Or throws another scalp on the pile, whatever you prefer.
The Journal is obviously very cozy with the Governor-elect:
New York Attorney General Andrew Cuomo filed a lawsuit against Ernst & Young for civil fraud Tuesday, accusing one of the nation’s largest accounting firms of helping Lehman Brothers Holdings Inc. hide its financial weakness from investors for about seven years before the bank finally collapsed in September of 2008.
Ernst & Young knew about, supported and advised Lehman on its “R s, a type of debt the bank took on, but labeled as sales, which made the firm appear to investors less risky than it really was, according to the complaint. The audit firm also stood by while Lehman misled analysts and investors on conference calls and in financial filings about its levels of risk, particularly after the firm’s stability began to crack after the credit crisis began in 2007, said the complaint.
“Ernst & Young substantially assisted Lehman Brothers Holdings Inc., now bankrupt, to engage in a massive accounting fraud,” Mr. Cuomo wrote in his complaint.
Now that the AG has pulled the trigger on this, we’re wondering what’s next. E&Y still isn’t talking, other than the statement they’ve been giving since the bankruptcy examiner’s report came out in March. One comment suggested a settlement in the nine figure range which would put them in proximity of the DOJ’s fine of KPMG back in 2005.
Colin Barr over a Fortune reports that Cuomo wants at least the audit fees back ($150 million, according to the complaint):
The complaint, filed in state Supreme Court, seeks the repayment of at least $150 million in fees the audit firm collected between 2001, when Lehman’s aggressive accounting began, and 2008, when the venerable bank collapsed, precipitating a global bank run.
“Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public,” said Attorney General Andrew Cuomo.
Something tells us that Cuomo won’t be satisfied by simply the audit fees; we’re talking about the largest bankruptcy in history, after all. If you feel like ballparking the fine, we wouldn’t turn away any outlandish guesses.
UPDATE: Felix Salmon also points out E&Y’s lack of communicado:
E&Y knew this was coming—we all did—but despite that fact, its only public reaction so far has been to refuse to comment. That doesn’t look good, and it forces us back to what the company said in the wake of the Valukas report—that its work as Lehman auditor “met all applicable professional standards,” whatever that’s supposed to mean.
He also agrees with us that the fine will be greater than the $150 million and notes (not hiding his disappointment) that no partners were named, “E&Y will avoid admitting blame and also avoid criminal prosecution. […] [T]he only defendant is Ernst & Young LLP; there are no named individuals on the list. So E&Y’s partners are probably safe too. Sadly.”
Unless, of course, the SEC or PCAOB opt to take up that disciplinary slack. Don’t forget that some people think that Cuomo is making this move because he wants the “last scalp” before leaving the AG’s office for the Governor’s mansion. We realize pinning hopes on the SEC and PCAOB isn’t exactly comforting for those wishing to see more action but maybe Cuomo’s actions are the motivation they needed.
We’ll keep you updated throughout the day and if there’s any internal word from the hallowed walls of 5 Times Square, do email us the details.
As we mentioned earlier, the Wall St. Journal has reported that out-going New York Attorney General Andrew Cuomo will be filing civil fraud charges against Ernst & Young related to its actions (mostly lack thereof) that led to the Lehman Brothers bankruptcy. Charges are expected this week but everyone is talking about it now obviously (and we were hoping for a quiet week).
Anyhoo, we’ve rounded up some of the early
sound blog bites out there and we’ll keep you updated throughout the day. Of course, if you’re with E&Y and have any insight or hear some calming, soothing words from TPTB, email us t��������������������ore–>
In her column at Forbes, Francine McKenna is happy that Andrew Cuomo is actually doing something, which is more than can be said for the Feds:
Whether Cuomo is doing this on his own, in defiance of the Feds, or has their implicit blessing in light of the Federal Government’s seeming unwillingness to act, New York’s Attorney General is showing the world he’s the only one in the US with the nerve to shake this tree.
Fox News’s Greta Van Susteren is not so impressed, saying criminal charges are really what’s needed:
Attorney General Andrew Cuomo needs to get tough instead of this “window dressing” CIVIL business. He is soon to be the Governor of NYC and this is his last act as the State’s Attorney General. I hope this is not to appease Wall Street. Let a jury decide whether is is criminal behavior or not and whether anyone has committed a crime. As it stands now, Cuomo is blocking that determination with only civil charges.
Felix Salmon postulates that Cuomo is using the possibility of criminal charges to scare E&Y into a settlement:
On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.
Yves Smith at Naked Capitalism is practically giddy and hopes that this will turn up the heat on Dick Fuld:
One can only hope turning up the heat on Ernst & Young will lead to the prosecution of Richard Fuld. The buck is supposed to stop with the CEO, particularly when they are paid as many bucks as Fuld received. Given the scale of looting that took place in the runup to and after the crisis, there is no hope of getting the banking industry back in its proper role of supporting the real economy until we see some senior bank executives in orange jumpsuits.
CNBC’s John Carney thinks that execs at both Lehman and E&Y should take the civil charges as good sign:
Why should executives at Lehman and Ernst & Young be relieved? Because the filing of civil charges rather than criminal charges may signal that prosecutors do not believe they can prove a criminal case. The key difference between criminal and civil charges in these contexts is the quality of evidence and it looks as if New York Attorney General Andrew Cuomo’s office has decided it doesn’t have the evidence to prove a criminal case beyond a reasonable doubt.
Fortune’s Colin Barr is appalled that E&Y’s Global CEO Jim Turley believes that there wasn’t any chicanery going on:
Take this exchange between E&Y chief Jim Turley and Fortune’s Geoff Colvin, from a September interview.
Colvin: Would it be fair to say that the crisis was caused in part by some financial firms doing misleading things that were within the rules?
Turley: I don’t know that it would be fair to say they were doing misleading things.
