Risk Management

BDO Ordered to Pay $170M in Fraud Case

The nation's 5th largest accounting firm loses its court battle with a Portuguese bank; appeals will be filed.
Stephen TaubAugust 14, 2007

BDO Seidman is on the hook for at least $170 million after a jury ruled on Friday that the accounting firm was negligent in failing to detect a massive fraud that cost a Portuguese bank $170 million, according to the Associated Press. The award could be higher depending on the amount of punitive damages the jury seeks, according to the report.

Six jurors deliberated for just one hour even though it was a complicated trial process that lasted for a number of months, reported the wire service. The case involves a 2004 lawsuit brought by Lisbon-based Banco Espirito Santo against BDO, sparked by the collapse of factoring firm, E.S. Bankest. The Banco Espirito Santo helped launch the factoring firm and had invested in it. BDO Seidman was E.S. Bankest’s auditor for seven years.

In March, a judge declared a mistrial. According to a Miami Heraldstory at the time, defense attorneys had moved for a mistrial after a plaintiff’s attorney, while questioning a witness, referred to the suicide of a BDO executive in 2003. The death reportedly took place shortly after a $220 million fraud was discovered at a BDO audit client, financial-services firm E.S. Bankest.

In June, following a new two-month trial, a Florida jury found that the accounting firm had committed gross negligence. Under current Florida law, Banco Espirito Santo can pursue punitive damages of as much as $510 million, according to the AP. “A judgment of that size certainly would have a severe impact on any firm,” a BDO spokesman told CFO.com in an earlier interview.

BDO Seidman said it will appeal the June verdict and Monday’s decision, reported the AP. The accounting firm also warned that if it loses the case, it may institute massive layoffs and could lose its position as the nation’s No. 5 accounting firm, added the wire service. “BDO Seidman respectfully but forcefully disagrees with this verdict,” the firm reportedly said in a statement. “This is an interim decision in a long process and a contingency that was anticipated.”

According to the suit, E.S. Bankest was a factoring firm jointly created in 1998 by the Banco Espirito Santo and Bankest Capital. The complaint alleged that Bankest “did almost no legitimate factoring,” and was instead used to funnel money from Banco Espirito Santo investors to Bankest principals. The plaintiff charged that BDO audited financials were used by Bankest to issue debenture notes — that ultimately proved to be worthless because of the scheme.

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