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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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August 20, 2007 12:01 AM ET
A BDO client in Florida defrauded this Portuguese
Landov
“We certainly wouldn’t look the way we do now,” Jack Weisbaum, chief executive officer of the Chicago-based firm, said Tuesday in testimony during the damages phase of the trial. The jury determined in June that BDO Seidman was grossly negligent in failing to spot massive fraud at account receivables factoring company E.S. Bankest that cost Portuguese bank Banco Espirito Santo $170 million. Last Monday, the jury decided that BDO should compensate the bank for its entire loss, and on Tuesday decided another $351 million in punitive damages were in order. The $521 million award appears to be the largest judgment ever against an audit firm of any size, let alone one that has never been included in the ranks of the Big Anything and which, according to 2006 financials provided to the court, had a net worth of $41 million. To give the verdict another perspective, the $521 million is nearly 2,100 times the $250,000 in fees BDO earned from its relationship with Bankest. While Mr. Weisbaum may have painted a grim picture for the jury of the punitive damages’ impact, publicly the firm is maintaining a brave face. “We believe that interim finding was the product of the jury not being permitted to hear major portions of our defense during that part of the trial,” the firm said in a written statement. “We therefore believe the gross negligence finding and punitive damages will not survive the appeal in this case.” BDO has posted a $50 million bond to appeal the case. Mr. Weisbaum was not made available for comment. Time, however, may not be on the accounting firm’s side. When Dade County Judge Jose Rodriguez signs off on the verdict, which should be within the next 30 to 45 days, the daily interest on the award will begin accumulating at more than $100,000 per day—a powerful incentive to settle the case. Whether BDO settles or takes the case to the Florida appeals court, the massive award provides further fuel for the debate about whether the liability of audit firms for frauds committed by their clients should be capped or otherwise limited. In this case, nine executives from E.S. Bankest and at least one of its clients have been implicated in the fraud, which centered around fictitious accounts receivable. The two central characters in the scheme, brothers Hector and Eduardo Orlansky, were both found guilty of fraud. Hector Orlansky, Bankest’s chief executive officer, has been sentenced to 20 years in prison, while Eduardo Orlansky, its chairman, has yet to be sentenced. “The case highlights the issue of auditor liability reform generally,” said Cynthia Fornelli, director of the Center for Audit Quality, a trade group representing the audit industry. Indeed, auditor liability is one of the key issues that a committee commissioned by Treasury Secretary Henry Paulson earlier this year is expected to address. The committee, co-chaired by former Securities and Exchange Commission chairman Arthur Levitt and former SEC chief accountant Donald Nicolaisen, will hold its first meeting sometime this fall. The auditor liability debate normally turns on the possibility that one of the Big Four firms—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—might be brought down by liability for corporate frauds. Cases recently settled by Deloitte and PWC for audits of Adelphia and Tyco, respectively, came in at $167.5 million and $225 million. The award to Banco Espirito Santo, however, has the potential to, if not destroy, at least cripple one of the few firms that can provide global audit services analogous to the Big Four firms. Per Florida law, a jury award of punitive damages cannot “financially destroy” a firm. The question is: How do you define “destroy”? For the year ended June 30, the U.S. arm of BDO Seidman reported revenue of $589 million and earnings of $170 million, distributing $134 million of that—slightly more than one-quarter of the damages award—to its partners. When asked by his lawyer during the damages portion of the trial what would happen if the partners were not paid their salaries, Mr. Weisbaum replied: “I suspect that they would not come to work.” Steven Thomas, the Sullivan & Cromwell lawyer representing Espirito Santo, said that BDO Seidman is trying to have it both ways. “BDO told the jury the damages could destroy the company; they then told the press that they have a contingency plan for dealing with this,” he said. “They market themselves as a global partnership with worldwide revenues of $3.9 billion. But even if you only look at the U.S. affiliate, it has sufficient revenues to pay the claim.” Just barely. Stephen Bronis, a partner with Miami-based law firm Zuckerman Spaeder and executive director of the white-collar crime committee of the American Bar Association, said he suspects the award could be reduced by Judge Rodriguez or even reversed on appeal. “From the testimony I saw,” Mr. Bronis said, “the damages could put the firm in financial jeopardy.” FW
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