It’s remarkable Turley would still say that two months after the financial firm of the best and the brightest, Goldman Sachs (GS), agreed to pay $550 million to settle Securities and Exchange Commission charges that it misled investors in a bubble-era debt deal. The auditors weren’t involved in that one, but the Wall Street mindset was pretty obvious to everyone not running an audit firm.
Over at DealBook, Peter Henning has an interesting theory that the NYAG could be going after the accountants while the SEC focuses on individuals:
If the S.E.C. agreed to share the Lehman case with the New York attorney general, then it may be that the state took the accountants as the focus of its investigation while the federal government concentrates on individuals. Such a division of labor would allow each to husband resources by avoiding any duplication of effort in the investigation – and may be the reason the state is planning to file charges before the S.E.C. decides to act.
Emily Chasan at Reuters managed to get a statement out of someone (Charlie Perkins’s phone has likely exploded by now) although the firm is sticking to the talking points:
A spokeswoman for Ernst & Young said the company did not comment on speculation and repeated a previous statement made by the firm about its dealings with Lehman Brothers. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time,” the statement said.
Matt Taibbi (whole post is worth a read) is calling for the paramedics:
My guess is that this suit is the beginning of the end for Ernst and Young and, who knows, may be the beginning of a series of investigations that ultimately take down the auditors and ratings agencies that made the financial crisis possible. Without accountants and raters signing off on all the bogus derivative math and bad bookkeeping, a lot of this mess would never have happened.
We’ll be updating this post with more reactions and as things develop.
Hell hath no fury like an obscure California county that feels completely gypped (to the point that they feel it’s fraudulent) by the largest professional services on Earth.
Marin officials fired another salvo in an escalating $105 million legal war with international computer consultants, filing a new lawsuit Thursday accusing them and a former county official of violating racketeering law in a bid to rip off taxpayers.
The new suit was filed against Deloitte Consultant LLP, software developer SAP and former assistant auditor-controller Ernest Culver, who served as project director of the county’s troubled computer installation before quitting to join SAP.
As you may recall, Marin County’s original suit against Deloitte for $35 million involved allegations of “fraud, misconduct and misrepresentation” which included using ‘neophytes’ on the implementation of the county’s ERP system. The new racketeering charges are especially interesting and the Marin Independent Journal has the details:
It alleges a conspiracy, asserting consultants wined and dined Culver and interviewed him for employment at the same time Culver was approving deficient work on the project, approving fee payments and helping line up new contracts.
“County taxpayers were charged for millions of dollars in services that Deloitte failed to properly perform” and residents were “defrauded of the honest services of a high-ranking county official,” according to County Counsel Patrick Faulkner.
Deloitte denied the allegations of the original suit, saying that Marin County was actually responsible for the snafu. However, and unfortunately for Deloitte, new shit has come to light:
Faulkner disclosed that the county has combed through its computer system to retrieve thousands of e-mails issued by consultants and Culver while they worked in county offices, providing a backbone for accusations leveled by the latest suit.
The complaint alleges six violations of the federal Racketeering Influenced and Corrupt Organizations Act by Deloitte and SAP, and three counts of illegal conduct against Culver, including a violation of the state anti-corruption statute.
So it doesn’t sound like there’s a smoking gun per se but enough back and forth that adds up to this:
The lawsuit, the county said in a press release issued late Thursday, claims that when problems with Deloitte’s work surfaced, Deloitte and SAP engaged in a “cover-up that included bribing Culver to falsely ‘approve’ Deloitte’s defective work, and silencing an SAP employee who tried to intervene on the county’s behalf.”
So, in other words, pretty bad stuff. The MIJ reports that “Settlement talks are expected and while the parties remain at odds, the latest court filing could spur negotiations.” Using our best translation skills, this more or less says, “Deloitte, SAP and Culver realize they’re fucked – begrudgingly – and will be going to the table any day now to sort things out.”
The Independent Journal also reports that SAP, Deloitte or Ernest Culver “could not immediately be reached.” Our own messages with Deloitte spokemen Jonathan Gandal and John La Place were also not immediately returned.
~ UPDATE includes link and quote from Overstock.com’s press release responding to the suit.
Gary Weiss is all over the $15 million lawsuit brought by seven California counties against Overstock.com today, noting that this could be a helluva problem for our fave SLC problem-child:
The counties had offered to settle with Overstock for as little as $7.5 million, but Overstock refused. No wonder: if the company had coughed up such a substantial amount of cash, it probably would have been driven into bankruptcy.
It was a Cottonwood man’s complaints about the firm that persuaded prosecutors to investigate the matter, said Erin Dervin, a Shasta County deputy district attorney.
In 2007, Mark Ecenbarger bought a patio set for $449 on Overstock. The website claimed the list price other companies were charging for the set was $999.99.
But when the furniture was delivered, there was a Walmart sticker on the side of the box showing the set was really worth $247.
Naturally, Overstock is saying that this one big misunderstanding and that isn’t how they do business. The prosecutors aren’t convinced:
The suit claims Overstock often outright makes up its list prices and compare-at prices based on arbitrary markups over the firm’s cost for the product. In many cases, Overstock entirely fabricated a fictitious comparison price and then claimed it was discounting that price, even when it was the only seller of the product, prosecutors allege.
You would think that such a troublesome lawsuit would cause havoc on the company’s stock price, wouldn’t you? Nope. Gary explains:
The reason for that is simple: fraud is already incorporated into the share price. This company is under SEC investigation for systematically cooking its books. Why should consumers be treated any differently than shareholders?
UPDATE: Full statement from Overstock is available although Patrick Byrne is MIA:
“Overstock.com stands by all our advertising practices, including providing comparison values which we thoroughly explain on our site. We have been singled out for standard industry practices, which we look forward to demonstrating in court,” said Jonathan Johnson, President of Overstock.com.
If you’re like us, you were crushed by the news of the IRS canceling the auction of Young Buck’s treasures. Whether it was the ‘marijuana leaf picture‘ or the Titans Fridge, the auction really had a lot to offer and it’s a shame – a damn shame – that Mr. Buck’s attorney put a stop to it.
