Risk Management

Nursing-home Verdict Against PwC Upheld

Accountancy must pay $10 million after a court confirmation of a finding of negligent misrepresentation in a Georgia state case.
Stephen TaubJuly 28, 2008

A $10 million verdict was upheld against PricewaterhouseCoopers, which earlier had been found liable for negligent misrepresentation in a series of financial audits of a Georgia nursing home conglomerate.

According to a report on law.com about the upholding of the verdict, PwC had petitioned a Georgia state court to set aside the jury verdict regarding the 1996 merger of nursing-home companies Convalescent Services and Mariner Health Group. The suit had been filed in 2002 by Stiles A. Kellett Jr. and Samuel B. Kellett, brothers who ran Marietta-based Convalescent Services. In 1995, they agreed to sell their facilities to Boston-based Mariner. Though the deal included some cash, the Kelletts were compensated primarily in Mariner stock, according to an earlier Atlanta Constitution report.

Mariner filed for Chapter 11 protection in 2000, and though it later emerged from bankruptcy, the Kelletts claimed that they lost more than $120 million on the deal. According to one story in the Fulton County Daily Report, the plaintiffs asserted that they never would have agreed to the deal had PwC predecessor Coopers & Lybrand, two of its audit partners, and Mariner CEO Stratton disclosed Mariner’s financial problems.

In February 2007, the accounting firm was cleared on charges of civil fraud and racketeering; a PwC partner and three former Mariner executives were also absolved of various charges. However, the jury found the firm had negligently misrepresented certain material and ordered it to pay $10 million.

In seeking that the $10 million be set aside, PwC had argued that William Bassett, who as trustee for the Kellett family trusts was the lead plaintiff, didn’t present any evidence to prove claims that the Kellett interests relied on alleged misrepresentations by PwC about Mariner’s financial condition, according to law.com.

However, the appeals court reportedly ruled: “The evidence authorized the jury to find that Coopers’ partners knew that potential investors like the Kelletts would rely on Coopers’ audits and ‘clean’ opinions regarding Mariner’s financial condition. The evidence further authorized the jury to find that, in the process of evaluating the proposed merger throughout 1994, when the Kelletts were serving as the trusts’ trustees, they actually and justifiably relied on Coopers’ opinions regarding Mariner’s financial condition…. Thus, when Bassett took over as the trustee in June 1995, the trusts (in the persons of the Kelletts) had already been misled by Coopers’ misconduct.”

A spokesman for PwC did not immediately return a call seeking comment.