Bank Sues BDO Seidman for $170 million

In a lawsuit that draws comparisons with Arthur Andersen's role in the Enron scandal, Banco Espirito Santo International sued BDO Seidman Tuesday, saying the accounting firm's unprofessional conduct cost the financial institution over $170 million.

The lawsuit, filed in federal court in Miami, USA, concerns the E.S. Bankest scandal that produced nine indictments last year. Four of the defendants have since agreed to plead guilty.

“As is now clear in the post-Enron, post-Arthur Andersen world, accounting is supposed to be a profession, which means that accountants' rich compensation comes with corresponding duties to follow the industry's rules,” reads the lawsuit. “BDO violated its duties and harmed those its profession is designed to protect.”

The bank's co-counsel on the case are Steven Thomas of Sullivan & Cromwell in Los Angeles and Mitchell Berger of the Fort Lauderdale firm Berger Singerman.

BDO Seidman officials said they hadn't yet seen the Miami lawsuit and declined to comment.

In the Enron case, Arthur Andersen was forced out of business after it was convicted of obstruction of justice for its work as auditor of the company. Federal officials said the firm had deliberately given the firm glowing audits in order to nurture a lucrative consulting contract.

BDO Seidman was the auditor for E.S. Bankest, a joint venture of Espirito Santo Bank and a Miami company called Bankest Capital.

The venture's business was purportedly “factoring,” where one company buys another company's accounts receivable at a discount. The factoring company then collects the full payments, pocketing the difference as profit.

“However, Bankest did almost no legitimate factoring and was instead used as a vehicle to funnel money from (Espirito Santo's) investor clients,” the lawsuit says.

Investors in E.S. Bankest's business relied upon audited financial statements provided by BDO Seidman. But the accounting firm, fearful of losing a client, chose not to perform comprehensive audits, the lawsuit says.

BDO also had a conflict of interest in that it was supposed to be an independent auditor but also had a highly intertwined business relationship with Bankest.

“BDO simultaneously served as a consultant to Bankest, reaping additional 'consulting' fees for work that is unclear,” the complaint states.

The investors in E.S. Bankest were later bought out by Banco Espirito Santo International. That left the bank holding the bag when Bankest collapsed.

Complicating matters further, the auditor had relationships with other companies that did business with Bankest and in fact were sometimes controlled by Bankest principals.

To attract investors, the size of these side businesses were often wildly inflated in financial statements. But BDO Seidman never did the required investigative work that would have uncovered the fraud, the lawsuit says.

“In short, BDO sacrificed its professional responsibilities for money,” says the lawsuit. “In so doing, BDO reneged on its obligations as professionals to profound effect.”

The Banco Espirito Santo affiliates filing the lawsuit are based in the Bahamas and the Cayman Islands. However, E.S. Bankest's offices were located in the Espirito Santo building on Brickell Avenue in Miami

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