Less than an hour after Thomas finished his closing arguments in a trial in which he sought to hold BDO International liable for a 2007 verdict he won against its U.S. affiliate, the six-person state court jury in Miami returned a defense verdict. The jury’s finding that BDO International bore no responsibility for the $170 million compensatory damages verdict against BDO Seidman followed Tuesday’s directed verdict for BDO International, which cleared the international of liability for $351 million in punitive damages against BDO Seidman.
“The jury got the case at 3:01 [P.M.] and they returned a verdict at approximately two minutes of four,” said BDO International lawyer Mark Raymond of Broad and Cassel. “The evidence is just overwhelming that there is no control by BDO International of its member firms–I am stunned that Thomas still bangs that drum. We all postulate theories, but when you lose in such a dramatic fashion, it’s time to get a new case. Steve Thomas is a terrific lawyer, but he had the facts wrong here.”
(I will have an updated post, with new clips, an interview with Steven Thomas and additonal analysis after the weekend.)
Judge John Schlesinger ruled from the bench in favor of BDO International yesterday. His ruling addressed only the punitive damages portion of the case brought by BES Bankest (Banco Espirito Santo) against the audit firm.
“The ruling leaves the BDO International jury to decide whether it should share liability with BDO Seidman for $170 million in compensatory damages.The punitive award was part of a $522 million verdict two years ago against Chicago-based BDO Seidman for its audits of a fraudulent Miami factoring business co-owned by the bank. The award is the largest ever against a U.S. accounting firm.
“I don’t believe the facts are in the neighborhood of adequacy to support punitive damages against BDO International,” the judge said in court Monday, according to a transcript. “They’re entitled to a judgment as a matter of law on the directed verdict.”
Closing arguments are expected to begin this afternoon.
Espirito Santo contended that BDO Seidman was an agent of BDO International when it failed to catch a $170 million fraud while auditing E.S. Bankest from 1998 to 2002. The bank, part owner of Bankest, was the victim of the biggest bank fraud in Miami history.
The bank contends BDO International had a responsibility to control BDO Seidman when the fraud took place. BDO International disputes the bank’s contentions and denies it had supervisory control over BDO Seidman.
Instead, BDO International maintains it provides administrative services to a network of independent member accounting and consulting firms that are separate legal entities.
The new jury has not been told about the dollar award by the 2007 jury. It will be asked whether BDO Seidman is an agent of BDO International.
The $522 million award against BDO Seidman is on appeal to the 3rd District Court of Appeal.
BDO International was dropped as a defendant in the 2007 trial, but the 3rd DCA said send it back, saying a jury must answer the agency question.”
I admit, I am very surprised.
Just listen to these two clips from Courtroom View Network of the June 3rd testimony of the International Secretary Paul Van Elten. You should also hear why I though it was pretty clear that BDO International did not do what they told the public they said they do. They were not managing and controlling one of their largest and most important member firms and have tried to wiggle out of that liability ever since the Banco Espirito Santo case came up.
I am preparing the clips from Courtroom View Network of yesterday’s proceedings and will insert them as soon as available.
Steven Thomas’ statement says it all:
“This is one of the most egregious business cases to come before the courts in our time. The jury will decide whether BDO Seidman is BDO International’s agent and therefore liable for the $170 million judgment against BDO Seidman. We believe the jury should have been given the opportunity to hold BDO International responsible for the punitive damages already awarded, based on BDO International’s now admitted fraud on the public. ”
The jury will still decide whether BDO International must share in the payment of the compensatory damages part of the case, $170 million. And the fact still remains: BDO Seidman is currently responsible for both the $170 million and the the $352 million dollar punitive damages unless reversed on appeal. They have already said that, as a US firm, they do not have that kind of money, that an award of that size plus the compensatory damages would break the US firm.
The key for the judge seemed to be that punitive damages were based on a finding of “gross negligence” and the plaintiff had not proved that BDO International, the umbrella firm of the global network, had been negligent in its supervision of BDO Seidman to that extent. That does not mean that jury’s finding of responsibility for the compensatory damages will not prove that BDO International was negligent at least in its supervision of the BES Bankest (Banco Espirito Santo) audit by BDO Seidman and that an umbrella firm has that connection to and responsibility for its member firms.