But having your home raided by IRS Agents wielding shotguns (our vision) is enough to get the most passive citizen upset. So if you’re Young Buck, simply getting to keep your material possessions won’t suffice:
Officials said Young Buck is suing the IRS over the raid, saying the government’s response to his tax problems has hurt his ability to make money and pay off his debts.
Got it? The IRS kicked down the doors, made off with all the man’s goods and now his records won’t sell. It has nothing to do with his music sucking.
Francine McKenna was the first to opine (strongly we might add) on the ruling in Kirschner v. KPMG (along with the derivative suit Teachers’ Retirement System of Louisiana and City of New Orleans Employees’ Retirement System v. PricewaterhouseCoopers) that was announced yesterday.
The New York Law Journal reported on the ruling first:
Ruling on certified questi irschner v. KPMG LLP, 151, and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP, 152—a 4-3 majority held that accountants who allegedly should have detected malfeasance by executives of Refco in Kirschner and American International Group Inc. in Teachers Retirement System cannot be sued under state law.
The Court held that the principles under which the suits were dismissed—in pari delicto and imputation—are “embedded in New York law” and “remain sound.”
Like we said, Francine had some thoughts on this and she did not hold back:
A majority of the New York Court of Appeals bought the self-serving, selfish and unjust arguments of the defendants and their flunky amicus brief toadies supporting criminal corporate fraudsters and, get this, the shareholders of the accounting firms (!!). The New York Court of Appeals abandoned the shareholders and creditors of Refco and AIG for criminals and incompetents.
If I were writing this decision as a novel of corporate cronyism to the extreme in a Utopian nirvana for capitalist parasites, I could not have imagined more contemptible excuses for judicial cowardice.
Those “flunky amicus brief toadies” include the AICPA, the New York State Society of CPAs and the Center for Audit Quality, who argued that our very capital market system was at risk if accounting firms (and other professionals) could be held responsible for fraud perpetrated by management.
We share Francine’s passion for holding accountants responsible for their culpability (plus, claiming “we were duped” does nothing for the industry’s reputation) but the ruling hardly comes as surprise. Judge Susan Phillips Read wrote for the majority:
The speculative public policy benefits advanced by the Litigation Trustee and the derivative plaintiffs to vindicate the changes they seek do not, in our view, outweigh the important public policies that undergird our precedents in this area or the importance of maintaining the “stability and fair measure of certainty which are prime requisites in any body of law” (Loughran, Some Reflections on the Role of Judicial Precedent, 22 Fordham L Rev 1, 3 ). We are simply not presented here with the rare case where, in the words of former Chief Judge Loughran, “the justification and need” for departure from carefully developed legal principles are “clear and cogent” (id.). Finally, to the extent our law had become ambiguous, today’s decision should remove any lingering confusion.”
We are also not convinced that altering our precedent to expand remedies for these or similarly situated plaintiffs would produce a meaningful additional deterrent to professional misconduct or malpractice.
In other words, these particular cases didn’t present a situation that demonstrated a desperate need for change in the law nor would it prove to be a helpful deterrent of fraud in the future. Bottom-line seems to be that Francine is upset at the majority’s pragmatic attitude but what do you expect from a panel of seven judges? It’s a long shot that you come across more than a couple of judges who are willing to turn years of case law inside out and upside down just because a company went bankrupt or a pension fund lost value.
That being said, there was a very enthusiastic and compelling dissent that basically calls auditors a bunch of pansies when it comes to accepting professional responsibility, “[I]t seems that strict imputation rules merely invite gatekeeper professionals ‘to neglect their duty to ferret out fraud by corporate insiders because even if they are negligent, there will be no damages assessed against them for their malfeasance.’ ” You can check out more over at RTA.
As far as the audit firms are concerned, they have to breathing a huge sigh of relief. Considering all the lawsuits out there, firms are already slowly bleeding to death by paper cuts. If this case had gone the other way, it could very well have been a mortal wound for the firms.
Kirschner v KPMG LLP [NY Court of Appeals]
Third-Party Liability Ruled Out in N.Y. Suits for Corporate Misdeeds [New York Law Journal]
New York Court of Appeals Stands By Corporate Man: In Pari Delicto Prevails [Re:The Auditors]
Republicans See a Political Motive in I.R.S. Audits [NYT]
“Leading Republicans are suggesting that a senior official in the Obama administration may have improperly accessed the tax records of Koch Industries, an oil company whose owners are major conservative donors.
And the Republicans are also upset about an I.R.S. review requested by Senator Max Baucus, the Montana Democrat who leads the Finance Committee, into the political activities of tax-exempt groups. Such a review threatens to “chill the legitimate exercise of First Amendment rights,” wrote two Republican senators, Orrin G. Hatch of Utah and Jon Kyl of Arizona, in a letter sent to the I.R.S. on Wednesday.
ick to point out that the I.R.S. was put under tight restrictions about access to Americans’ tax returns as a result of political shenanigans by the Nixon administration involving tax audits.”
AIG’s Real Numbers Still Shrouded in Secrecy [Jonathan Weil/Bloomberg]
“Two years ago when the government seized control of AIG, the Treasury in effect took a 79.9 percent ownership stake in the company, through preferred shares and warrants it received as part of AIG’s $182 billion bailout package. By keeping its stake below 80 percent, the government ensured that a financial-reporting method known as push-down accounting wouldn’t be permitted under U.S. accounting rules.
The reason that was so important? Had AIG chosen to implement push-down accounting, it would have had to undergo a complete re-assessment of all its assets and liabilities. And, with a few possible exceptions, the company would have been required to begin showing them on its balance sheet at their fair market values, which may have left AIG’s books looking a lot worse.”
Delays to Tax Tables May Dent Paychecks [WSJ]
“Lack of congressional action on 2011 income taxes may force the Treasury Department to make unprecedented moves to prevent U.S. workers from seeing large tax increases in their January paychecks.
