NEW YORK, Jan 13 (Reuters) - Steven Thomas of Thomas,
Alexander & Forrester was once a partner at Sullivan & Cromwell,
before he decided he'd rather be a plaintiffs' lawyer and
founded a boutique specializing in big-money claims against
auditing firms. Thomas has won two huge verdicts in Florida
state court against BDO Seidman: $520 million on behalf of the
Portuguese bank Espirito Santo; and about $130 million for the
Batchelor Foundation. (The Espirito Santo verdict was overturned
on appeal; the case settled on confidential terms on the eve of
retrial. The Batchelor verdict is on appeal.) He's also settled
cases against KPMG (for the trustee of New Century Financial);
against BDO (for the trustee of Axium); and against Ernst &
Young (in a confidential arbitration). He's currently litigating
three cases against Deloitte, the erstwhile Taylor Bean auditor;
Madoff-related cases against E&Y and KPMG; and a case against
McGladrey & Pullen that stems from the Tom Petters fraud. Thomas
spoke with me from his office in Venice, California, about how
he decides what cases to bring and how he battles auditing firm
On the Case: When a client has a notion to bring claims
against an auditor, what factors do you first consider to decide
whether it's a viable case?
Steven Thomas: We first want make sure the auditors have
done something wrong. Just because there is a fraud doesn't
necessarily mean the auditors are at fault. What we look at is
to determine whether or not the auditors did their job. Did they
violate their duty?
The second thing we look at in advising clients is the size
of the case. The reason we do that is, the auditing firms,
they're professional litigants. They have tremendous resources.
They have done these cases over and over again. The cases are
fairly technical, not so much in the accounting sense, but in
the legal sense. There are a number of technical ways these
cases have to be pursued legally, and technical defenses, and
the auditing firms know that backwards and forwards. So if
you're going to go up against the auditing firms, then you need
somebody with like experience. But you also need to understand
that they're going to use everything they can to fight you,
whether they did something wrong or not. So there has to be
enough at stake for a client to take that task on.
OTC: What's your threshold?
Thomas: Our firm threshold is a little different than what
someone [might consider] a viable claim. We typically don't take
cases on with damages of less than $50 million or $75 million.
But that doesn't mean that's the only viable time you can bring
such a claim. Other firms who do it differently, have a
different business model, can take those on. But from a client
perspective you can't go after them for a small amount of money
because they'll spend you under the table.
OTC: Okay, so what would you say a threshold is for anyone?
If you have a claim that's worth less than $5 million, $10
million, is it not worth it? Where would you draw that line?
Thomas: It isn't so much a dollar threshold, it's a
percentage of the value of what it's worth to you as a company.
So I would, What's your revenue? For some companies,
$100,000 is a heck of a lot of money. But given what the
accounting firms will do to you, it has to be an important
amount of money to your company to make it worthwhile to go
after them. That's just reality. In a way, the auditing firms
have achieved their goal. They want to make it hard to sue them.
They work hard in legislatures to make that true, they work hard
in court, they work hard and lobby at the [Securities and
Exchange Commission] and everywhere else to make that true. And
in a lot of ways they've achieved that goal.
OTC: Of the classic defenses we see from audit firms, I
guess the one with the broadest sweep is in pari delicto [a
common law doctrine that holds one wrongdoer can't recover
damages from a partner-in-crime]. Does that depend heavily on
where you're bringing the claim, since that's a state-law based
Thomas: You're correct: Those are state-law claim defenses,
and therefore, the state you're in bears heavily on the
viability of that defense. The reason the in pari delicto
defense has come to the forefront over the past two years is
because of a 4-3 decision in the [Court of Appeals] in New York.
In that decision, [the state high court] applied in pari delicto
to auditing firms. Now other state courts have looked at it and
said in pari delicto shouldn't apply to an auditing firm because
it's an auditing firm's duty to detect fraud. In pari delicto
says if there's a fraud, you get off. If it's your job to detect
fraud, it shouldn't be the fraud itself that absolves you of
OTC: Which states have held differently than New York?
Thomas: Florida has held specifically that it's an
accounting firm's duty to detect fraud and therefore in pari
delicto, or a defensive claim of fraud against the client, would
not be viable. States that have not held as specifically in that
context have held that an in pari delicto claim can be an issue
of fact that depends on the duties of the auditors. States close
by New York -- New Jersey and Pennsylvania -- have looked more
closely. New Jersey, in particular, has looked at the fact that
it is the auditing firm's duty to detect fraud and applying in
pari delicto in that situation is not impossible but very
OTC: So it's not a coincidence that a lot of your big-ticket
cases have been in Florida?
Thomas: It doesn't have anything to do with the law, it just
happens to be where those cases were. All those cases arose in
Florida, they weren't moved to Florida because of the law. But
it is true that in litigating the number of cases we've had
against accounting firms in Florida, it's given those courts a
chance to look at and try to make legal decisions that are
rational based on the public duty that accounting firms have.
