October 14, 2019

Settlements

PwC Settles with FDIC for $335 Million Over Colonial Bank’s Epic Collapse

Well, this was some news I really wasn’t expecting today. FDIC as Receiver for Colonial Bank, Montgomery, AL, reached a $335 million settlement with PricewaterhouseCoopers LLP related to professional negligence claims. Colonial Bank failed on August 14, 2009. https://t.co/W2ohFNCvRe — FDIC Gov (@FDICgov) March 15, 2019 Here is the full statement from the FDIC: The […]

Colonial Bank Collapse Will Cost PwC $625 Million, Reports Say

[Updated with statement from Bartlit Beck Herman Palenchar & Scott] Reports are hitting the interwebs this afternoon that a federal judge has ordered PwC to pay the Federal Deposit Insurance Corp. $625 million in damages for failing to uncover a long-running fraud scheme between its client Colonial Bank and the now-defunct mortgage lender Taylor, Bean & […]

pwc colonial award

PwC Faces Damages That Range From ‘Bad’ to ‘Worse’ But Probably Far Short of ‘Catastrophic’ for Colonial Bank Failure

Francine McKenna reports on MarketWatch that the Federal Deposit Insurance Corp. stands to collect a pret-tay pret-tay pret-tay big chunk of change from PwC for the losses from the bankruptcy of Colonial Bank. The FDIC, acting as receiver for the failed Colonial Bank Group that collapsed in 2009, has asked Judge Barbara Rothstein to award […]

grant thornton uk ftse

Grant Thornton Gets Dinged for Giving Partners with Audit Quality Issues More Work

The Public Company Accounting Oversight Board has announced a big settlement with Grant Thornton over quality control violations and audit failures. The firm was censured and agreed to pay a $1.5 million civil penalty. The quality control violations related to the assignment of two Philadelphia-based partners to audits in 2013 when they had been cited […]

LinkedIn Has to Pay for Sending All Those Annoying Emails

LinkedIn's Add Connections service sent a bunch of unwanted emails without people's consent and now they have to pay $13 million to settle a lawsuit. I'm glad someone finally convinced them that "Spam" isn't a valuable endorsement. [Mashable via Gizmodo]

Bonus Watch: Campbell v. PricewaterhouseCoopers Plaintiffs

A tipster wrote us earlier today: FYI, the wage settlement checks arrived. […] All of these years of waiting has led to me being paid pennies on the dollar… Yet again PwC finds a way to stick it to me. And we've seen the check! We agreed to not publish it to protect our tipster's […]

EY

EY Glad That Whole Lehman Brothers Thing Is Over

EY settled its litigation with the New York Attorney General today, paying $10 million to make Eric Schneiderman go away. The suit was originally brought by now-New York Governor Andrew Cuomo over four years ago. EY claims that this was the “last significant lawsuit” remaining and said, “After many years of costly litigation, we are pleased […]

(UPDATE) There’s a Settlement in the Works for the Big Overtime Suit Against PwC in California

The last update on Campbell v PricewaterhouseCoopers we had for you was back in May of last year, when the trial date was predictably changed (again), pushing the festivities off until March of this year. Well, we're happy to tell you we have a little news. It seems both sides were able to "work things […]

Ernst & Young, Living in Denial, Settles with Lehman Investors for $99 Million

This is rich. Michael Rapoport reports: Ernst & Young LLP has agreed to pay $99 million to settle investor class-action allegations that it turned a blind eye when its audit client Lehman Brothers Holdings Inc. misled investors before the investment bank's 2008 collapse. The investors and Ernst "have reached an agreement in principle" to settle the […]

Deloitte Satisfied with Size of Check It’ll Cut to Settle Taylor Bean & Whitaker Lawsuit

The Green Dot blinks: Breaking: Attorney Steven Thomas says lawsuit by Taylor Bean & Whitaker bk trustee vs Deloitte settled "mutual satisfaction of parties". — Francine McKenna (@retheauditors) October 3, 2013 I've confirmed Francine's account with Mr. Thomas. Deloitte has not responded to our email requesting for comment. I spoke to Steven Thomas a few […]

