Florida Judge Rules Out Punitive Damages in Accounting Malpractice

June 17, 2009

A Miami judge ruled on Tuesday that BDO International B.V. should not have to pay $352 million in punitive damages awarded against its U.S. member, BDO Seidman, in an ongoing landmark audit malpractice trial.

Closing arguments are due from Wednesday in the ongoing case, in which BDO International is accused of not properly overseeing BDO Seidman in the latter’s audits of a Miami-based factoring company set up by Portugal’s Banco Espirito Santo .

The landmark case against Brussels-based BDO International is being closely watched in the accounting industry because if the Miami jury finds for Banco Espirito Santo, it will be the first time a global accounting entity is found legally liable for the errors of one of its national members.

In a directed verdict delivered ahead of a jury decision, Judge John Schlesinger “carved out” punitive damages totaling $352 million from the case, ruling them out from the trial, lawyers said.

The punitive damages, along with $170 million in compensatory damages, had been awarded against BDO Seidman in 2007 after a Miami jury found the U.S. company negligent in failing to detect fraud in the E.S. Bankest factoring firm.

“I don’t believe the facts are in the neighborhood of adequacy to support punitive damages against BDO International B.V. They’re entitled to a judgment as a matter of law on the directed verdict. It’s granted on that claim,” Schlesinger said in his ruling, which he reaffirmed in court on Tuesday.

However, BDO International still faces the possibility of being found liable for the $170 million compensatory damages.

“We are pleased that the judge has issued a directed verdict throwing out the plaintiff’s claim for punitive damages in this case,” said BDO International, which now calls itself BDO Global Coordination B.V.


BDO Seidman has already appealed against the 2007 verdict, which found the U.S. accounting company responsible for “gross negligence” for failing to carry out proper audits between 1998 and 2002 of E.S. Bankest.

BDO’s legal team argued in the latest Miami trial that the Brussels-based international company was not an accountancy company, but simply a “coordinating entity” and so could not be held legally responsible for the actions of its members.

Steven Thomas, lead lawyer for Banco Espirito Santo, sought to show in the trial that BDO International, through its articles of association, statements and member firm agreement signed with BDO Seidman, had the right and duty to ensure the quality of the auditing work carried out by the U.S. company.

“The jury will decide whether BDO Seidman is BDO International’s agent and therefore liable for the $170 million judgment against BDO Seidman,” Thomas said, reacting to the judge’s decision to “carve out” the punitive damages.

“We believe the jury should have been given the opportunity to hold BDO International responsible for the punitive damages already awarded,” Thomas added.

E.S. Bankest collapsed in 2003 and its two founders were jailed for a fraud calculated by investigators at $170 million.

Factoring companies buy other firms’ outstanding bills, known as accounts receivable, at a discount. They later collect the bills and keep the difference.

(Reporting by Pascal Fletcher; Editing by Jane Sutton; Editing by Gary Hill, Dave Zimmerman)


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