BDO – Nibbling Away At Their Viability

Given all that’s at stake for BDO in the Banco Espirito Santo (BES) judgement, and everything else on their mind it’s a wonder any court considers an agreement like this worth the paper it’s printed on…

$19M deal struck to settle Suprema suit
The former auditor of failed cheese company Suprema Specialties and several others will pay $19 million to settle a class action lawsuit that alleged they should have known about a massive fraud that doomed the business.

Accounting firm BDO Seidman, as well as several former Suprema board members and underwriters, signed a memorandum of understanding following more than a year of mediation, according to a letter submitted to a federal judge last week by a plaintiff’s attorney.

Attorney Eric Kanefsky wrote he expects the parties to sign a stipulation of settlement within the next few weeks. Along with BDO, the settling parties are former board members Rudolph Acosta Jr., Paul Desocio and Barry Rutcofsky, and underwriters Janney Montgomery Scott, Pacific Growth Equities and Roth Capital Partners.

The securities class action case has been pending since early 2002, when Paterson-based Suprema evolved from a high-flying public company to one raided by the FBI and bankrupt. Since then, federal prosecutors have secured six guilty pleas and two convictions against former employees or customers who participated in the scheme…

This is an interesting case, profiled in the WSJ Law Blog a while back. Unfortunately, the “I was duped” defense didn’t cut it for BDO in this case.

The company, whose former stock symbol was CHEZ, was liquidated after its two top executives were charged in an indictment alleging they orchestrated a massive fraud involving millions of dollars in fictitious cheese sales…The Third Circuit opinion was particularly critical of Suprema’s auditor, BDO Seidman: “The accounting violations set forth here surpass an inference of ordinary negligence; they reasonably suggest that BDO either knew of, or willfully turned a blind eye to, the fraud at Suprema.” But the court also hastened to add that there could be validity to the auditor’s claim that it too was a victim of fraud. BDO attorney Ira Greenberg told the Star-Ledger that while he was disappointed with the ruling, “we will defend the case vigorously.”

I’ve heard that BDO has already asked their partners to dip into their own pockets for the $50m bond that was posted in the BES case. They can’t possibly have had any significant insurance coverage say my sources, and the event may not have been covered. Did they report the claim on a timely basis? I’ve also heard that they have the audacity to be considering some kind of public offering or other type of solicitation for outside capital to fund the judgement and punitive damages award.

It isn’t unprecedented for partnerships to raise outside capital to fund ongoing operations or acquisitions. A law firm in Australia did it, traditional partnership-model investments banks like Goldman Sachs did it, and even “private” equity firms are doing it. Finally, all the Big 4 plus Andersen did it by selling off their consulting arms. However, the efficacy of this strategy for a public accounting firm of any significance has already been exposed as a myth, by a preeminent expert. And who in their right mind would give them money for any piece of the business if those funds are intended to go directly to pay a legal settlement. Not in this credit environment…

Where is the PCAOB in all this? When are they going to tell the firms it’s time to open their books and let us all know their overall financial exposure to ongoing litigation, where they’re going to get the money to fund the settlements, (hopefully not someone from some guys whose last name ends in a vowel,) and the approach they use to estimate the necessary reserves? That kind of transparency, the type they enforce on their clients, doesn’t seem to hurt their clients’ chances when going to court. There’s really no excuse.