New York Puts Deloitte in Time-out Over Standard Chartered

Remember last summer when Deloitte got itself wrapped up in a big international money laundering scandal? It was pretty exciting international intrigue-y stuff! The New York Department of Financial Services fined Standard Chartered bank $340 million last August for helping Iran move money around and now Cuomo & Co. have gotten around to holding Deloitte responsible […]

Ernst & Young Admits That Some of Its Partners Were Running a Tax Shelter Factory

What a fine thing for the Manhattan U.S. Attorney to announce on a Friday afternoon that it had reached at settlement with Ernst & Young over its tax sheltering activities: Ernst & Young LLP will pay $123 million to settle a U.S. tax-fraud probe as part of a non- prosecution agreement, according to a statement […]

Deloitte Resents the Depiction of Its Independent Review Foreclosure Work as “Story Time”

Deloitte, the consulting firm hired to examine foreclosures for JPMorgan Chase, brought in reviewers to look at the documents before the examination procedures were ironed out. The result: Employees sat around with no work for more than a month while collecting a paycheck. “We would just read our books,” one of the reviewers said. “We strongly […]

Big 4 Firms Performing Quite Well in the Self-Preservation Department

If you are able to find Google's homepage and have a couple of functioning digits, it isn't difficult to find news of Big 4 audit firms settling lawsuits over the past few years. Satyam. Countrywide. Bear Stearns. Sino-Forest. There are others. There will be more. In the UK, regulators have been grilling the Big 4 over […]

Things Are Turning Out Okay for Ex-Olympus CEO, Less So for Current Olympus Employees

Former Olympus CEO Michael "Go ahead and fuck with me, I'm from Liverpool" Woodford took a big risk blowing the whistle on the $1.5 billion accounting fraud at his old employer. In a show of thanks for finding the booboo, the company promptly fired him. A questionable strategy it seems because Mr. Woodford sued Olympus […]

Koss (Man and Company) Settles with SEC for Four Years Worth of Trainwreck Financial Statements

One-man C-suite Michael Koss and the company that bears his name settled with the SEC today, according to a Commission litigation release. This all stems from the dodgy financial statements the company put out from 2005 to 2009 that were carefully orchestrated by shopper-'til-you-stopped-her Sue Sachdeva. As for the punishment, well, it's kinda meh: The […]

Former Deloitte Employee Swings to Settlement with SEC Over Insider Trading Charges

Remember Annabel McClellan? She’s the wife of former Deloitte partner Arnold McClellan who sorta got wrapped up into an insider trading mess with her sister and brother-in-law last fall. Annabel is also a former Deloitte employee who gave up the glamorous life of a Salzberg solider to be a stay-at-home mom. Oh! and she was working on swingers app called My Nookie that was on the verge of taking the scene by storm. The whole insider trading thing put those ambitions on hold due to the fact that Annabel may be looking at some jail time and she settled civil charges with the SEC yesterday for $1 million. The good news for Arnie is that if judge gives the settlement the thumbs-up, he’ll be off the hook who, prosecutors say, had no clue that the Mrs. was engaging in extracurricular activities:

McClellan, who pleaded guilty in April to one count of obstructing the SEC’s investigation, said she overhead her husband talking about the deals and passed the information to her brother-in-law, according to a transcript of her change of plea hearing.[…] McClellan told prosecutors that her husband wasn’t aware of or involved in passing information, according to documents filed in the SEC case.

Of course, if Arnie wasn’t aware that Annabel was trading under his nose, it makes you wonder with whom she was researching Amazon Squat and the Foldover.

