I’ve been off the grid the last few days and only just catching up. So it seems BDO International escaped the knock on effect of the $522 million judgment against BDO Seidman in the Banco Espiritu Santo (BES) case. The case, which fell in two parts was effectively torpedoed when Miami-Dade Circuit Judge John Schlesinger ruled from the bench that BDOI was not responsible for the punitive damages. That part of the judgment amounted to $352 million. It took the jury less than an hour to rule that BDOI was not responsibile for the compensatory damages of $170 million. According to Law.com, the judge said:
“I don’t believe the facts are in the neighborhood of adequacy to support punitive damages against BDO International.”
Francine McKenna is surprised:
Just listen to these two clips from Courtroom View Network of the June 3rd testimony of the International Secretary Paul Van Elten. You should also hear why I though it was pretty clear that BDO International did not do what they told the public they said they do. They were not managing and controlling one of their largest and most important member firms and have tried to wiggle out of that liability ever since the Banco Espirito Santo case came up.
I’m not surprised. While the case was ongoing, Francine and I were discussing this in background. I took the view that even if BES was successful, how would any jury verdict be enforceable in Belgium against a ‘firm’ of 12 people? That of course assumes that a Belgian court would agree with such a verdict, something I find implausible at best. There were other factors in play. Plaintiff’s lawyer made a hash of the opening argument to the point where I felt someone should have told him to get on with matters rather than repeatedly labouring the control point. It was stultifying stuff that alienated me so goodness knows how the jury felt.
During my conversation with Jeremy Newman, BDO’s global CEO, he made the logical argument that BDO globally is really a franchise. At the time he said: “If you got a bad meal from the local MacDonalds, would you sue the head office? Of course you wouldn’t.” There were deeper problems for the plaintiffs. The fact that BDO didn’t do what it might appear to have been doing publicly were matters of fact that seemed to have weighed more heavily than the plaintiffs thought. Boston.com starkly illustrates the difference:
“They had the right to decide if BDO Seidman even exists as BDO,” Thomas [for plaintiff] said in closing arguments. “They admitted this right of control, right in their annual report. They want the strong brand because that’s how they make money.”
“My client never sought to be the boss, never became the boss and didn’t have the right to be the boss,” Raymond told the jury.
But Raymond [for defendant] said the evidence showed the opposite: that the member firms held all the power and the international entity existed solely for such administrative functions as coordinating meetings, distributing auditing manuals and handling a membership directory.
The judgment means that BDOI has options. It can throw Seidman to the insolvency wolves given that firm has already claimed it cannot settle a judgment of that size. That need not be fatal because the firm can always reform under a new name at some point in the future. It would likely be a lot smaller than the current firm but at least BDOI could retain a US presence. Whether that is viable is another matter given the fact the partners appear to be at risk of personal insolvency. Alternatively, BDO Seidman can carry on litigating in an effort to at least set aside some of the punitive damages award or come to a settlement that doesn’t destroy the firm.
The large firms will need to rethink their positioning. As a matter of principle, it is wrong to claim ‘global’ status when you don’t have management control over the networked firms. That’s something both the judge and jury in this case clearly ignored – as they should have done. This was never about what they claim but what they did. However it doesn’t take away from the public perception, which impacts fee generation capability as Thomas claimed. It is interesting to note that in its most 2008 annual report, (PDF download) BDOI says:
BDO International is a world wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country.
The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located.
Nothing in the arrangements or rules of BDO International shall constitute or imply an agency relationship or a partnership among BDO Global Coordination BV and BDO Member Firms.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
This is a repositioning from that which is said to have existed at the time when BDO Seidman failed BES. It does however make clear the relationship that exists between the firms, now exemplified in renaming BDOI to BDO Global Coordination.
Thomas has said his client may appeal the verdict but it is hard to see on what grounds. Thomas’s claim that BDOI has perpetrated a fraud on the public sounds meritorious but the jury has effectively said: ‘So what?’ Even if you argue the jury got it wrong, there would have to be a slew of new facts the jury did not hear about for this case to have a reasonable chance of being directed in favour of BES. However, none of this will provide relief for the Big 4 which are facing mounting litigation. PWC has the threat of Satyam hanging over it. As Francine says:
Interestingly enough, word on the street all over the world, is that PwC, in particular, is scared witless of these suits given the inevitable suit against PwC International that will be filed in the Satyam fraud. In fact, one of their inside counsel subscribed to the Courtroom View Network coverage and has been listening every day. Sources have told me that more than one of the PwC firms of both the “network” and SEI (shared economic interest) variety, and there are both, are seriously evaluating options including dissolving and splitting off to avoid the potential liability of a catastrophic Satyam verdict.
If PWC does break up then that is almost a tacit admission of responsibility. If it does nothing but chooses to fight and/or settle then its reputation takes another knock, along with its balance sheet. As I’ve said on numerous occasions, these are interesting times for the profession as a whole and the Big 4 in particular. Closer regulatory scrutiny must surely be the price they will have to pay for remaining in existence.
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