Accounting Firm Must Pay $521 Million in Fraud Case

MIAMI, Aug. 14 -- A jury on Tuesday ordered accounting firm BDO Seidman to pay more than $351 million in punitive damages in a negligence case, bringing BDO's potential liability in the case to about $521 million.

The jury had found BDO negligent for failing to find massive fraud in its audits of a financial services company backed by a Portuguese bank. The amount will be added to the same jury's award of $170 million in compensation to the bank, Banco Espirito Santo.

In court filings, BDO Seidman had warned that a loss of $170 million could trigger massive layoffs and cause the company to lose its standing as the fifth-largest accounting firm. The jury was barred from issuing damages that could destroy a company.

In testimony Tuesday, BDO Seidman attorney Adam Cole asked the company's chief executive, Jack Weisbaum, whether the firm's financial operations would stay the same if it had to pay punitive damages.

"Probably not," Weisbaum said. "It would be very difficult. We certainly wouldn't look the way we do now."

The jury decided Monday that BDO Seidman must compensate the bank and provide punitive damages for failing to reveal massive fraud at the bank's former partner, E.S. Bankest. The same jury found the accounting firm grossly negligent in June.

BDO Seidman said it will appeal the jury's verdicts, so it will post a $50 million bond as it appeals. This is the second trial in the dispute, with the first ending in a mistrial in March. The fraud also led to prison time for former E.S. Bankest executives.

Cole showed the jury financial statements for fiscal 2006, which showed the firm's net worth of $171 million. BDO Seidman argued that the punitive damages should be based on net worth, but the bank contended that it should be based on revenue.

For the fiscal year ended June 30, BDO Seidman reported revenue of $589 million, according to a news release on its Web site. Weisbaum said the company has 2,800 employees in 34 offices nationwide.

BDO Seidman attorney Arturo Alvarez laid the blame on "thieves" at E.S. Bankest who defrauded the bank and said the accounting firm did not intentionally bungle the audits. He asked the jury for no punitive damages.

"We were victims, too," Alvarez said. "We never knew [the fraud] was happening."

At least seven people, including E.S. Bankest directors Eduardo and Hector Orlansky, have already been convicted or pleaded guilty to federal criminal charges related to the fraud and sentenced to prison. In criminal trials, E.S. Bankest was accused of inflating the value of the accounts receivable it bought and presenting fake audited financial statements.

BDO Seidman 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.