Wife of former Deloitte partner to pay $1 million [Bloomberg]

GSI Group: Internal Controls Won’t Be an Issue Going Forward

GSI Group Inc. (GSIG) said it reached a settlement with the U.S. Securities and Exchange Commission by consenting to a cease and desist order related to accusations that it improperly recognized revenue on certain transactions at its semiconductor business from at least 2004 through June 2008, partly because of insufficient internal controls. The SEC alleged that as a result, the supplier of precision technology and semiconductor systems had overstated revenue by 0.7% in 2004, 1.4% in 2005, 17% in 2006 and 5% in 2007 and by 13% and 5.6% in the first and second quarters of 2008. The company said it agreed to the settlement without admitting or denying the SEC finding and wasn’t charged with fraud or required to pay any penalties. “GSI fully cooperated with the SEC in its two year investigation and has undertaken a number of corrective actions and internal control enhancements,” said Chief Executive John Roush. [Dow Jones]

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]

PwC India Affiliates Settle with SEC, PCAOB Over Satyam Audit Failures

The affiliates – Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta – must pay $6 million to the SEC, $1.5 million to the PCAOB and are barred from accepting U.S.-based clients for six months. The SEC fine is the largest ever levied against a foreign-based accounting firm in an SEC Enforcement Action and the PCAOB fine is the largest in the regulator’s history. PW India must also “establish training programs for its officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise its audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.” The SEC’s press releasilures “were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India.”

More from Bob Khuzami & Co.:

“PW India violated its most fundamental duty as a public watchdog by failing to comply with some of the most elementary auditing standards and procedures in conducting the Sataym audits. The result of this failure was very harmful to Satyam shareholders, employees and vendors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Cheryl Scarboro, Chief of the SEC’s Foreign Corrupt Practices Act Unit, added, “PW India failed to conduct even the most fundamental audit procedures. Audit firms worldwide must take seriously their critical gate-keeping duties whenever they perform audit engagements for SEC-registered issuers and their affiliates, and conduct proper audits that exercise professional skepticism and care.”

For the PCAOB, Chairman James Doty:

“The reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports. Two of the PW India firms, PW Bangalore and Lovelock, repeatedly violated PCAOB rules and standards in conducting the Satyam audits. These confirmation deficiencies contributed directly to the auditors’ failure to uncover the Satyam fraud.”

And Claudisu Modesti, the Director of Enforcement:

“Accounting firms that audit U.S. issuers, including affiliates of international accounting networks, provide an essential bulwark for investors against issuer clients that are committing fraud. PW Bangalore and Lovelock repeatedly failed to meet their obligation to comply with PCAOB standards, and these failures contributed to PW Bangalore and Lovelock failing to detect the fraud committed by Satyam management.”

You can see both the enforcement actions on the following pages. As for the firm, here’s a portion from PW India’s statement:

The SEC and PCAOB orders found that PW India’s audits of Satyam did not meet US professional standards and, as a result, did not discover the fraud underlying Satyam’s 2005-2008 financial statements. The orders make clear that Satyam management engaged in a years-long fraud, going so far as to create scores of fictitious documents for the purpose of misleading the auditors.

These settlements, in which PW India neither admits nor denies the U.S. regulators’ findings, apply only to the U.S. regulatory enquiries into Satyam. Neither of the orders found that PW India or any of its professionals engaged in any intentional wrongdoing or was otherwise involved in the fraud perpetrated by Satyam management. The settlements mark the end of the Satyam-related U.S. regulatory enquiries concerning PW India and are a positive step and important milestone in putting the Satyam issue behind PW India. PW India remains hopeful of resolving the outstanding enquiry with the Indian market regulator.

Sounds a little defensive, doesn’t it? Here’s what PwC International Ltd. had to say:

PricewaterhouseCoopers International fully supports PW India’s decision to resolve these issues with the US regulators and is hopeful that an agreed resolution will also be reached with the Indian market regulator. The PwC network will continue to work closely with PW India as it fulfils its commitments to its regulators, its clients, and to the Indian and global marketplaces.

