A federal jury yesterday awarded $11 million in damages against Alexander Grant & Co. for breach of contract, negligence and fraud in connection with the firm's audits of the failed Auto-Train company.
If upheld, the proceeds of the award ultimately would go to the creditors of the company, which previously transported thousands of Washington-area vacationers from Northern Virginia to Florida. Auto-Train stopped operations in May 1981 and filed for bankruptcy in September of that year.
However, James Strother, general counsel for Alexander Grant, indicated that his firm would ask U.S. District Judge John Garrett Penn to set aside the jury verdict, which he called "incomprehensible." Failing that, he said, the firm undoubtedly would appeal the verdict.
The court-appointed trustee for Auto-Train, Murray Drabkin, orginally filed a $51 million suit against the accounting firm in 1983, charging that Alexander Grant fraudulently failed to report federal tax liens against the company and allowed misleading descriptions of Auto-Train's financial condition to be issued.
Drabkin alleged that Grant's audits of the 1977, 1978 and 1979 financial statements of the firm violated generally accepted auditing and accounting standards, as well as certain accounting regulations of the Securities and Exchange Commission.
Alexander Grant was charged with failing to disclose the existence of nearly $2.4 million in delinquent federal payroll taxes, as well as failing to disclose the deteriorating condition of rolling stock, among other violations cited in a statement released by the estate yesterday.
The jury upheld Drabkin's allegations in connection with the 1978 and 1979 audits and awarded compensatory damages against the accounting partnership, the 11th-largest in the country. Strother said that if the verdict is upheld, it would represent the largest judgment ever against Alexander Grant.
Drabkin said yesterday that he was pleased with the verdict, which he said reflected the failure of the firm to carry out its auditing responsibility. This failure, he added, deprived the board of directors of "vital information as to the true financial conditions of the company.
"As a result, they were unable to take necessary, timely actions to deal with the problems," said Drabkin, a lawyer with the Washington firm of Cadwalader, Wickersham and Taft.
Grant's lawyer Strother, however, rebutted the contention that Grant misled the board of directors, saying that the company had issued a "going concern qualification" with the disputed audits. Such a qualification, he said, involves the auditors telling a company that it is in bad financial shape and that the audit opinion is presented on the assumption that the company will be kept alive as a going concern.
Such a qualification represents "just about the worst thing that an auditing firm can say about a company short of disclaiming an opinion," Strother added. "The report was qualified subject to the company's ability to turn itself around."
For these reasons, Strother said that he was confident the verdict would be reversed. Drabkin said, however, that the going concern qualification did not excuse the firm from carrying out its auditing responsibilities.
The award from the suit will be distributed by the estate of the company to its creditors in accordance with federal bankruptcy law, according to the trustee statement. The company owes approximately $20 million to creditors and has assets of $5 million to $10 million, according to Philip R. Argetsinger, a legal assistant in Drabkin's firm. Any legal fees arising from the pursuit of the suit will be determined by the bankruptcy judge, Drabkin said.