Tuesday, January 16, 2007
Jury selection begins today in the $170 million case against accounting firm BDO Seidman for its audit work of E.S. Bankest, a factoring firm that turned out to be a fraud.
BY PATRICK DANNER
Accounting firm BDO Seidman never earned more than $75,000 a year in fees in the five years it audited E.S, Bankest, a one-time Miami financial-services company that turned out to be a fraud.
Nevertheless, BDO Seidman is being sued for at least $170 million for its involvement with E.S. Bankest, which produced one of South Florida’s biggest banking scandals. Nine principals of E.S. Bankest are facing federal prison time.
Jury selection is slated to begin today in Miami-Dade Circuit Court in Banco Espirito Santo International’s civil lawsuit against BDO Seidman, which is accused of negligence in failing to detect the fraud that the financial institution says cost it $170 million. The trial is expected to last at least a month.
The trial could have significant implications for Chicago-based BDO Seidman, the world’s fifth-largest accounting firm. A jury verdict against the firm could lead to job losses for thousands of its accountants, auditors and staff and jeopardize its standing as one of the biggest accounting companies, BDO Seidman said in a court document filed in September.
BDO Seidman has maintained that it was neither negligent nor reckless in its audits of E.S. Bankest. BDO Seidman has filed its own suit against various former E.S. Bankest officials.
“BDO Seidman was a victim of this fraud,” the firm said in an e-mail Monday. “It was these bankers, not BDO Seidman, that profited handsomely from the millions of dollars this fraud generated for Espirito Santo.”
E.S. Bankest was a factoring company created in 1998 by Espirito Santo Bank and Miami company Bankest Capital Corp. Factoring firms buy other firms’ outstanding bills — known as accounts receivable — at a discount. They later collect the bills and keep the difference.
However, Bankest was instead used to funnel money from Espirito Santo’s investor clients, the amended lawsuit against BDO Seidman alleges.
BDO Seidman “abdicated its professional responsibilities” by failing to ensure the debts owed to E.S. Bankest “were real debts owed by real companies,” the lawsuit adds.
The lawsuit also alleges BDO Seidman had a conflict of interest because it reaped fees for serving as a consultant to E.S. Bankest, while also having relationships with companies that did business with E.S. Bankest.
“BDO rubber-stamped phony audit reports,” said Steven Thomas, a Los Angeles lawyer representing the bank, in an e-mail.
Responds BDO Seidman: “This litigation is an attempt by Espirito Santo to deflect attention from their own collusive actions and to shift the blame to BDO Seidman.”
While the lawsuit makes comparisons with now-defunct accounting firm Arthur Anderson’s role’ in the Enron debacle, Judge Jose Rodriguez has prohibited at trial any mention of Enron, calling it prejudicial. BDO Seidman said any comparison is “ridiculous.”
If BDO loses the trial, the implications could be widespread.
“A jury verdict against BDO could have a significant impact on the way they conduct their audits in the future and might have an impact on the public’s perception of the firm,” said Stanley Foodman, a Miami forensic accountant not involved in the case.
The firm reported $3.91 billion in revenue in its last fiscal year, up 17 percent from a year ago.
The trial comes five months after E.S. Bankest’s top officers, Eduardo and Rector Orlansky, and two others were found guilty for their parts in the fraud.
In a court document filed this month, Hector Orlansky, 61, asked the court to ignore the sentencing guideline of life in prison because of various factors, including his health.