BDO Seidman has more recent bad publicity about its leadership to contend with – the same leadership in place during the the Banco Espirito Santo audits that were found to be grossly negligent:
Bloomberg June 10, 2009: BDO Seidman LLP’s ex-chief executive officer and a former tax-shelter promoter at the defunct law firm Jenkens & Gilchrist are among seven defendants set to appear in federal court on June 23 to answer charges that they marketed phony tax shelters.
Denis Field, 51, the former CEO at accounting firm BDO Seidman, and Paul Daugerdas, 58, a former Jenkens attorney in Chicago, were charged by a federal grand jury in New York with conspiracy and tax evasion for allegedly marketing fraudulent tax shelters from 1994 through 2004.
The indictment also charged Robert Greisman, 48, a former partner at BDO… On June 3, former BDO Seidman Vice Chairman Charles Bee pleaded guilty to federal charges that he helped clients evade more than $200 million in taxes through illegal shelters.
And in March another BDO Seidman Vice Chair pleaded guilty to similar charges.
So BDO International and its network of member firms are left, for now, with a big dilemma borne of their desire to shield the International umbrella firm and its member firms from responsibility for the operations and management of a particular member firm that goofed up:
What to do about BDO Seidman and the US firm, especially if the judgement is upheld and the US firm can’t pay?
Member firms, in general, want to be shielded from the responsibility for each other when, for example, there’s an egregious case of “gross negligence” by one of them that threatens the franchise and brand.
I’ve heard from many, both in and out of BDO Seidman, that they are going on, “business as usual.” College recruits to BDO Seidman are wondering when they’ll start and for how long they’ll have a job. But they are still accepting offers from the US firm, albeit perhaps reconsidering if they have another offer. Partners are not leaving in droves, splitting off or setting up new firms or aligning with others.
And clients are still choosing BDO as their auditor, if you can believe it. According to data from Compliance Week on auditor changes, so far in 2009, 23 firms have dumped BDO or a member from as their auditor, most often choosing another next tier or regional firm, but 14 companies have selected a BDO firm as their new auditor, most often coming from a Big 4. Are they making the choice simply on the promise of lower fees? I think that’s irresponsible. See the data here.
I’m at the Maryland Association of CPAs’ Business Expo – speaking, moderating a panel and sitting on a panel – and BDO Seidman is here, as a sponsor. The banner on the BDO Seidman booth in says, “BDO Seidman: Local strength. Global capabilities.”
Even if Steven Thomas is unsuccessful in pulling BDO International, and therefore, the members firms into the total circle of liability for the BES Bankest judgement, he will have at least made inroads on the template for his next case, KPMG International re: New Century. (And he did win the original judgement against BDO Seidman, which is still huge.)
KPMG International will be both a harder and easier case. Harder because KPMG is much more sophisticated than BDO and actually, usually, do what they say to the public they do. And they have documents to “prove” it. Easier because when they do what they purport to do in annual reports and websites and marketing materials, they may not do it well or may let politics/favoritism trump consistency and fair application of those policies to every partner. And there will be emails, and documents, and PCAOB inspection reports, both public and private versions post-2002, to prove it. It will be a much different ball game.
The next tier firms – BDO, Grant Thornton, and RSM – readily admit to regulators they have neither the infrastructure nor capacity to follow through on the quality standards that a “global network” connotes. For proof, listen to this webcast of the third session from a February 2008 PCAOB Standing Advisory Committee Meeting where quality standards for global networks were discussed. You will hear the contrast between EY and Deloitte vs GT and Moore Stephens. It’s dramatic and the regulators have allowed it.
Interestingly enough, word on the street all over the world, is that PwC, in particular, is scared witless of these suits given the inevitable suit against PwC International that will be filed in the Satyam fraud. In fact, one of their inside counsel subscribed to the Courtroom View Network coverage and has been listening every day. Sources have told me that more than one of the PwC firms of both the “network” and SEI (shared economic interest) variety, and there are both, are seriously evaluating options including dissolving and splitting off to avoid the potential liability of a catastrophic Satyam verdict.
Will Steven Thomas get the PwC International case? Maybe Stuart Grant? Or another attorney who will learn from both of their efforts? Each case is different and, yet, they are all adding kindling, laying the foundation for the bonfire of the Big 4 vanities, even before they’re tried.