Halliburton's

(HAL) - Get Report

past keeps coming back to haunt it.

The company now faces allegations it engaged in massive financial fraud that extends well beyond an old accounting change that, this week, triggered a

multimillion-dollar settlement with the government.

An institutional shareholder, who is seeking to block a small settlement with the company, now accuses Halliburton and four senior executives of deliberately misleading investors by overstating revenue, understating expenses and downplaying major asbestos liabilities.

The filing doesn't name former CEO Dick Cheney, now the vice president, as a defendant. It does, however, single out current CEO David Lesar as the alleged "mastermind of the accounting schemes" and notes that he previously served as the company's outside auditor at Arthur Andersen. It also names former CFO Douglas Foshee -- now the CEO of

El Paso

(EP)

-- among the accused. All four defendants are described as experienced certified public accountants who controlled both financial decisions and disclosures to the public.

The court filing points to statements made in regulatory filings and conference calls -- coupled with testimony from Halliburton insiders -- as evidence of fraud.

The "complaint includes significant new evidence uncovered by the

plaintiffs in their ongoing investigation of the wrongs committed that form the basis of the class' claims here," states a court motion seeking permission to file a new lawsuit against the company. "In sum, the ... complaint alleges that Halliburton caused hundreds of millions of dollars more in damages than has previously been alleged."

The proposed class action lawsuit, which requires court approval to be filed, describes Halliburton's reported net income -- over a period when the company's stock peaked -- as a "sham" and its past reassurances about asbestos exposure as "outright lies." The AMS Fund, one of four lead plaintiffs involved in the shareholder litigation, is now seeking to block a proposed settlement that offers as little as "half a penny" a share to participating class members. The fund pledges to seek a more equitable settlement instead.

For its part, Halliburton -- which neither admitted nor denied

Securities and Exchange Commission

findings on past accounting missteps in this week's settlement -- blasted the law firm behind the latest allegations. The company claims that Scott & Scott is "violating the spirit" of a court order, issued with June's preliminary approval of a shareholder settlement, that bars additional complaints from being filed.

"This is just the latest chapter in Scott & Scott's publicity-driven efforts to extort money from Halliburton's current shareholders," says company spokeswoman Wendy Hall. "This is lawsuit abuse of the worst variety and serves no purpose but to smear the name of Halliburton and its employees. No one will benefit from this action other than Scott & Scott -- including their own clients."

But attorney David Scott claims just the opposite is true.

"The

proposed settlement gives a black eye to the plaintiff's bar," he says. "We're going to do everything in our power to see if we can do better for the shareholders."

Halliburton's stock slipped 1.1% to $29.77 on news of the court filing.

Silent Treatment

The new 100-page complaint accuses Halliburton of engaging in at least five different accounting schemes that seriously misrepresented the true health of the company. It also alleges that the financial maneuvers were "interlinked" with an extended coverup of the company's asbestos exposure.

"Increased disclosure of the company's true asbestos liabilities during the class period would have forced the company to set aside additional reserves -- reserves that the company could ill afford precisely due to defendants' accounting fraud," the complaint states.

According to the new lawsuit, Halliburton learned in September of 2001 that it had lost an asbestos trial that resulted in $65 million worth of damages against the company. The lawsuit goes on to say that Halliburton not only failed to disclose the unfavorable ruling, but also reassured investors -- during a conference call more than a month later -- that it had suffered no asbestos-related setbacks. Foshee is quoted as saying "there is really not anything new to report." And Lesar goes a step further by telling investors "there have been no adverse developments at all" on the asbestos front.

"These statements to analysts and investors are chilling in light of the individual defendant's actual knowledge that a jury, during the very quarter in question, had returned a verdict based on ... claims against Halliburton for not less than $13 million per claim for just five plaintiffs," the lawsuit states.

Moreover, the complaint states, investors were heavily dependent on the company itself for any information about the case.

"Halliburton was not a named defendant," the lawsuit explains. "The verdict was not accessible on any database. The verdict was not reported by the press regionally or nationally. And notice of the verdict was available only at the single state district courthouse in which it was rendered -- one of hundreds in Texas."

The lawsuit notes that Halliburton again failed to mention the ruling when filing its quarterly report the following month. It says that only in December of 2001 -- after losing two other big jury trials -- did it finally disclose the months-old decision. News of the three verdicts, totaling some $131 million in damages, cut the company's stock by nearly half.

"On that Friday, investors finally came to the collective realization that the company had been affirmatively misleading them in its assurances regarding the company's asbestos exposure, financial performance and future prospects," the lawsuit states. "Investors now realized that the company could be in danger of bankruptcy."

'Sophisticated' Scheme

By then, the complaint states, Halliburton was weakened by years of accounting fraud that had allowed the company to please Wall Street.

For starters, it states, the company manipulated project-level accounting at KBR -- the unit now conducting extensive work in Iraq -- to hide cost overruns and make the division look profitable. Citing testimony from an insider, the complaint states that employees were ordered by their various finance directors to do "whatever it took to make

the project come back to plan" or achieve profitability. It also claims that employees who complained were punished -- including one who was reassigned to China for two years -- or terminated altogether.

Second, the complaint accuses Halliburton of overstating revenue. It claims that Halliburton would knowingly overbill customers -- and even fabricate invoices to its own subsidiary -- in order to boost its revenue even though it had no real expectation of getting paid for the receivables. It also points out that Halliburton's accounts receivables, as a percentage of overall revenue, surged by nearly 40% during the period in question.

Third, the lawsuits claims that Halliburton used the cash component of a special charge -- intended for personnel reduction and facility consolidation following the company's big merger with Dresser Industries -- to cover ordinary expenses instead. It even claims that Halliburton reported $23 million worth of personnel reduction costs in a quarter when it didn't lay off a single employee.

The lawsuit claims that former Dresser executives were particularly outraged over Halliburton's alleged misuse of the merger-related cash.

"These former Dresser executives describe Lesar as the mastermind behind Halliburton's accounting manipulations, and whose personal ethics they described as 'slash and burn,'" the lawsuit states. "After meetings with the auditors during the class period ... Lesar would laugh derisively about how much questionable accounting he was able to get the auditors to accept or overlook, according the former Dresser executives."

The complaint also states that Dresser executives grew similarly angry after Halliburton began aggressively depleting Dresser's old reserves to "ridiculously low levels." It also claims that Halliburton improperly sold off some of Dresser's most profitable businesses just to raise much-needed cash and protect its own interests.

"Carrying out accounting fraud of such intensity and duration could not be accomplished without the detection of even a compliant auditor through the use of a single, simplistic scheme," the complaint summarizes. "Instead, the fraud at Halliburton was perpetrated in a sophisticated and multifaceted manner. ... The five schemes are described in detail and linked to the knowing or severely reckless actions of defendants."

In addition to Lesar and Foshee, two other Halliburton accountants -- Gary Morris and Robert Muchmore -- are specifically named as defendants. Scott & Scott said it excluded Cheney because the lawsuit is "strictly an accounting case."

In its civil case with Halliburton, the SEC said Cheney "provided sworn testimony and cooperated willingly and fully in the investigation conducted by the commission's career staff."