October 17, 2018

ES Bankest

What’s Do We Make of BDO’s ‘Secret Settlement’ in the E.S. Bankest Dispute?

BDO is trying to put the E.S. Bankest/Banco Espirito mess behind it by submitting a “confidential agreement” to settle its litigation with the bankruptcy estate of E.S. Bankest, according to the South Florida Business Journal.

It sounds as though this could be put to rest as the bankruptcy trustee Barry Mukamal is quoted as saying, “I’m satisfied that this settlement is in the best interests of the estate,” although the creditors have to give the stamp approval as well. What’s not immediately clear from the article is to what extent Banco Espirito is involved in this settlement, the only mention being “”Lisbon-based Banco Espírito Santo and the estate of E.S. Bankest sued BDO Seidman regarding more than $140 million lost to a financial scheme run by former officers of E.S. Bankest.” I shot an email over to Steven Thomas who has represented Banco Espirito to sort this out and his spokesperson replied with the following statement, “BDO USA, LLP has entered into confidential settlement agreements with Banco Espirito Santo and Barry Mukamal, the bankruptcy trustee of E.S. Bankest, L.C., pursuant to which the lawsuits against BDO have been resolved.”

So when I asked if the re-trial was still on, I was simply referred back to the statement which kindasorta makes it sound as though this whole thing is over. But it still isn’t clear to me. Can anyone make sense of this? In the meantime, if I get to the bottom of this riddle, I’ll post an update.

BDO Seidman files secret settlement in malpractice case [SFBJ]

BDO Wins New Life as Florida Appeals Court Orders New Trial

In what amounts to a HUGE win for BDO, the Florida 3rd District Court of Appeal in Miami has ordered a new trial in the case between BDO and Banco Espirito Santo:

A Florida appeals court has thrown out a $521 million jury verdict and ordered a new trial in a dispute over audits between accounting firm BDO Seidman and a major Portuguese bank.

The Third District Court of Appeal in Miami ruled Wednesday that the 2007 trial was wrongly divided into three phases.

That meant jurors decided BDO Seidman should pay punitive damages too early in the case.

BDO Seidman was sued by Portugal’s Banco Espirito Santmed on a Miami company later exposed as a huge fraud. The bank claimed BDO Seidman was negligent for not detecting the fraud, costing the bank $170 million in losses.

Jurors awarded the bank $170 million in losses plus $351 million in punitive damages.

We reached out to the Steven Thomas, lead counsel for the Banco Espirito for his reaction:

This case has been sent back for another trial because of the procedural ‘bifurcation’ issue. We are pleased that the effort and hard work the jury put into this case was recognized by the appellate court, and we specifically note that the Court did not dispute BDO unethical conflicts of interest or its negligence. 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. We look forward to trying this case and reminding everyone of BDO Seidman’s neglect of its public duty and the enormous conflict of interest they had.

Despite the overwhelming evidence, undisputed negligence cited by Mr Thomas, the mood inside BDO is one of vindication. From the firm’s press release not yet posted on the firm’s website:

The firm is pleased to announce that the Third District Court of Appeal of the state of Florida has unanimously overturned a 2007 jury verdict against the firm and ordered that the Bankest case be retried in the 11th Circuit Court. The Court of Appeal concluded that:

• The Trial Court erred in its original decision to trifurcate the trial, ruling that it was prejudicial to have allowed the case to be presented in three phases. This made it possible for the jury to find BDO grossly negligent without, at the same time, considering the conduct of other actors, including representatives of Banco Espirito Santo.

• The Appellate Court further concluded that the evidence of reliance on BDO’s audit opinions was insufficient to sustain the claims of the Bankest investors, save for the one individual who testified at trial.

• The Trial Court improperly allowed into evidence prejudicial hearsay testimony and documents that further served to deprive BDO of a fair trial.

The Appellate Court concluded, “We have carefully considered every substantive and procedural authority that might be applied to preserve at least some of the jury’s findings. In this case, no such balm is found.”

“We are very pleased that the Appeals court has reversed the lower court verdict. We have consistently stated that we were confident that the jury’s erroneous verdict in this case would be reversed on appeal. The addition of punitive damages at the time only served to emphasize the injustice that took place at the trial court,” said CEO Jack Weisbaum. “A new trial will be in accordance with the Court of Appeal’s decision and we will prove that BDO acted at all times consistent with its professional obligations and that its audit opinions were based on the proper application of generally accepted auditing standards.”

So we’ve got a new trial with a re-energized BDO and a tenacious plaintiff. It sounds like BDO will stick with its defense strategy of “we did no wrong,” so this should be fun.

Florida Third District Court of Appeal Decision [PDF]

Accounting News Roundup: Tipsters Expose Fraud More Often Than Most Controls; What if the PCAOB Is Unconstitutional?; BDO Could Question Forensic Accountant’s Credibility | 06.01.10

Something Wicked This Way Comes [CFO]
A recent Association of Certified Fraud Examiners (ACFE) study discovered that “[o]f the top eight controls ranked by effectiveness, only one — surprise audits, which cut fraud losses by 51% — is part of the traditional accounting-based control structure. Financial-statement review, internal audits, and Sarbanes-Oxley-mandated certifications by CEOs and CFOs all ranked below the nonaccounting controls in terms of effectiveness in preventing fraud.”

Controls have no match for good old human conscience, “tips expose fraud three times as often as do management reviews, internal audits, or account reconciliations.”


The problem however, is that employees may not be getting the training about how to report fraud if they know it’s happening, “an unsupportive corporate culture and poor employee training leave potential whistle-blowers unsure of whom to talk to.” Plus the baddies are doing their best to dissuade them, as Sam Antar told CFO, “[They] don’t go down without a fight, they don’t fight fairly, and they are going to intimidate whistle-blowers — that’s the nature of their game.”

Accounting for Crisis [Portfolio.com]
Gary Weiss writes over at Portfolio about the impending decision in Free Enterprise Fund v. PCAOB and he’s not impressed with the FEF’s argument, “claiming that the board would give our Founding Fathers heart attacks because its members are appointed by the Securities and Exchange Commission and not the president and can’t be removed except for cause.”

That despite the PCAOB’s lack of fireworks in its daily activities, “The PCAOB has not exactly rocked our world—and obviously its existence did nothing to keep Lehman from its Repo 105 book-cooking scheme. But getting rid of it, particularly on specious Constitutional grounds, would be a blow to the cause of more accurate financial statements.”

The odds say that the SCOTUS will affirm the lower court’s decision but just in case, Gary agrees with Interim PCAOB Chairman Dan Goelzer that Congress needs to act fast if the Court surprises us and reverses the decision.

Clifton Gunderson buys Stockton Bates [Philadelphia Business Journal]
Philadelphia-based Stockton Bates will join Clifton Gunderson’s 1,900 employees and 300 partners effective today. Stockton has 32 employees between three offices in Philadelphia, Lancaster, PA and Haddonfield, NJ.

BDO Seidman fights claims brought by fraudster Lew Freeman [South Florida Business Journal]
Convicted forensic accountant Lewis Freeman testified in the case of ES Bankest and BDO. So it’s not outside the realm of possibility that Freeman’s conviction could call his credibility as a witness into question as well as the Bankest bankruptcy proceedings, where Freeman acted as the court-appointed receiver.