The issue: 2011 tax-withholding tables. Treasury officials usually release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.”
Steven Bandolik Joins Deloitte’s Distressed Debt & Asset Practice [PR Newswire]
“Deloitte announced today that Steven Bandolik has joined its distressed debt and asset practice. Bandolik’s hire marks the latest in a series of strategic growth initiatives executed over the last 18 months to expand Deloitte’s distressed debt and asset practice.
‘Challenges need to become opportunities in order for borrowers, lenders and investors to move forward, and get back to their core business of making positive returns on investments. Despite lower interest rates, obtaining new financing regardless of loan performance continues to be an issue unless properties and financial positions are extremely strong,’ said Bandolik. ‘In this environment, clients require intellectual capital to re-structure transactions, and design sensible underwriting, due diligence and risk management procedures. Their debt may need to be structured more conservatively, requiring higher equity levels that could withstand future stress, with a focus on deleveraging over the holding period.’ ”
Hollinger Inc.: Settlement of Claims Against KPMG LLP [Marketwire]
“The Litigation Trustee of Hollinger Inc. (“Hollinger”) announced today that he has entered into a settlement agreement with KPMG LLP to resolve all claims against Hollinger’s former advisor advanced by the Litigation Trustee on behalf of Hollinger. The settlement entails no admission of liability on the part of KPMG LLP. The terms of the settlement include releases in favour of KPMG LLP from Hollinger and its subsidiaries, as well as from third parties involved in related Hollinger litigation. The settlement and the releases are subject to court approval, which will be sought on notice to other affected parties. The rest of the terms of the settlement agreement are confidential.”
CAQ Reports on Fraud Best Practices, Launches New Effort [Compliance Week]
“The CAQ conducted five roundtables and 20 in-depth interviews to develop consensus on how companies can best create a financial reporting environment where fraud has little potential to seed or take root. The CAQ published the findings as a cornerstone to further collaborative efforts with other professional groups to share ideas and best practices on how to derail fraudulent financial reporting.”
PwC audit clients asked to give up internal information [Accountancy Age]
“Ian Powell, chairman of PwC told an audience of 300 business professionals, the audit model needed reform, and believed some internal discussions, now privately held between an auditor and company, needed to be made public.
‘It may well be that by making more of those discussions public, the value of an audit can be collectively improved,’ he said.
‘I have asked our lead audit partners to discuss this idea with audit committee chairs of PwC clients to see if we can work together on a voluntary basis to improve the disclosure of such matters over the next reporting cycle.’
The comments come as the European Commission prepares to release a green paper on audit competition, due later this month, and the House of Lords prepares to hear evidence on the issue, next week.”
Greenspan: Financial overhaul to have ‘significant impact’ on economic growth [On the Money/The Hill]
Some people are still listening to this man.
Madoff clan denies fraud role, seek suit dismissal [Reuters]
A consistent message may actually convince someone, some day.
The least convicted embezzler-cum-recovering shopaholic Sue Sachdeva could do is help out the company that she ripped off to the tune of $34 million.
Despite how Suz feels about it, her lawyers do not want her to be deposed in Koss’s civil case against her and Grant Thornton until after she is sentenced to prison for the rest of her worthwhile shopping days. Doing so would jeopardize putting her back at Nordstrom’s sooner than they would like:
Sachdeva anticipates receiving a two-level decrease in the federal court sentencing guidelines by accepting responsibility for her actions, her Madison attorney Jack Williams said in court documents filed last month. She reached a plea agreement on the charges in July.
“Submitting to a deposition could jeopardize Mrs. Sachdeva’s opportunity to receive that decrease,” Williams argued.
Koss Corp. vehemently opposes Sachdeva’s motion on the grounds that she needs to cooperate not only with prosecutors in her criminal case, but also with her former employer in its efforts to win a civil judgment against her and former Koss auditor Grant Thornton LLP.
Sachdeva tries to delay her deposition in Koss suit [The Business Journal of Milwaukee (partial subscription required)]
Obama Against a Compromise on Extension of Bush Tax Cuts [NYT]
“President Obama on Wednesday will make clear that he opposes any compromise that would extend the Bush-era tax cuts for the wealthy beyond this year, officials said, adding a populist twist to an election-season economic package that is otherwise designed to entice support from big businesses and their Republican allies.
Mr. Obama’s opposition to allowing the high-end tax cuts to remain in place for even another year or two would be the signal many Congressional Democrats have been awaiting as they prepare for a showdown with Republicans on the issue and ends speculation that the e open to an extension. Democrats say only the president can rally wavering lawmakers who, amid the party’s weakened poll numbers, feel increasingly vulnerable to Republican attacks if they let the top rates lapse at the end of this year as scheduled.”
Oracle CEO Rails Against H-P For Mark Hurd Lawsuit [Dow Jones]
Were the HP board membersnot aware that Larry Ellison does what he wants? Oh and that’s he’s filthy rich and will buy all of their homes and their families’ homes and burn them to the ground if you dare cross him?
“Oracle Corp. (ORCL) Chief Executive Larry Ellison issued on Tuesday a strongly worded criticism of Hewlett-Packard Co. (HPQ) and its lawsuit against H-P’s former Chief Executive Mark Hurd, suggesting that Oracle might discontinue its 25-year partnership with H-P.
‘Oracle has long viewed H-P as an important partner,’ said Oracle CEO Larry Ellison in a statement. ‘The H-P board is acting with utter disregard for that partnership, our joint customers, and their own shareholders and employees. The H-P Board is making it virtually impossible for Oracle and H-P to continue to cooperate and work together in the IT marketplace.’ ”
Six Flags Entertainment Corporation Announces John Duffey to Join Company as Chief Financial Officer and Lance Balk to Serve as General Counsel [PR Newswire]
Despite rumors that Duffey is scared to death of roller coasters, he assumes the big chair.
