Florida Appeals Court Turns Down Heat, For Now, On BDO Seidman

I was surprised by the news that the record verdict against BDO Seidman in the Bankest fraud had been reversed. I was stunned not because the verdict had been reversed on appeal but by the reasons why.  Everyone has to prepare for a new trial because a judge erred in the setup of the proceedings.

That’s not supposed to happen.

It was a screwy sequence of events, for sure.  Every time I wrote about the case I had to carefully consider how to present all the twists and turns, ins and outs and complex machinations the court forced both sides to endure.

The 20-page opinion was written by Judge Vance E. Salter. Judges Gerald B. Cope and Linda Ann Wells concurred. Salter said Rodriguez’s trial-planning decision was based on good intentions for efficiency purposes.

“These objectives are much harder to achieve, however, in a complex case,” Salter said.

Rodriguez ordered the first phase of the trial to determine whether BDO Seidman had committed gross negligence, but Salter noted that was two months before the jury considered issues of causation, reliance and comparative fault.

One potential negative for the plaintiffs in the retrial is the likely judge. Miami-Dade Circuit Judge John Schlesinger, the judge who rendered the verdict for the defense in the BDO International phase of the case, has taken over Judge Jose Rodriguez’s civil division and will hear the retrial.  I was not impressed with Judge Schlesinger’s level of interest or aptitude during the BDO International trial for this “complex case brought by plaintiffs not in privity with the accounting firm/defendant.”

From Leagle’s posting of the opinion: The salutary objectives of judicial economy (no phase II damages trial is required if the jury returns a defense verdict in phase I), and the reduction of a longer case into more digestible “phases,” often support bifurcation and the exercise of that discretion. These objectives are much harder to achieve, however, in a complex case brought by plaintiffs not in privity with the accounting firm/defendant. In such a case, liability ultimately turns on specific demonstrations of knowledge, intent, and reliance. The evidence pertaining to those issues is inextricably intertwined with the claims and affirmative defenses on issues of comparative fault, causation, and gross negligence.

Bankest’s attorney Steven Thomas is optimistic about a retrial.  Me?  Not so much.   This isn’t because I doubt Mr. Thomas’ ability to kick tail as he did in the original trial.  This isn’t because the case doesn’t have sufficient merit.

From Michael Rapoport at DJ/Wall Street Journal: Steven Thomas, an attorney for Espirito Santo, said he was looking forward to a retrial. “The evidence of BDO Seidman’s failures of even the most basic auditing procedures is so overwhelming that we expect a new jury will reach the same conclusion as the original jury,” he said in a statement.

My doubts about the efficacy of a new trial are based on the disappointing, frustrating and completely unsatisfying way the court and the judges in this case have proceeded.  Some of the additional comments raised by the Appeals Court do not bode well for this plaintiff’s chances next time around. This is in spite of the fact they made a point of saying they would stop at the prejudice imposed by the trifurcation issue and say no more that would prejudice a new trial.

Because of the prejudice inherent in the premature, first-phase gross negligence finding, we do not address in detail other aspects of the trial. Our conclusion regarding the “trifurcation” issue renders moot or pretermits our consideration of most of the other parts of the jury’s verdicts and the remaining points on appeal and cross-appeal.

There are two other issues raised by the Appeals Court that may prove problematic to the plaintiffs in a retrial.

Judge Salter faulted Judge Rodriguez for allowing disgraced attorney-accountant Lewis Freeman to give hearsay evidence.

A court-appointed receiver or trustee …may testify from personal knowledge regarding relevant aspects of his or her own personal investigation of the business failure and liquidation or reorganization of the entity. There is, however, no broad exemption from the rules of evidence that would allow a receiver or trustee to introduce hearsay, or hearsay within hearsay, regarding statements by out of court declarants.

The original case actually started out with a mistrial based on the inadvertent mention of a suicide by plaintiff’s counsel. However, Mr. Thomas has recovered from serious setbacks before.

