$55 million punitive damages added to Batchelor award

by Jose Pagliery - Daily Business Review

February 2, 2011 -

For the second time in two years, a Miami-Dade Circuit trial challenging the auditing practices of BDO Seidman, the nation's seventh-largest accounting firm, has ended with a multimillion-dollar award against the firm.

Like the first time around, BDO hopes to score a reversal on appeal.

It worked last summer when the 3rd District Court of Appeal discarded a $521 million award issued by a jury that found BDO audits failed to catch a $170 million bank fraud.

This time, the stakes are not as high but are still substantial. The $91.7 million verdict came Monday from a jury that concluded BDO's fraud and negligence allowed a publicly traded company to mislead investors and cause investment losses.

The six-member jury awarded $55 million in punitive damages and $36.7 million in compensatory damages to the estate of Miami aviation pioneer George Batchelor and the Miami Beach-based charitable foundation bearing his name.

The accounting firm issued statements vowing to appeal.

"We believe that there are serious errors in this trial, both as to the viability of the plaintiffs' claims and the fairness of the trial" before Circuit Judge David C. Miller, BDO said in a statement.

The firm did not elaborate on its claims of error but said its Greenberg Traurig attorneys are already working on post-trial motions.

Steven Thomas, the lead partner of the Venice, California, law firm representing the foundation and Batchelor's estate, criticized BDO for the move.

"That's BDO's M.O. If something goes wrong, they attack the judge," he said. "This verdict is not because of an error a judge made. The verdict is there because they committed fraud. It's not someone else's fault. It's theirs. And as long as they keep doing this — denying their public duty and blaming everyone else — they'll keep facing juries who say it's their fault."

Trial Theme

That phrase — public duty — rang out as the plaintiff's main trial theme.

The imposition of punitive damages was attributable to what he called "BDO's defiance," Thomas said Tuesday. "BDO's continual denial of their public duty is what caused that award. You're certified public accountants. I don't think you can sit in front of the jury and deny your middle name."

Greenberg Traurig shareholder Adam Cole, who represented BDO, declined comment after the verdict. He told jurors before they deliberated on punitive damages that the compensatory award and fraud and negligence findings were enough for the accounting firm to get the point.

"Everybody will know it, and BDO will suffer the consequence. That is punishment enough," he said. "It's not a situation where BDO tried to hurt somebody."

BDO was accused of improperly auditing Boca Raton-based Grand Court Lifestyles, a senior housing operator that filed for bankruptcy protection in 2000 after a string of losses.

Batchelor invested $78 million in the company, and attorneys for his estate claimed BDO auditors hired in 1998 hid signs of declining finances and caused his loss.

BDO defended its audit practices as sound and told jurors even a $5 million punitive award would hurt the Chicago-based firm.

Internal financial documents shown in the courtroom during testimony by BDO chief financial officer Howard Allenberg about the firm's net worth offered a rare glimpse of the inner workings of the private partnership of BDO Seidman USA.

The award represents more than 16 percent of BDO's $546 million in 2010 revenue, which was down from $582 million in 2009.

Allenberg reported partner distribution of $16 million and net income of $40,176 last year compared with partner distribution of $17.1 million and net income of $6.1 million in 2009.

Cole moved to seal BDO's financial documents after Allenberg's testimony, but the judge did not issue a decision.

Change In Auditors

BDO was hired by Grand Court after the company fired its Deloitte & Touche auditors. While Deloitte performed full audits, plaintiff attorney Steven Thomas maintained BDO improperly agreed to sampling techniques that limited its financial review.

During trial, Thomas pointed to an 8-K regulatory filing by Grand Court with the Securities and Exchange Commission in 1998 to notify investors of a significant event — its change in auditors.

The report assured investors that Grand Court had not consulted BDO about the application of accounting principles "or the type of audit opinion that might be rendered" — short for opinion shopping.

But jurors decided BDO crossed the professional line.

During a video deposition, Aram Kostoglian, BDO's audit partner on Grand Court, said he received a call from the company before his firm was hired and discussed sampling. Auditors would review financial statements for Grand Court's properties but not appraise each one.

Thomas said that proved problematic because BDO set a $450,000 threshold for financial materiality. Many of its 118 properties were each worth more than that, yet only 27 were appraised.

"It makes sense that if something standing alone will crater your financial statements, you have to look at it. You can't sample material items," Thomas said after the trial.

Coral Gables attorneys Hector Lombana of Gamba & Lombana and solo litigator Gonzalo Dorta served as local plaintiff counsel.

The plaintiffs and Deloitte & Touche reached a confidential pretrial settlement.

That left jurors to focus on solely BDO, sifting through years of Grand Court's financial reports to determine whether BDO negligently failed to disclose facts to the SEC or supplied false information on its audit.

Key Participants Died

Kostoglian died before trial and Batchelor died before the lawsuit was filed, so jurors were forced to rely on Kostoglian's video deposition and a transcript of a Batchelor deposition.

The estate and foundation repeatedly played a segment of Kostoglian's deposition in which he was questioned about the significance of the word "public" in certified public accountant.

"I'm not sure I understand what you mean by any responsibility to the public. I've always viewed myself as being responsible to myself to do a good job," he said.

Thomas argued that wasn't enough — the firm owed a duty to the public to avoid misleading investors. He asked jurors to award $76 million in compensatory damages and $82.8 million in punitive damages.

In response, the defense portrayed the estate's lawsuit as an attempt to point the finger at the last auditors in place before Grand Court's demise, noting 82 percent of Batchelor's investments in the company were made before BDO was hired. Cole also noted that only a fraction of Batchelor's investment came through his foundation.

BDO also argued Batchelor relied on his own financial advisers, not the accounting firm, when deciding to pour his money into a company that posted losses before bankruptcy.

"In a sworn deposition prior to his death, Mr. Batchelor never mentioned BDO among a lengthy list of professionals and associates he relied on in making his decision to invest in Grand Court. Moreover, the vast majority of Mr. Batchelor's investments took place prior to BDO issuing its audit opinion" in 1999, BDO said in a statement.

"We strongly disagree with jury's decision, and we are confident the verdict will be reversed on appeal as there were numerous reversible errors made by the court during this trial. The addition of punitive damages only serves to emphasize the injustice that has taken place," the firm said.

Deja Vu

It won't be the first time the 3rd District Court of Appeal reviews a case involving BDO's audit work with Cole and shareholder Karen Bitar on one side and the California trio of Thomas, Emily Alexander and Mark Forrester on the other.

An appellate panel last summer reversed a $521 million award for Espirito Santo Bank, which blamed BDO for missing a $170 million fraud at E.S. Bankest, a Miami factoring company half-owned by the bank.

If the award is upheld, it would be a big win for the estate and foundation.

"This trial and the results are all about the dozens of organizations that the Batchelor Foundation funds in South Florida. And those organizations are all the better for this verdict," said Bruce Rubin, a spokesman for foundation.

A Miami-Dade jury delivered nearly a $92 million verdict — $55 million in punitive and $36.7 million in compensatory damages — against BDO Seidman for shoddy accounting work for the late George Batchelor and his foundation.

Jose Pagliery can be reached at (305) 347-6648.