Former Advatech CFO Sentenced To 51 Months In Prison [Dow Jones]
“Richard Margulies, 59, was convicted of a June 2008 scheme that involved hiring two individuals to make “manipulative” purchases in the company’s stock in exchange for illegal kickbacks. He provided the two with shareholder lists, confidential information and non-public press releases to help slowly drive up the share price.
Soon after, Margulies was investigated by the Securities and Exchange Commission. He was indicted in December 2008 on charges that included conspiracy and securities fraud. Margulies pleaded guilty.
The court found he intended to cause $2.5 million to $7 million in losses as a result of his actions.”
Deloitte Becomes a Thomson Reuters Certified Implementer [PR Newswire]
Apparently this is BFD.
BP Takes Some Blame in Gulf Disaster [WSJ]
“The report finds BP facing a tricky balancing act. The British company risks exposing itself to greater legal liability if it assumes a large part of the blame for the disaster, but if it doesn’t do this it likely would be accused of evading responsibility. Meanwhile, parceling out blame to other companies involved in the well risks drawing blowback from them. BP officials and legal analysts say the company is trying to be careful to avoid letting the findings devolve into more mud-slinging.”
Citrin Cooperman Ranked Among Inc. Magazine’s Fastest-growing Private Companies [PR Log]
“According to Inc., Citrin Cooperman was the 148th fastest growing firm in the magazine’s broad “financial services” category, which includes accounting firms, brokerages, lending services and technology firms serving the financial industry.”
PwC isn’t necessarily to blame, mind you, at least not yet. As it stands, Faruqi & Faruqi are investigating Diamond’s Board of Directors for accepting the $12.50 offer that PwC made last month.
F&F cites “at least one financial analyst values Diamond’ common stock at $14.00 per share,” hence, gypping investors. This is just the latest in a long line of investigations that were announced since the deal was announced. HOWEVER!
As far as we can tell only one actual lawsuit has been filed, in Delaware and it also notes that the deal was structured “that bars other bidders from making an offer” and includes a $9 million termination fee.
Faruqi & Faruqi, LLP, a leading national securities firm headquartered in New York City, is investigating the Board of Directors of Diamond Management & Technology Consultants, Inc. (?Diamond? or the ?Company?) (NasdaqGS: DTPI) for potential breaches of fiduciary duties in connection with their conduct related to the sale of the Company to PricewaterhouseCoopers LLP (?PricewaterhouseCoopers?). The proposed transaction offers Diamond shareholders to only receive $12.50 in cash for each share they own. According to Thomson/First Call, at least one financial analyst values Diamond’ common stock at $14.00 per share.
Whether the Diamond’ Board of Directors breached their fiduciary duties to Diamond’ stockholders by failing to conduct an adequate and fair sales process to sell the Company prior to agreeing to this proposed transaction, whether the proposed transaction undervalues Diamond shares and by how much this proposed transaction undervalues the Company to the detriment of Diamond shareholders are the key focus of this investigation.
Faruqi & Faruqi, LLP is a national law firm which represents investors and individuals in class action litigation. The firm is focused on providing exemplary legal services in complex litigation in the areas of securities, shareholder, antitrust and consumer litigation, through all phases of litigation. The firm has an experienced trial team which has achieved significant victories on behalf of the firm’s clients.
Faruqi & Faruqi, LLP Announces Investigation Related to the Acquisition of Diamond Management & Technology Consultants, Inc [Business Wire]
PWC, Diamond Management Sued Over $378 Million Buyout [Bloomberg BusinessWeek]
We briefly mentioned this case on Monday but since everyone seems to have checked out mid-week, we’re sure you won’t mind.
Way back in the dawn of the Clinton Administration, some financial reporting chicanery went down at Papel Giftware, Inc. so that Cast Art Industries of Corona, California would run into the company’s outstretched arms. More specifically, chicanery that consisted of ” ‘systemic, organized, improper accounting practices at Papel.’ ” Cast Art failed in 2003 which made everyone sad/mad.
KPMG was on watch as this all went down and a jury found the firm negligent in 2008 under the Accountant Liability Act.
The bitch of it is, the KPMG partner was thisclose to pulling out of the engagement, “[A] July 2000 letter by KPMG partner John Quinn that said Papel Chief Financial Officer Rick Wasserman gave an ‘unfair and misleading characterization of the accounting and auditing issues.’ Quinn said he was ‘very much inclined’ to recommend ending work with Papel after that year’s audit, according to the opinion.”
That ‘very much inclined’ didn’t result in “we withdraw from the engagement.”
However, since the KPMG is a professional services firm with the necessary means and a reputation to protect (according to some, anyway) they appealed the ruling and on August 26th a three-judge panel of the New Jersey Appellate Division still said, “yep, it’s accounting malpractice.”
This was a thrilling result for plaintiffs who are looking to squeeze more damages out of the firm:
“This is a huge win and no matter how KPMG wants to spin it, it’s a devastating loss for KPMG,” plaintiffs’ attorney Michael Avenatti said in an interview. “KPMG’s appeal of this case may go down as Exhibit A of ‘Be careful of what you wish for.’ Now, we have the ability to go collect potentially $10 million to $20 million more in additional damages.”
Right. The spin.
A KPMG spokesman, Daniel Ginsburg, said the firm is “considering our available options” after the ruling.
“We are pleased that the court affirmed dismissal of the plaintiff’s fraud claim against us, and also reversed the jury’s verdict by ordering a new trial on the issue of damages,” Ginsburg said in an e-mail. “We are disappointed, however, with the court’s ruling on legal issues regarding the plaintiff’s negligence claim.”
Actually, not much spin there. Just one of those kiss your sister/brother moments.
But that’s exactly what they got! The pro-Israel nonprofit Z Street filed suit against IRS Commish Doug Shulman because Z Street and other “pro-Israel groups whose policies conflict with that of the [Obama] administration,” are getting the stinkeye from the IRS.