The second challenging issue relates to Florida law.  That state prohibits judgments that would bankrupt a defendant. The appeals court reminded the plaintiffs that such a judgment would not be allowed in the future. Even more troubling is they seemed to imply that audit firm partners should be paid “profits” each year before considering claims of any parties damaged by the firm’s frauds or gross negligence. Audit firms have no duty to reserve for or disclose serious legal contingencies since they don’t use GAAP themselves.

Isn’t a partnership a form of business that implies everyone takes responsibility for wrongdoing by any one of them?  Taking risks means having to say you’re sorry and pay the piper if you make a really big mistake. In some cases, it’s not right to keep a bad firm alive another day.

The amount of punitive damages assessed against BDO exceeded several-fold BDO’s net worth according to the phase III record. While it is true that BDO, like most professional service firms, distributed substantially all of its annual net income to its partners (leaving a year-end net worth much lower than annual net income), the $351 million punitive damages award would plainly “lead to [the defendant’s] financial demise.” Lipsig v. Ramlawi, 760 So. 2d 170, 189 (Fla. 3d DCA 2000). An accounting firm that must distribute its net income and net worth to judgment creditors rather than the partners who produced that income will not have partners (or clients) for long. But for our decision to remand for a new trial on the “trifurcation” issue, we would have been compelled to find an abuse of discretion in the denial of BDO’s post-trial motion for a remittitur regarding the punitive damages.

Bankest’s attorney Thomas had to file a motion to force discovery because they suspected that while the case was under appeal,  “assets have been or are being dissipated or diverted while such a stay is in place.” If the courts in Florida believe an audit firm can distribute all assets in order to avoid paying judgments then Mr. Thomas and Bankest should consider settling soon to grab what’s there. Otherwise, each year this goes on, whatever BDO Seidman can make from their gullible clients will be paid out to their partners, in full, leaving nothing to pay for their sins.

7 replies
  1. anon
    anon says:

    This is turning into a Michael Moore movie subject matter. Massive amounts of fraud, suicide, overturned rulings…wonder if he’s reading and watching as well?

  2. Billy Jean
    Billy Jean says:

    It’s interesting that you want BDO to lose the case no matter what. An experienced attorney friend of mine read the decision and thought that even if BDO is found negligent, they would only have to pay damages for their share of the negligence, which would be like 1/10th of the original judgment. In the end, the people most at fault in this case were those who committed fraud and are in jail.

  3. Francine
    Francine says:

    @Billy Jean

    I don’t “want” BDO to lose the case. They already lost it. Based on my reading of the evidence (which is skewed certainly by distance and the vagaries of a trial transcript and trial video) it looks like they were grossly negligent in the audit. If you read the post carefully, I recommend that Bankest settle now, since the complications of the case and the requirement for another trial make it a long and expensive trip.

    But what I would have liked to see is a good case with the International firm brought in and tried the right way and the trial done right. It looks like that will never happen here and it looks like it won’t happen in KPMG New Century since Mr. Thomas settled that for his client. Maybe it will happen in Satyam. The point of that is to finally hear these issues and decide them in front of a judge with the interest and aptitude to hear them out. That would take a lot of the uncertainty out of current and future litigation for the audit firms. And their partners and employees.

  4. Billy Jean
    Billy Jean says:

    The ruling also threw out a class of people who couldn’t have relied on the audited financial statements, which would further reduce liability. At the end of the day, it will probably be settled for less than $50M, and it will not be disclosed to the public, just like KPMG’s recent settlement.

  5. Francine
    Francine says:

    @Billy Jean

    I think the number will be a little bigger than $50 million (the current bond posted) but smaller than a Mack truck. 🙂

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  1. […] a law that prohibits a judgment that would bankrupt a defendant.  That came into play in the reversal on appeal of the huge judgment against BDO Seidman in the Bankest fraud […]

  2. […] of the next-tier firms – Grant Thornton, BDO Seidman or any other firm in that category in other parts of the world – could pick up the business […]

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