investors who lost their life savings. For a settlement to fall through, Srader said, "is the height of cruelty."

Napolitano said that two previously scheduled meetings with victims, set for Monday and Tuesday, would still be held.

The Andersen executives named to Volcker's transition team are C.E. Andrews, head of the firm's worldwide audit practice, and Lawrence Rieger, global managing partner for assurance services.

-- Melita Marie Garza