From Zulu Avenue’s complaint:
The case is brought because, through its corporate counsel, Z STREET was informed explicitly by an IRS Agent on July 19, 2010, that approval of Z STREET’s application for tax-exempt status has been at least delayed, and may be denied because of a special IRS policy in place regarding organizations in any way connected with Israel, and further that the applications of many such Israel-related organizations have been assigned to “a special unit in the D.C. office to determine whether the organization’s activities contradict the Administration’s public policies.” These statements by an IRS official that the IRS maintains special policies (hereinafter the “Israel Special Policy”) governing applications for tax-exempt status by organizations which deal with Israel, and which requires particularly intense scrutiny of such applications and an enhanced risk of denial if made by organizations which espouse or support positions inconsistent with the Obama administration’s Israel policies, constitute an explicit admission of the crudest form of viewpoint discrimination, and one which is both totally un-American and flatly unconstitutional under the First Amendment.
Pro-Israel group claims IRS persecution [Politico]
And this has nothing to do with Lehman Brothers.
Attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos are representing a group of investors in a lawsuit filed against hedge fund auditors Ernst & Young after the group lost more than $17 million following the collapse of a Plano, Texas-based hedge fund that promised low-risk investments.
The lawsuit focuses on two funds sold by Plano’s Parkcentral Global and was filed on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas R. Brown Family Private Foundation. The now-defunct Parkcentral Global was operated by affiliates of billionaire and former presidential candidate H. Ross Perot before closing its doors after losing a total of more than $2.6 billion.
“Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom,” says attorney Demetrios Anaipakos, who will try the case with Amir H. Alavi.
Did you hear that E&Y? RECORD TIME! But why the Ross Perot mention, Ahmad, Zavitsanos & Anaipakos? Got something against eccentric Texas billionaires that like explaining complex things with charts? Sadly, the BPR does not elaborate.
The lawsuit includes claims that New York-based Ernst & Young falsely represented that the company fairly audited Parkcentral Global and the auditor failed in its “watchdog” [Ed. note: These quotation marks appear to be unnecessary. Also, the “watchdog” thing, sucks as metaphor.] role to warn relying investors of the risk of fraud and noncompliance by management. The suit accuses Ernst & Young of fraud, negligent misrepresentation, securities fraud and conspiracy.
This month, Brown Investment Management, L.P., one of the plaintiffs in this suit against Ernst & Young, won a Delaware Supreme Court ruling that requires Parkcentral Global to disclose its former investors. Those investors could be added to the new Houston lawsuit.
The investments of the Brown foundation, Brown Investment Management and the two other family-related ventures totaled $16 million and were lost within 90 days despite a “worst case loss” estimate of 5 percent. Mr. Comiskey, like his fellow investors, lost 100 percent of his investment when Parkcentral Global went under.
Mr. Anaipakos and Mr. Alavi have handled disputes against hedge funds and private equity firms for more than a decade. This lawsuit is separate from a class action filed in the U.S. District Court for the Northern District of Texas against Parkcentral Global.
Not to be confused with the settlement that KPMG reached with the Trustee of New Century that we reported on back in June. This particular lawsuit was brought by New York State Teachers’ Retirement System and shareholders in New Century.
A federal judge on Monday granted preliminary approval to a $125 million cash settlement for shareholders of bankrupt New Century Financial Corp., one of the largest lenders to collapse during the subprime mortgage meltdown.
The settlement involves three stipulations: Auditor KPMG LLP will pay $44.75 million; the underwriter defendants will pay $15 million; and New Century’s former officers and directors collectively will pay more than $65 million.
Along with the undisclosed sum from the Trustee of New Century, KPMG also paid $24 million to settle with the shareholders of Countrywide. Since we have no idea what the firm paid to settle with the Trustee we can’t give a ballpark number for settlements for the last 3-ish months but on the low end it’s at least $69 million.
If we put the over/under at $100 million, what are you taking? Throw in your ballpark figure just for fun.
Unless you were born blind and deaf, you may have noticed that South Florida has its share of shady characters. We all know that Berns Madoff frequented the area. Plus there’s the obsessively dapper Lew Freeman, who was Miami’s go-to forensic accountant until he thought he’d just keep his client’s money.
Another model citizen/criminal in FLA is Scott Rothstein. His Ponzi Scheme managed to bring in just over $1 billion and he got 50 years for his trouble. But now the fallout from Rothstein’s little stunt is now raining hell on Miami accounting firm Berenfeld Spritzer Schechter & Sheer.
The trustee overseeing the bankruptcy of Rothstein Rosenfeldt Adler has accused Berenfeld, et al. of funneling $450 million to Rothstein.
As you can imagine, the crew over at BSS&S aren’t thrilled with the accusations and called the suit, “inaccurate and flawed,” and claim that they “conducted [our] duties professionally, conscientiously and in good faith.”
Well, the trustee obviously doesn’t see things that way and laid out several allegations, specifically, the following:
• Berenfeld improperly adjusted RRA’s income by $20 million in 2007 and by $75 million in 2008.
• Berenfeld withheld information from RRA President Stuart Rosenfeldt (who has claimed he had no knowledge of firm finances and couldn’t read a balance sheet).
• Berenfeld prepared tax returns in a way that did not distinguish between RRA operating cash and client trust funds, giving the misimpression that RRA had more available cash than it actually owned.
• Berenfeld did not pursue information about bookkeeping after RRA staff – including CFO Irene Stay and COO Debra Villegas – denied access to information about bank statements, fee income and trust accounts.
• Berenfeld “knew of wildly inaccurate RRA bookkeeping and inadequate accounting personnel evidenced by the way in which books and records were created and maintained, leading to extraordinary adjustments, tantamount to rewriting the books and records of RRA.”
• Berenfeld provided a “nebulous” letter to Rothstein to help cover up $15 million in suspicious transactions in response to an anti-money laundering compliance inquiry from Gibraltar Bank.