PricewaterhouseCoopers International is committed to a PwC presence in the vibrant and fast growing Indian marketplace.

“India is a key market for PwC and we are committed to working with our colleagues in India to build on a successful practice with quality at the centre of everything it does,” said Dennis Nally, Chairman of PricewaterhouseCoopers International. “The last two years have been challenging for PW India but I believe that PW India has learned the lessons of Satyam, made the right changes and is on a sound footing to move forward, dedicated to quality work.”

This may be a foreign firm but it makes us wonder if the SEC and PCAOB are just getting warmed up. Mr Doty and SEC Chief Accountant James Kroeker will be on the tomorrow’s panel that we will be live-blogging and it will be interesting to hear what they have to say.

SEC_PW India

PW_India

A Few People Are Not Satisfied with the $624 Million Countrywide Settlement

And, unfortunately for Bank of America and KPMG, that could mean digging through the couch cushions.

Several large institutional investors have rejected a court settlement where Countrywide Financial Corp. had agreed to pay $600 million to a number of national pension funds. Those pulling out of the agreement include BlackRock Inc.; the California Public Employees Retirement System, or Calpers; T. Rowe Price Group Inc.; Nuveen Investments Inc.; and the Maryland State Retirement and Pension System, according to a document from the suit filed in U.S. District Court in Los Angeles. The investors decided the settlement, initially agreed to last May, wasn’t enough and will seek their own terms with the mortgage originator and its current owner Bank of America Corp., as well as Countrywide’s auditor KPMG LLP. KPMG had committed another $24 million to the settlement.

In typical HofK fashion, the firm didn’t bother commenting for the Journal’s story however BofA managed to express their disappointment, “It is unfortunate that some investors chose to opt out of what we believe is a fair and equitable agreement to settle these issues.” Right. Because the likes of BlackRock and Calpers should be tickled pink with the pleasure of splitting $624 million with dozens of other investors.

Big Investors Refuse Countrywide Settlement [WSJ]

Accounting News Roundup: Debunking the Audit Industry Green Paper; Theories Behind the Tax Cut That Nobody Noticed; AIG Is Doing a Happy Dance | 10.22.10

The EC’s Green Paper, “Audit Policy: Lessons from the Crisis”: The Bureaucrats Blow Another Chance [Re:Balance]
Jim Peterson dissects the European Commission’s Green Paper on the audit industry and isn’t impressed with what is inside.

Interesting Issues in Timing of Green Mountain Insider Stock Sales and Disclosure of SEC Inquiry [White Collar Fraud]
Sam Antar is curious about GMCR executive Michelle Stacy’s sudden exercising of stock options. You see, GMCR was notified of the SEC investigation into their revenue recognition on September 20th. Ms. Stacy exercised and sold her options on the 21st. The company announced the SEC investigation on the 28th.

Regardless of what analysts think about Vermont hippies and their knowledge of revenue recognition, the timing will certainly get the attention of someone (who finds porn disgusting) at the SEC.

Why Nobody Noticed Obama’s Tax Cuts [TaxVox]
According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.

Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.

Poll: Financial crisis will force states to raise taxes [On the Money]
78% say it’s gonna happen.

Office Depot, execs settle SEC disclosure charges [Reuters]
The SEC had accused the company, its CEO Stephen Odland and former chief financial officer Patricia McKay of conveying to analysts and big investors that the company would not meet analysts’ earning estimates for the second quarter of 2007.

New Faces Enter Fray in Accounting [NYT]
Floyd Norris remembers the old cast at the FASB, IASB and introduces the new ones.


AIG Raises $17.8 Billion in Record AIA Hong Kong IPO [Bloomberg]
American International Group Inc. raised a record HK$138.3 billion ($17.8 billion) from the Hong Kong initial public offering of its main Asian unit, putting what was once the world’s largest insurer on course to repay its 2008 bailout.