OTC: One of the interesting things about suing auditing
firms is the structure that so many of them have adopted, where
they have a parent, but then they have all these satellites
internationally that operate with their names, but which they
claim are separate businesses. How has that contributed to the
difficulty of suing audit firms and how have you pierced that
Thomas: It doesn't cause difficulty in suing the domestic
arm of, for example, KPMG. Where it does prove difficult is for
some of the non-Big Four, in being able to tap the resources for
collection of judgment of all their operations outside the U.S.
For the Big Four, the problem it causes is, in fact, they of
course are an integrated firm worldwide, and if there are
activities that take cases outside the United States, they
pretend that it's some completely separate entity that just
happens to have their exact name on the door. It makes
cross-border litigation more difficult. If you go into
Singapore, you can walk right into KPMG's offices and they have
the exact same logo and exact partners all meeting together and
the fiction is that they're somehow a separate entity.
OTC: So how receptive have courts been to arguments that
they're the same entity?
Thomas: Overall, not very. There have been some good
decisions and some bad decisions. I think the accounting firms
have been winning on that front. The accounting firms have been
able to convince judges, particularly in New York, that they
were different, separate entities.
OTC: We've seen a lot of litigation involving U.S.- listed
Chinese companies, which are virtually impossible to collect
judgments against. Some of the plaintiffs in that litigation
have tried to go after accounting firms. Has that been something
your firm has looked into?
Thomas: We have not done that work, so I couldn't comment
first-hand on it I know the argument, I've seen it in
cases in which we have been involved. The argument of the
accounting firms is that we essentially set up this entity to
license our name to different entities around the world, and we
coordinate, but we're all separate. And of course, when [a
client] is coming to hire them for their services, they say,
well, you're going to get Deloitte in Singapore. But then, of
course, when they get sued, they barely know that Deloitte is on
the door in China.
OTC: Why have you stayed out of the China litigation?
Thomas: We haven't made a conscious decision to stay out. My
firm only takes a handful of large cases. We have three partners
and a number of attorneys who work with us as special counsel.
Our model is to take very few large cases and then win them. So
in a given year, we may only take a single case.
OTC: When there is a big apparent accounting lapse, do you
look at it with interest? For instance, Olympus and MF Global
are the two big scandals of the moment. Are those things you've
looked at? Or do you not get interested in something until a
client knocks on the door?
Thomas: We stay very well informed about all developments
concerning accounting firms. We're very interested in decisions
the [Public Company Accounting Oversight Board] or SEC takes and
we try to stay very involved in all aspects of [auditing
oversight]. As far as accounting cases, yes, if I read something
in the paper, I might think "Oh, there could be someone we could
help in that case."
OTC: What's your thumbnail view of Olympus and MF Global?
Thomas: We're not directly involved in either one so I
couldn't give you an opinion. I know what I've read and seen in
the papers and quite frankly with some information that's been
brought to us. But until we have a chance to really review it, I
don't assume that the accounting firm or anyone else necessarily
did something wrong. Before we bring a case, in every instance,
we're not looking for some small mistake. The cases we bring,
there's been clear, if not gross, negligence or fraud involved.
For our cases, that's what we're looking for.
OTC: In terms of regulation of the auditing industry, do you
see anything that that the accounting board has done or has
contemplated doing that's going to make a big difference?
Thomas: The recent public statements by the PCAOB,
including, for the first time, with Deloitte, unsealing part of a report, was extraordinarily critical. The report specifically
looked at what I think is one of the very key issues in the
accounting world now, which is the culture of the accounting
firms. They particularly attacked the culture of Deloitte as one
that is not skeptical of management and in fact accepted
management's representations. The PCAOB out and
clearly, "Look, your job as accounting firms, as auditors, is to
test management's representations, not to just accept them
because your job is to see if management is either creating
material errors or doing fraud." It's sort of a comeback to the
in pari delicto defense. And the PCAOB came out and reaffirmed
that accounting firms' jobs are to check management
representations. You can't just accept them. That's what an
auditing firm does. If we were just going to accept management
representations, we wouldn't need auditing firms at all. I think
that statement by the PCAOB, and aggressiveness in coming
out and demonstrating that approximately half of the audits of
Deloitte they looked at were materially flawed, that is
OTC: Might that language from the PCAOB make a difference in
litigation? Is that something you would cite to a judge who's
weighing an in pari delicto defense?
Thomas: It is something we could cite in trying to explain
to a court what the law should be and what makes sense. But I
was actually at a more basic level. I wasn't so much thinking
about in one of my litigations what I could do to win. I was
thinking of making accounting firms better at actually doing
their job as auditors.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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