TheCorporateCounsel.net

August 15, 2007

BDO Seidman Faces a $521 Million Jury Verdict

On Tuesday, a Miami jury ordered accounting firm BDO Seidman to pay $351 million in punitive damages, in addition to $170 million in compensation that BDO was previously ordered to pay to Banco Espirito Santo, a Portuguese bank. BDO was found negligent for failing to uncover a massive fraud during the course of its audits of a Miami-based financial services company.

An article appearing in today’s Washington Post notes: “In court filings, BDO Seidman had warned that a loss of $170 million could trigger massive layoffs and cause the company to lose its standing as the fifth-largest accounting firm. The jury was barred from issuing damages that could destroy a company.

In testimony Tuesday, BDO Seidman attorney Adam Cole asked the company’s chief executive, Jack Weisbaum, whether the firm’s financial operations would stay the same if it had to pay punitive damages.

‘Probably not,’ Weisbaum said. ‘It would be very difficult. We certainly wouldn’t look the way we do now.’

The jury decided Monday that BDO Seidman must compensate the bank and provide punitive damages for failing to reveal massive fraud at the bank’s former partner, E.S. Bankest. The same jury found the accounting firm grossly negligent in June.

BDO Seidman said it will appeal the jury’s verdicts, so it will post a $50 million bond as it appeals. This is the second trial in the dispute, with the first ending in a mistrial in March. The fraud also led to prison time for former E.S. Bankest executives.

Cole showed the jury financial statements for fiscal 2006, which showed the firm’s net worth of $171 million. BDO Seidman argued that the punitive damages should be based on net worth, but the bank contended that it should be based on revenue.

For the fiscal year ended June 30, BDO Seidman reported revenue of $589 million, according to a news release on its Web site. Weisbaum said the company has 2,800 employees in 34 offices nationwide.

BDO Seidman attorney Arturo Alvarez laid the blame on ‘thieves’ at E.S. Bankest who defrauded the bank and said the accounting firm did not intentionally bungle the audits. He asked the jury for no punitive damages.

‘We were victims, too,’ Alvarez said. ‘We never knew [the fraud] was happening.’

At least seven people, including E.S. Bankest directors Eduardo and Hector Orlansky, have already been convicted or pleaded guilty to federal criminal charges related to the fraud and sentenced to prison. In criminal trials, E.S. Bankest was accused of inflating the value of the accounts receivable it bought and presenting fake audited financial statements.”

Small Changes to SEC Forms May Prevent Big Headaches

It is good to know that the SEC’s Commissioners can still agree on something without putting out competing proposals (or putting out any proposals for that matter). Amid the flurry of releases published on August 6th, the SEC published final rules making minor but nonetheless important changes to Form 144, Forms 3, 4 and 5, and Schedules 13D, 13G and TO. The SEC has finally deleted all requirements (or in some cases, an option) for filing persons to include an IRS identification number in these filings. With respect to the Section 16 filings, the SEC had already removed provisions allowing reporting persons to include IRS identification numbers, but some clean-up of those forms was still necessary. The IRS identification number of issuers is still required on the cover page of most Securities Act registration statements and Exchange Act reports, but for what purpose it is hard to say. In the adopting release for these most recent amendments, as well as in the 2003 adopting release for the changes to the Section 16 forms, the SEC said that the IRS identification number was not useful to the SEC for tracking or processing purposes.

One of the problems that references to IRS identification numbers has caused over the years is that sometimes natural persons thought that they had to provide a Social Security number in lieu of an IRS identification number. Filing anything on EDGAR that includes a Social Security number obviously puts people at risk for identity theft, and it remains virtually impossible to get anything pulled down or changed once it gets filed on EDGAR.

A good practice tip is to always have someone check filings, and in particular exhibits, for Social Security numbers and other personal information. This also goes for no-action letters and other correspondence. A little bit of diligence on the front end can prevent some big headaches down the road.

Recent IPO Trends

In this podcast, John Partigan of Nixon Peabody provides some insight into how the IPO market is changing (and provides some gloss on this recent “IPO Trends Study”), including:

– Why did Nixon Peabody and Mergermarket conduct a study of IPO trends?
– What companies did you survey?
– Did your evaluation find any big surprises?
– Any insights into IPO market conditions for the rest of 2007?

– Dave Lynn