Now, we’ve heard that law firms aren’t the best when it comes to running their businesses, but ‘wildly inaccurate bookkeeping and inadequate accounting personnel’ that leads to ‘extraordinary adjustments, tantamount to rewriting the books,’ takes things to a whole new level. Berenfeld employee
TerryTracy Weintraub gets special attention in the suit, so we can presume he’s the one responsible for knowing – and not being too concerned – about RRA’s exceptionally shitty books. Oops!
You know what sucks? Getting sued. Ask Bill Michael, KPMG’s UK head of FS. He’s pretty sick and tired of all the sue-happiness going on in the world today. Sure, the financial crisis nearly destroyed the world as we know it but dammit, blaming auditors is downright ludicrous. Why? Because it’s unfair.
Bill Michael, UK head of financial services at KPMG, attacked what he described as “unfair”, “deep pocket” lawsuits which pay “little or no attention to the balance of responsibility between auditor and management”.
“We operate in a highly litigious environment where the balance of risk and reward has driven us to a world of caveats,” said Mr Michael. “Any corporate failure or financial loss invariably carries with it the risk of suing the auditor.”
Right. Because in law school they teach future litigators to “pay attention to the balance of responsibility between auditor and management.” Supposedly Bill Mike would like everyone to start respecting the Big 4 business model and leave them alone to do their work. Because in case you hadn’t heard, this is a life and death matter for accounting firms, you know:
“I can tell you, we are acutely aware of risk management and its consequences from both an individual and a firm perspective.
“You only have to look at what happened to a great firm like Arthur Anderson after its audit of Enron,” said Mr Michael. Arthur Anderson was eventually cleared after its audit of the collapsed energy trader, but the accountancy has already folded as a result.
He also criticised the “enormous rewards for failure” in the banking industry, drawing attention to the way some of those responsible for the collapse of major firms were able to move to other banks or hedge funds.
“The risk-reward relationship is not only lop-sided; it impairs our ability to provide broader observations,” said Mr Michael.
Describing the sometimes tense relationship between accountants and the firms they are auditing, he said that each review often started with the premise of “we don’t trust you”.
So in other words, get your witch hunt on with the banks and hedgies but leave us the hell alone. Nobody likes us the way it is.
[caption id="attachment_13953" align="alignright" width="260" caption="Not a legitimate business expense?"][/caption]
Remeber Tyco? Dennis Kozlowski. Mark Swartz. Roman orgy parties. It sounded like a hoot. Too bad the law got in the way.
An accounting manager at Tyco Electronics claims that he was ‘coercively’ fired for taking issue with “Tyco’s exorbitant bashes for its CEO Thomas Lynch and other top executives ‘were almost identical to parties for which Tyco’s former CEO [Dennis Kozlowski] was criminally charged and convicted.’ ”
What kind of party expenses you ask? Run-of-the-mill stuff like ‘mermaid greeters’ and ‘costumed pirates/wenches.’
It doesn’t hurt to have a little eye candy at a company bash, amiright? And maybe Jeffrey Weist was okay with the scantily clad roaming hotties and really just took exception with the $2,350 for the tattoo artist (tatts included!) and limbo and fire dancers, $2,500 for chair covers and sashes and the $1,000 hotel rooms.
Whatever lavish (read: kick-ass) expense it was that turned out to be the straw that broke the stuffy accountant’s back, Jeff Wiest not letting this happen:
The complaint adds: “This requested payment seemed particularly inappropriate from a morale aspect, coming in the midst of continued downsizing pressure, and seemed contradictory in that this one party equated to approximately seven positions for one year in the accounts payable function managed by Wiest,” according to the complaint.
Wiest says that despite his objections, “it was decided to go ahead with the event, to treat the proportionate share of the party as income, and to ‘gross-up’ the bonuses to the employees involved. In other words, the company would pay each highly paid employee an additional amount of cash beyond the value of the trip in order to cover his/her tax liability.”
This approach brought “the total cost of the event to approximately a half million dollars,” according to the complaint.
He claims that each high-ranking Tyco employee was awarded up to $7,500 per person, or $15,000 per couple, as additional “income,” for attending the party. All of the 30 employees who attended were receiving salaries of more than $102,000, Wiest says. He adds that 23 of them took their wives.
And they got paid to go! What is going on at Tyco? Other than it’s the best place to work EVER.
Back to Wiest. For taking high road, Weist alleges that Tyco turned the screws back on him:
In response to his repeated questioning of these extravaganzas, Wiest says, Tyco began an “investigation” of him. This led to bogus accusations that he had made sexually oriented comments, Wiest says.
“Examples given included a comment to an employee going on a honeymoon cruise to not stay on the ship the whole time; a comment about his wife’s hormone issues during her pregnancy being difficult for him, and a comment regarding the uses of improved flexibility from working out. It is noteworthy that the hormone comment would have been several years old, as Wiest’s child was born in 2006,” the complaint states.
He claims Tyco also raised questions about a decade-old brief relationship he had had with a California-based Tyco employee, and baseball tickets that Wiest had been given by a superior.
Jesus. If they would have just invited him to the party, we probably wouldn’t have to go through all this.
Same Old Tricks at Tyco, Accountant Says [Courthouse News Service]
Damages Control [NYT]
Because BP could end up paying a metric asston in punitive damages over the Deepwater Horizon whathaveyou, the Senate recently approved a repeal of punitive damages awarded in civil disputes being deductible for tax purposes.
The problem is that it probably won’t work, as Gregg Polsky and Dan Markel, two law professors at the University of North Carolina at Chapel Hill and Florida State University write in an op-ed in today’s Times:
“When plaintiffs and defendants reach a settlement before a trial, which happens in most cases, they aren’t required to specify which parts of the settlement are punitive and which are compensatory; there ne number. That allows defendants to disguise the amounts that they would have paid as punitive damages as additional compensatory damages.
And because the measure maintains the deductible status of compensatory damages, nearly all punitive damages will remain, as a practical matter, deductible. This easy circumvention surely explains the meager revenue projections from the measure: $315 million over 10 years.”
