“Never mud-wrestle with a pig. You end up covered with pig-shit. And the pig actually likes it.”
There was palpable relief on June 23 in the halls of international accounting network BDO’s firm in the US, née Seidman. The Florida Court of Appeals, reversing a potentially devastating $521 million jury verdict, ordered a new trial of the claims by Banco Espirito Santo relating to alleged faulty audits of the irregular accounts of Seidman's factoring company client Bankest.
attention to this threat hanging over Seidman’s existence since 2007 (here, here and here), it is now right to look beyond the
predictable chest-thumping press releases of the adversaries (see here), and contemplate just who has won what.
Notably, to start, Seidman lives to fight on.
Even though the
opinion (available here) makes clear that the appellate court would
not have let stand the $321 million in punitive damages imposed by the jury for
its finding of Seidman’s egregious conduct, the Seidman firm was still facing
disintegration. Being forced to pay only
the $159 million of compensatory or “ordinary” damages would have inflicted on its 273 partners the unsustainable obligation to work for nothing for a year or more (based on industry
profit margin data and Seidman’s reported fiscal 2009 revenue of $620 million -
Dealing not with the merits, but only with the defects in procedure it found in the lower court’s trial management, the appellate tribunal held that the claims of Seidman’s grossly negligent conduct were inextricably “intertwined” with issues of “causation, reliance, and comparative fault” – that is, in lay terms, that Seidman’s allegedly bad behavior should have been evaluated by the jury in context of the bad behavior of all the other actors in the sordid story of Bankest.
press-release confidence of Seidman’s CEO, that it “acted at all times
consistent with its professional obligations,” has been neither established nor
vindicated, but remains to be re-tested in another fulsome public proceeding.
As for the Banco plaintiffs, the obligation to re-try the case is another reminder of the lawyers’ caution, to be careful of getting your wish from a trial judge. A lawyer who rings the bell for a huge jury verdict, when the judge has put the bell-rope in his hands, may walk with a little more clank in his swagger. But a judgment only really counts as bankable when affirmed on appeal and collected.
And while both sides will claim to have learned of their
courtroom strengths and weaknesses from the original trial, the very rationale
of the appellate rulings that require a new trial also gives a road-map for the
other side by which to by-pass the perceived speed-bumps the first time.
So with the learning process a bi-lateral one, another go-round will feature re-treaded strategies on both sides.
the attitude of courtroom veterans, that second trials have the inevitably
stale air of re-cycled themes, witnesses and evidence – the very reason they
happen so seldom.
That sentiment plus traditional analysis suggest that, under the appellate court’s signals about the extent of the penalty against Seidman that it would sustain, the parties will reach a settlement – one that to Seidman would be highly painful but tolerable – in effect, the number of months its partners might stand to work without take-home pay before they bolt for the exits.
On the other hand,
trials of life-threatening claims against the large accounting firms are so
rare as to make impossible either patterns or reliable predictions.
The Florida court did make one observation of unintended and presumably un-ironic import:
“An accounting firm that must distribute its net income and net worth to judgment creditors rather than the partners who produced that income will not have partners (or clients) for long.”
In other words,
even a small state’s intermediate judiciary recognizes that so long as the
large accounting networks are put to the hazard of litigating for their
survival, the entire global franchise of privately-provided assurance is at
Critics of that structure, who in essence dispute the very legitimacy of the firms’ business models (here), remain challenged to articulate an achievable alternative that will offer sustainable value to the community of financial statement users.
If the prolonged and now-extended agony of Bankest teaches nothing else, it is that the auditor-viability dialog is still not satisfactorily engaged.
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