Banco Espirito Santo Int’l, Ltd. v. BDO International, B.V. provides new reasons for concern about

To keep pace with the ever-expanding global economy, many accounting firms have joined together in alliances to better take advantage of the opportunities presented in our ever-flattening world.  There has been a significant growth in the number and types of accounting firm alliances, networks, associations and alternative practice structures in the United States and abroad.  However, like the international accounting “firms,” which clearly are “networks,” the accounting firm alliances and associations also have kept a particularly watchful eye on the cases like Nuevo Holdings v. PricewaterhouseCoopers LLP, In re Parmalat Sec. Litig. and Banco Espirito Santo Int’l. Ltd. v. BDO International, B.V. to assess the extent to which association with other firms might bring forward “vicarious liability” for the actions of those other firms.  The recent appellate court decision in the Banco Espirito case presents some new guidance in this thorny area.

On March 12, 2008, Florida’s Third District Court of Appeal reversed a trial court’s prior directed verdict in favor of BDO International, B.V., holding that there is at least a question of fact whether the BDO International, the international parent organization of the BDO accounting network, should be held vicariously liable the failure of its member firm, BDO Seidman, LLP, to detect a massive fraud in the course of conducting audits E.S. Bankest L.C. for the years 1998-2002.

Case history

 

E.S. Bankest L.C. (“Bankest”) was a Miami-based lender engaged in the factoring business.  Factoring is the practice of lending against a percentage of the future value of the borrower’s liquid assets, usually the borrower’s accounts receivable, in return for an assignment of those assets, which in the case of accounts receivable would result in the account becoming payable directly to the factor.  Bankest engaged in a massive fraud involving the fabrication of financial records that concealed hundreds of millions of dollars in losses.  After the company failed, several of its principals, including the CEO, were indicted and sentenced to prison.

Banco Espirito Santo Int’l, Ltd. (“Banco Espirito”) invested in Bankest prior to its failure. Bankest engaged BDO Seidman, LLP to audit its financial statements for the years 1998-2002.  BDO Seidman did not detect the fraud and issued clean audit opinions for the years in question.

In 2004, Banco Espirito discovered the fraud and commenced a lawsuit against BDO Seidman and BDO International, B.V. in Florida state court.  Banco Espirito alleged that BDO Seidman committed professional malpractice and was grossly negligent in its audits of Bankest’s financial statements.  Banco Espirito also alleged that BDO International was vicariously liable for BDO Seidman’s malpractice and gross negligence on the grounds that BDO Seidman was an agent of BDO International.

BDO International first sought to dismiss the claims against it based on the argument that the Florida courts did not have personal jurisdiction over it because it was a Netherlands corporation with its principal business offices located in Belgium.  The trial court denied that motion based on the finding that BDO International should expect to be called into court for the acts of its “underlings” and that BDO International actually transacted business in Florida through BDO Seidman.  That holding was affirmed on appeal.

BDO International then sought to have the complaint dismissed as a matter of law based on the absence of any relationship upon which vicarious liability could be based.  That motion also was denied based on the trial court finding there was a question whether BDO Seidman was an actual agent of BDO International for which BDO International, as principal, could be held vicariously liable.  Accordingly, the matter was slotted to go to trial against both defendants – BDO Seidman and BDO International.

The liability phase of the trial against BDO Seidman and BDO International started in early 2007.  In June, the jury found BDO Seidman liable, but the trial court granted BDO International’s motion for a directed verdict and dismissed the case against BDO International based on a finding that Banco Espirito had not presented sufficient evidence to prove an actual principal-agency relationship between BDO International and BDO Seidman.

 

At the conclusion of the damages phase of the trial in August, the jury awarded $170 million in compensatory and $351 million in punitive damages against BDO Seidman.  BDO Seidman is appealing the jury verdicts, and Banco Espirito appealed the trial court’s dismissal of BDO International. 

On March 12, 2008, Florida’s Third District Court of Appeal reversed the trial court’s directed verdict in favor of BDO International, holding that there is a question of fact whether the international organization is vicariously liable as principal for BDO Seidman‘s conduct, as its agent, in failing to detect the fraud.

Appellate decision

 

The appellate court first noted that the only theory of liability presented against BDO International at trial and in the appeal was “actual agency,” and that “apparent agency” was not argued.  The court further noted that “[v]icarious liability may arise in various ways under Florida law.”

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