AIG sold 7.03 billion shares, or a 58 percent stake, at HK$19.68 each, the top end of a marketing range, Hong Kong-based AIA said an e-mailed statement. It used an option to expand the sale offered from 5.86 billion, or a 49 percent stake.

Comment: EU audit proposals full of contradictions [Accountancy Age]
More debunking of the EC Green Paper.

Aetna CFO duties to expand under new CEO [Reuters]
Aetna Inc [AET.N] will expand the responsibilities of Chief Financial Officer Joseph Zubretsky to include leadership of the health insurer’s strategic diversification plans under the incoming chief executive officer.

Angelo Mozilo Wishes He Had John Elway’s Problems

Neither man is having a very good week but Moz got especially bad news today that might cause him to cut back on luxury items including 86ing the private jets with tanning beds and the two-tone shirt collection:

The Securities and Exchange Commission today announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company.

Mozilo’s financial penalty is the largest ever paid by a public company’s senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.

Former Countrywide CEO Angelo Mozilo to Pay SEC’s Largest-Ever Financial Penalty Against a Public Company’s Senior Executive [SEC]

In Other Words, Nicolas Cage’s Accountant Is Probably Counting Some Money

“Nic is happy that it is resolved.”

~ A TMZ “source,” on the settlement reached between NC and his former accountant, who were both blaming each other for Cage’s financial trubs.

Judge Grants Preliminary Approval in New Century Shareholder Settlement: KPMG to Pay $44.75 Million

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.

Law.com reports:

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.

$125 Million Shareholder Settlement in New Century Financial Collapse [Law.com]

Earlier:
A Few People Noticed That New Century Execs Settled with SEC

A Few People Noticed That New Century Execs Settled with SEC

There were just a few reports late on Friday about New Century Execs settling with the SEC over the failure to make certain risk disclosures. However, it’s worth mentioning that this is still more coverage than the settlement that KPMG reached with New Century that we reported on in late June – still no press release – but that’s neither here nor there.


SEC statement:

On July 29, 2010, the Commission accepted settlement offers from three former officers of New Century Financial Corporation. Brad A. Morrice, the former CEO and co-founder; Patti M. Dodge, the former CFO; and David N. Kenneally, the former controller, consented to the relief described below without admitting or denying the allegations in the Commission’s Complaint. The settlement offers, which have been submitted to the Court for approval, are contingent upon the Court’s approval of a global settlement in In re New Century, Case No. 07-931-DDP (C.D. Cal.).

The Commission’s complaint alleges, among other things, that New Century’s second and third quarter 2006 Forms 10-Q and two late 2006 private stock offerings contained false and misleading statements regarding its subprime mortgage business. The complaint further alleges that Morrice and Dodge knew about certain negative trends in New Century’s loan portfolio from reports they received and that they participated in the disclosure process, but they did not take adequate steps to ensure that the negative trends were properly disclosed. The Commission’s complaint also alleges that in the second and third quarters of 2006, Kenneally, contrary to Generally Accepted Accounting Principles, implemented changes to New Century’s method for estimating its loan repurchase obligation and failed to ensure that New Century’s backlog of pending loan repurchase requests were properly accounted for, resulting in an understatement of New Century’s repurchase reserve and a material overstatement of New Century’s financial results.

That “material overstatement” consisted of a $90 million profit in Q3 of ’06 that was actually a $18 loss.

Morrice, Dodge and Kenneally all agreed to cough up some of their ill gotten gains and were subjected to fines but they didn’t come close to Michael Dell sized proportions.

SEC Settles with Former Officers of Subprime Lender New Century [SEC]
Ex-New Century Managers to Pay $1.5 Million Over Subprime Lender’s Failure [Bloomberg]

Dell, Man and Machine (Maker), Close to Settlement with SEC

In SEC-settlements-that-don’t-involve-Goldman Sachs news, Dell put their annual shareholders meeting on a brief kibosh because the company and founder Michael Dell are thisclose to settling charges for omitting disclosures for dealings with Intel Corp.

