Aug. 15, 2007 (Associated Press) — MIAMI – Accounting firm BDO Seidman must pay $170 million in compensation and provide punitive damages for its negligence in failing to reveal massive fraud in a financial services company backed by a Portuguese bank, a jury decided Monday.
Six jurors deliberated only an hour to lay financial blame on BDO Seidman and find that the bank, Banco Espirito Santo, was not negligent in allowing the fraud to take place. The speed of the verdict surprised many in the courtroom, mainly because it was a complicated trial process that has lasted for months.
A hearing is scheduled Tuesday to discuss the next step – deciding the amount of punitive damages, which are generally capped at three times the amount of compensatory damages in Florida.
The same jury in June found BDO Seidman grossly negligent in failing to uncover $170 million worth of fraud in audits of a former partner of the bank, E.S. Bankest LLC. This is the second trial in the dispute, with the first ending in a mistrial in March.
“Espirito Santo is gratified by the jury’s verdict and the jury’s diligence,” said Steven Thomas, attorney for Banco Espirito Santo.
BDO Seidman said it will appeal the June verdict and Monday’s decision. In court filings, BDO Seidman had warned that a loss of $170 million in the case could trigger massive layoffs and cause the company to lose its position as the nation’s No. 5 accounting firm.
“BDO Seidman respectfully but forcefully disagrees with this verdict,” the firm said in a statement. “This is an interim decision in a long process and a contingency that was anticipated.”
In closing arguments Monday, BDO Seidman lawyer Adam Cole argued that Banco Espirito Santo shared in the blame because its higher-ups enabled the fraud by not properly keeping track of bad transactions that later landed several people in prison.
Thomas said the bank relied on BDO Seidman, whose duty it was to protect the bank from fraud at Bankest, established in the late 1990s.
“You can make things right and make Banco Espirito Santo whole,” Thomas said in a cluttered courtroom packed with attorneys, accounting executives, media and stacked boxes of evidence.
“If your grossly negligent verdict matters, then by finding punitive damages you’ll deter BDO Seidman and other accounting firms from coming into court and saying it’s not their job to find fraud,” Thomas said.
Thomas argued that Banco Espirito Santo entered the partnership with Bankest in part because of faulty BDO Seidman audits showing that income had nearly tripled from 1995 to 1996. Bankest was engaged in a business called “factoring,” in which money is lent to other companies immediately in return for higher payments those companies expect to receive later.
Thomas had said that BDO Seidman certified audits for Bankest accounts totaling some $225 million, of which only $5 million represented legitimate income.
“The guys carrying out the fraud depended on BDO … not doing their job,” Thomas said Monday.
But Cole pressed the point that a “circle of trust” among board members at Banco Espirito Santo essentially rubber-stamped activities such as falsified accounts receivable and cycling money through the different entities. Cole said bank notes were sold under misleading circumstances.
Cole also argued that about 10 executives failed to keep track of financial statements showing questionable transactions, including Victor Balestra, who was president of the bank and vice president of Bankest.
“They had an obligation to take a look and they didn’t,” Cole said. “That’s the reason why we’re here today. The audits are just a small piece of it.”
Banco Espirito Santo, which was founded in Portugal in 1920, spread to Portuguese-speaking Brazil and bought a Miami-based bank in the early 1980s.
At least seven people, including Bankest directors Eduardo and Hector Orlansky, have already been convicted in federal court of criminal fraud charges and sentenced to prison.
BDO Seidman operates 34 offices and has 300 independent, allied firms around the country. It is allied with BDO International, which coordinates companies with about 30,000 partners and staff and reported total fee income of $3.91 billion in 2006, according to the firm’s Web site.