Arguments Heard in BDO Appeal of $521 Million Verdict

Oral arguments for BDO's appeal of the verdict in the Banco Espirito fraud case were this past Tuesday, the 16th, in front of the Florida 3rd District Court of Appeal in Miami.

If you're not familiar with this case, we'll catch you up: Banco Espirito Santo International Ltd., Banco Espirito Santo S.A., and ESB Finance all invested in E.S. Bankest L.C. BDO served as the auditor of Bankest. Crazy massive fraud (bogus accounts receivable) was going on at Bankest that was discovered by Banco Esprito. Bankest went bankrupt, their executives went to jail, Banco Espirito lost millions.

Banco sued BDO in 2004 and in 2007 a jury found the Firm liable for malpractice and gross negligence. Prior to the jury's decision, BDO CEO Jack Weisbaum testified that the firm would not be able to pay punitive damages. The jury didn't care and awarded Banco $170 million in compensatory damages and $351.7 million in punitive damages for a grand total of $521.7 million, the same amount of accounts receivable that BDO "audited". Now here were are, it's 2010, appeals process. Whew. Follow?

We spoke with Steven Thomas, who has represented Banco Espirito Santo throughout this case, earlier this week and he filled us in on many details. BDO is appealing the verdict arguing that the case should not have been bifurcated (i.e. divided into two) at trial. In other words, it sounds as though BDO has resorted to arguing technical legal points in this appeal as opposed to defending against the finding that they both performed malpractice and were grossly negligent.

As we explained above, the malpractice and gross negligence arose out of BDO's failure to discover the fraudulent accounts receivable at Bankest. At trial, Mr. Thomas told us that under cross-examination, the BDO engagement partner admitted that it was the auditors' job to find fraud and then subsequently contradicted himself when being questioned by his own counsel, saying it wasn't their job.

Regardless of what side you fall on in the whole auditors' responsibility to discover fraud argument, Mr. Thomas told us this, "I have a litigated a lot of cases on this issue and we never, ever, ever lose."

We reached out to BDO and Greenberg Traurig the law firm representing BDO for comment. Neither firm has gotten back to us.

BDO has indicated that it will appeal this case to the Florida Supreme Court if necessary and since BDO International was found to be not liable, the entire judgment falls to the U.S. firm. BDO had $620 million in revenues in its most recent fiscal year and currently has around 3,000 employees. And despite the fact that this case will not be resolved for some time, if BDO ultimately compelled to pay the damages it could have a devastating impact on the firm.

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