Dell Inc proposed a settlement with U.S. financial regulators over a long-running investigation of the computer maker’s accounting, and adjourned its annual shareholders meeting on Friday.

Dell adjourned the meeting until August 12 to give shareholders time to consider the discussions related to the settlement, which was announced shortly after the meeting convened.

It said earlier that the company and Chief Executive Michael Dell submitted a settlement proposal, which was still subject to approval by the U.S. Securities and Exchange Commission as well as a U.S. District Court.

The probe into accounting matters began in 2005. Dell later acknowledged accounting errors and restated financial results from 2003-2007.

Nothing to get too worked up over probably since the company only set aside $100 mil but if the entertainment for the meeting had to cancel (e.g. Dallas Cowboys cheerleaders), there’s probably a lot of upset people down in Round Rock.

KPMG Resolves Lawsuit with New Century

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.

KPMG Chips in as Countrywide Picks up $600 Million in Settlement

Investors who lost money in King Oompa Loompa’s house of no hassle mortgages announced that they have reached a $624 million settlement with KPMG and Countrywide. Maybe that’s why the Kaptains of Klynveld were in such an optimistic mood.


KPMG’s share of the settlement was $24 million which hardly seems worth it. Think about it. Bank of America could probably cough up an extra $24 mil without any trouble and KPMG would probably be fine not cutting a check at all. It’s just like your friend that hassles with you over the check at, “My share was only $18.25.” Eventually you just tell them to f**k off and pay for the whole thing yourself.

BofA’s Countrywide in $624 mln lawsuit settlement [Reuters]

Ernst & Young Pays $8.5 Million to Settle Charges with SEC Over Bally Fraud

Thumbnail image for ey8ball.jpgSix current and former partners at Ernst & Young were charged, along with the firm, by the SEC late yesterday in relation to the audits the firm performed of Bally Total Fitness’ financial statements from 2001 to 2003.
Bally settled accounting fraud charges with the SEC in 2008 that were related to its financial statements from 1997 to 2003.
Because everyone and their dog was freaking out over Enron in screws to their clients to follow GAAP, E&Y had identified Bally as “one of E&Y’s riskiest 18 accounts and as the riskiest account in the Lake Michigan Area.”


Floyd Norris:

The firm forced Bally to stop recording revenue in an improper manner that allowed it to claim earnings earlier than was allowed by accounting rules.
But in doing that, the firm allowed Bally to not admit to having violated the rules in the past, an action that would have forced it to restate its accounts and admit that losses in previous years had been much larger.

Mr. Norris also reported that a source of his at the SEC has stated that “he knew of no previous enforcement cases in which a partner of a major firm was cited for his actions as head of a national office.”
The partner in this case is Randy G. Fletchall, the partner in charge of E&Y’s National Office. He along with Mark V. Sever, E&Y’s National Director of Area Professional Practice, and Kenneth W. Peterson, the Professional Practice Director for the Lake Michigan Area office are the current E&Y partners who settled the charges with the SEC.
The former partners include: Thomas D. Vogelsinger, the Area Managing Partner for E&Y’s Lake Michigan Area through October 2003, William J. Carpenter, the E&Y engagement partner for the 2003 audit, and John M. Kiss, the E&Y engagement partner for the 2001 and 2002 audits.
While the news of a current partner of such lofty heights is notable, an extra twist that isn’t being reported in the MSM comes from GC contributor, Francine McKenna, who tells us that Mr. Fletchall served as the former AICPA Chairman from 2007-2008 and Mr. Sever, a former chairman of the Accounting Standards Executive Committee:

What none of the stories that just hit tell you, though, is that at least two of the EY partners charged, Fletchall and Sever, held leadership positions with the AICPA in the past.

Did Mr. Fletchall get off with a slap on the wrist given his AICPA leadership position, AICPA PAC contributions and significant campaign contributions to Senator Christopher Dodd? Mr. Fletchall is used to telling the SEC what it should do. Quite used to it.

