VideoOn April 29, 1999, E. David Gable's improbable dream came true. Carnegie International Corp., a small Internet support and computer telephony holding company he took over three years earlier, graduated from the OTC Bulletin Board to a listing on the American Stock Exchange. Gable, a former car dealer, even rang the opening bell in honor of the listing for the company he had initially run out of his attic. "This was everything I'd ever worked for," says the 54-year-old Baltimore native.
The very next day, Gable's nightmare began. The Securities and Exchange Commission started asking questions about Carnegie's accounting — specifically, about how the Hunt Valley, Maryland-based company had recognized revenue from a 1998 software-licensing deal — and Amex halted trading in the stock. As Gable tells it, he was confident it wouldn't take long to allay the SEC's concerns and get Carnegie back on the Amex board. But there was one problem: Carnegie's auditors, Grant Thornton International, wouldn't return Gable's phone calls.
In fact, "it took three weeks and a letter from a New York law firm to get them on the phone," recalls Gable. When he finally did, he didn't like what he heard. Grant Thornton wanted to send in a new team to completely redo Carnegie's 1998 audit, and Gable reluctantly agreed. "I didn't want any more trouble," he says. But the months passed while the auditors collected more and more information. In the meantime, business evaporated and investors filed a class-action lawsuit. Carnegie never did resume trading on Amex; the company was delisted in January 2000 and went back to penny-stock land, where it currently trades in the neighborhood of 1 cent.
At first, hiring Grant Thornton had been a coup for Gable, since the accounting firm gave Carnegie, which lost more than $15 million in 1998 on revenues of $7.3 million, the credibility it needed to move to Amex. But today, Gable blames Grant Thornton for Carnegie's demise. It was Grant's botched audit, he charges, that led to the trading halt. As a result, Carnegie is now suing the firm, alleging fraud and negligence. It seeks a whopping $2.1 billion award, including punitive damages — steep recompense for a company whose annual revenue topped out at an unprofitable $20.3 million. "We had the business built, and Grant Thornton just burned down the house," laments Gable, who remains chairman of Carnegie.
Grant Thornton sees it differently. The firm considers the case to be a frivolous one — a desperate act by a floundering company that went bust along with the Internet bubble. Grant admits that accounting errors were made, but it says Carnegie was responsible for them. Lawyers for Grant charge that Carnegie perpetrated a fraud by lying to them about the transactions in question and creating false documents to cover them up.
It's not uncommon for clients to sue their auditors when problems with accounting arise. And the stakes for the auditor are high. "There is always a chance that a client will win a case against its auditor," says Jay Nisberg, president of Jay Nisberg & Associates, an audit-firm consultancy. For this reason, says Nisberg, most auditors settle cases under pressure from their insurance companies, rather than take their chances in court. Last October, for example, PricewaterhouseCoopers agreed to pay $21.5 million to the shareholders and creditors of Anicom, a now-bankrupt wire and cable company, to settle a suit that claimed the accounting firm was reckless in its audits.
But Grant Thornton says it intends to fight the charges when the case resumes — likely in March — in a Baltimore circuit court. Will the facts of the case support the world's fifth-largest accounting firm or an obscure telecom start-up with a checkered past? Says Nisberg, "You never know what a judge or jury will do." Aside from the harm of a large financial award, a Grant Thornton defeat could wreak considerable damage to its reputation at a time when auditing firms are already scraping bottom in public opinion. (Grant Thornton CEO Ed Nussbaum has been vocal in recent months about what auditors need to do to clean up their act, and says Grant has added measures to detect fraud.
Roaring Mice
Unlike Grant Thornton, Carnegie doesn't have much left to lose. The company's history is brief but bizarre. One of the original partners, Scott Caruthers, is currently in jail, awaiting trial on charges that he conspired to murder Gable and two others. It was Caruthers who began one of Carnegie's businesses in 1987, with a plan to develop a new kind of exercise weights.
Gable had other ideas for the company. After he took over in 1996, he took Carnegie public via a so-called reverse merger with Electronic Card Acceptance Corp. (ECAC) and DAR Products Corp., two bulletin-board companies in very different businesses: credit-card transactions and grip technology. Carnegie soon got rid of ECAC and DAR and acquired a series of businesses, mostly in the telecom industry. It even bought a Victoria Station restaurant to "provide cash flow," according to the company's 10-SB filing (an initial registration of securities for small businesses).
Gable's ultimate ambition, however, was to create a one-stop telecom and networking shop for small and midsize companies — a strategy that would have eventually brought Carnegie in competition with companies like Lucent, Nortel, and the Baby Bells. Carnegie's aim may have looked absurdly high, but it was a time when anything seemed possible. Other mice had roared by 1998, the year Bernie Ebbers completed WorldCom's purchase of MCI Communications Corp. WorldCom had started out much the same way as Carnegie had, and Gable was looking to follow a similar path to stardom.
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