The solution, according to Polsky and Markel is to make juries “tax aware” so that they may adjust their findings appropriately, “the prospect of tax-aware jurors would also raise the amounts of settlements before trial — when, again, most cases are actually resolved. This is because the amount of a settlement depends on the amount that a jury is expected to award after a trial. If tax-aware juries became the norm, plaintiffs would push for higher settlements, and thus both settling and non-settling defendants would bear the correct amount of punishment. Under the Senate’s approach, in contrast, only the very few non-settling defendants would bear that punishment.”
Five Fake Finance Twitter Feeds [FINS]
These are far better reasons to be on Twitter than Ashton Kutcher or Kim Kardashian.
More cloud accounting benefits [AccMan]
“It is becoming increasingly obvious that clouding computing benefits as they apply to the accounting arena stretch way beyond the ability to save time, effort and cost. As I meet with more customers, I am discovering benefits that only customers can express.”
Apollo Said to Hire PricewaterhouseCoopers’s Donnelly as CFO [Bloomberg BusinessWeek]
“[Gene] Donnelly, who starts in his new role today after 29 years at New York-based consulting firm PricewaterhouseCoopers LLP, fills a vacancy left by the departure of Kenneth Vecchione in January, said the person, who asked not to be identified because the hiring wasn’t announced. Barry Giarraputo, the company’s chief accounting officer, had been serving as interim CFO.”
Deloitte answers fraud reports [The Prague Post]
Francine McKenna tweeted about this story yesterday, where Deloitte has been cited by one Czech newspaper as being investigated by Czech anti-corruption police.
“Deloitte has been put on the defensive since the June 28 report in the daily Lidové noviny (LN) that quoted unnamed sources alleging a slush fund used to bribe public officials and fraudulent accounting that gave clients better financial results. Deloitte says the results of an internal review highlighted ‘certain deficiencies in management reporting,’ but considers the results an internal matter and will not make any comments.”
Francine McKenna reported briefly last week that KPMG settled the $1 billion lawsuit with the New Century Liquidating Trustee. Sure enough, we checked with Steven Thomas and he gave us the same statement:
“The New Century Liquidating Trustee and KPMG LLP have entered into a confidential settlement agreement, pursuant to which the lawsuits and arbitration against KPMG LLP and KPMG International have been resolved.”
Well! That’s some important news. We called up KPMG shortly after we read Francine’s post last week to see what they had to say about it and we were told that they’d get back to us. Unfortunately, we’re still waiting but we’re sure they’re excited, just taking the time to find the right words. Anyway, we’re here when you’ve perfected the prose. In the meantime, if you’d like to take a shot at what the response might be, pen it below.
We’ll pass along more details as they become available.
FSA accuse auditors of failing to question management bias [Accountancy Age]
The Financial Services Authority has decided that it was about time it called out a few people, “Auditors have become yes men who don’t adequately question management bias according to concerns raised by the UK’s chief financial regulators. The Financial Services Authority (FSA) and the Financial Reporting Council today released a scathing discussion paper into the profession following concerns raised in the wake of the financial crisis. Among its concerns is that auditors ‘portrays a worrying lack of skepticism’ when scrutinising potential management bias.”
Not onl ef=”http://www.accountancyage.com/accountancyage/news/2265630/fsa-audit-report-regulator”>FSA wants new enforcement powers including the ability to ” fine, censure or disqualify audit firms.” The FSA also wants to meet with auditors several times a year, rather than just once, as well as direct access to audit committees.
Alex to Become Hurricane as Swells Reach Gulf Spill [Bloomberg]
“Tropical Storm Alex, the first named system of the Atlantic hurricane season, strengthened today, forcing the evacuation of rigs in the Gulf of Mexico and pushing swells toward the worst U.S. oil spill.
The storm, packing maximum sustained winds of 70 miles (110 kilometers) per hour, was 460 miles southeast of Brownsville, Texas, before dawn today, moving north-northwest at 8 mph, the U.S. National Hurricane Center said in an advisory. The circulating winds were near reaching hurricane status of 74 mph.”
New York state may tax out-of-state hedge fund execs [Reuters]
Desperate idea of the day from the brain trust in Albany, “Recession-hit New York could raise an extra $50 million a year by collecting income taxes from people who work for hedge funds in the state but live elsewhere, according to a legislative plan to raise revenue…A spokesman for Democratic Assembly Speaker Sheldon Silver said by telephone on Monday that it means hedge fund managers would be treated the same way as other commuters.”
Aprill: The Impact of Bilski on Tax Strategy Patents [TaxProf Blog]
In non-PCAOB SCOTUS news, the decision in Bilski v. Kappos addressing “Whether a ‘process’ must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (‘machine-or-transformation’ test), to be eligible for patenting….” was examined by Ellen P. Aprill of Loyola-L.A. regarding the impact on tax strategy patents:
“Bilski is at best a mixed bag for those who think tax strategies should be patentable. It gives little help and does allow business method patents, albeit somewhat begrudgingly. It demonstrates that for those who believe that tax strategies should not be patented, legislation is needed.”
Method Man pleads guilty to NYC tax-evasion charge [AP]
“Hip-hop star Method Man pleaded guilty to a tax-evasion charge Monday, writing a check on the spot for the final $40,000 restitution payment after owing about $106,000.” What, no cash?
U.S. Court to Hear Janus Appeal In Securities Case [Reuters]
“The lawsuit, brought on behalf of those who bought Janus stock from mid-2000 through early September 2003, alleged that the prospectuses of several of Janus funds created the misleading impression that the company would adopt measures to curb market timing, when in fact secret arrangements with several hedge funds permitted such transactions, to the detriment of long-term investors.”
Well! You might have thought that Koss would just handle this Sue Sachdeva situation like gentlemen headphonesmiths but you would have thought wrong!
Koss is suing S-squared and Grant Thornton for their respective roles in the alleged embezzlement of $31 million from the Brew Town company.