These are interesting questions that the SEC probably doesn’t want to address. The connection, in appearance, is shady and we can only speculate as to what happened during the negotiations of the settlement.
The Commission, remaining stoic, gave a standard issue boilerplate statement, saying:

“It is deeply disconcerting that partners, even at the highest levels of E&Y, failed to fulfill their basic obligations to the investing public by not conducting proper audits. This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence. The $8.5 million settlement, one of the highest ever paid by an accounting firm, reflects the seriousness of their misconduct,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

So it appears E&Y is getting sent to their room here, despite the $8.5 million fine being “one of the highest ever paid by an accounting firm.”
The firm also agreed “to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.”
Were the AICPA connections enough to keep them out of really hot water? At the very least, it didn’t hurt anything. If you have any information regarding this story, get in touch with us, and we will update you with any developments.
SEC Charges Ernst & Young and Six Partners for Roles in Accounting Violations at Bally Total Fitness [SEC Press Release]
EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day [Re: The Auditors]
Ernst to Pay the S.E.C. $8.5 Million [Floyd Norris/NYT]

Deloitte, Grant Thornton Settle with Parmalat Investors

check.jpgU.S. Investors in Paramalat — the disturbingly long-life milk producer — have settled their lawsuit with Deloitte and Grant Thornton for $8.5 million and $6.5 million respectively.

Personally, if you make the decision to be associated with a company that consciously screws with the natural dairy production of a bovine, we’d say you’re on your own. However, this is America, where if you lose an asston of money on an investment (despite the morally ambiguous nature of said investment, not to mention the shiesty management), you sue.

The case was brought by several funds on behalf of thousands of investors who said they lost money from Parmalat’s multi-billion-dollar fraud.

“It is very rare that worldwide coordinating audit networks enter into settlements like what we have,” said James Sabella, a lawyer at Grant & Eisenhofer PA in New York representing the investors, in an interview.

Lead plaintiffs include Hermes Focus Asset Management Europe Ltd, Cattolica Partecipazioni SpA, Capital & Finance Asset Management, Societe Moderne des Terrassements Parisiens and Solotrat, court documents show.

We don’t know about the statement that settlements are “very rare”. The Big 4 has paid out nearly $6 billion in settlements since 1999 and settlements this year have included Deloitte/American Homes and E&Y/Akai.

Regardless, the good news for the investors is at least they got something. The bad news is that it was far less than the amount they claimed to have lost:

The U.S. equity investors believed they suffered $138.2 million of damages, but Sabella said their claims might have been reduced by earlier settlements. He also said taking their case to a jury could have been “full of difficulties.”

A Deloitte spokesperson declined to comment pending the approval of the settlement by Judge Lewis Kaplan. Grant Thornton did not immediately return our email requesting comment.

This latest development in the story that never ends Parmalat case is the first that we’ve reported that doesn’t involve the persistence of the company trying and failing and trying again to chase down banks and auditors for money related to the company’s bankruptcy in 2003. From the looks of it, we’ll be following these developments long into the next decade.

Ex-Parmalat auditors settle US investor lawsuit [Reuters]

Deloitte Settles American Homes Lawsuit

Barry Salzberg.jpgDeloitte becomes the first accounting firm, to our knowledge, to settle a sub-prime lawsuit by burying the hatchet with American Home Mortgage Corporation.
The total settlement was for $37.5 million of which Deloitte’s share was $4.75 million. We’re guessing that Barry Salzberg wasted more money on Rogaine last year.
We should mention that Deloitte and their fellow defendants decided to settle prior to the judge hearing their motions to dismiss the case. We thought this was a little strange so we decided to consult with some experts.
Their take was that the settlement seemed a little premature but made the points that 1) It’s often cheaper to settle early and B) if your company’s name is associated anything “sub-prime” you’re more or less responsible for the whole damn financial crisis.
Another Significant Subprime-Related Securities Lawsuit Settlement [The D&O Diary]