BDO Gets Accused of Inflating Revenue Ahead of the ESOP Again, This Time in a Class Action Lawsuit

We knew it was only a matter of time before someone filed a class action lawsuit against BDO USA for all that ESOP stuff. Pretty much ever since the secret partner meeting happened back in 2023 we’ve heard from countless current and former partners saying “Gee I wish someone would sue the shit out of BDO” (paraphrasing) for everything related to BDO’s deal with Apollo and the ESOP.

Here’s a transcript of just one such voicemail we received a few months back:

I’m a current member of BDO, a partner or now principal as we’re called. I read your article on Going Concern, there’s a lot of good information there. I’d love to see a class action suit by the former partners. Unfortunately I’m a current partner so I’m not willing to start something like that, but we would love to see that, there’s been a lot of discussions that we’re hoping some partners who have left would do that because of a lot of the things that you mentioned in the article.

Well buddy, it’s your lucky day.

On January 17, Tristin Taylor — who is listed as a current employee of the firm in the lawsuit — filed a class action complaint against BDO in United States District Court for the District of Massachusetts Eastern Division alleging various naughtiness related to the ESOP.

The allegations in the complaint, embedded in its entirety below, include (reminder…allegations):

Inflated Stock Valuation:

• BDO executives allegedly inflated company revenues and valuations before selling 42% of the company’s stock to the ESOP for $1.3 billion, a price claimed to be above fair market value.
• The inflated valuation caused the ESOP to overpay and unduly enriched BDO executives who sold their shares but retained control over the company.

Conflicts of Interest:

• The creation of the ESOP was allegedly structured to benefit company executives who influenced the valuation process and the appointment of trustees.

Governance Issues:

• The ESOP did not obtain control over the company despite its purchase of a significant share of BDO stock, as the governance structure allowed BDO executives to retain voting power and control.

Debt Burden:

• The ESOP was financed through a high-interest loan facilitated by BDO, leading to significant financial strain on the company and the ESOP.

ERISA Violations:

• The lawsuit claims violations of the Employee Retirement Income Security Act (ERISA), including breaches of fiduciary duty, prohibited transactions, and imprudent investment decisions that harmed ESOP participants.

This is not the first time allegations of inflated revenues have floated (clearly, if you read the headline of this post). Here are two separate instances we’ve written about:

Lawsuit Counterclaim By an Ex-Partner Accuses BDO of Shady Behavior Around the ESOP, PE Deal, and Corporation Conversion

Another Explosive BDO Lawsuit Counterclaim Accuses the Firm of Inflating Revenue, ESOP Tomfoolery

Some specifics from the suit:

Prior to the Transaction, the BDO ESOP had no assets with which to purchase the Company’s stock. To facilitate the transaction, the Company entered into a private credit deal with Apollo Global Management affiliates (“Apollo”), through which Apollo provided the Company the funds required to consummate the transaction. Based on the best information available to Plaintiff, the loan between Apollo and the Company carried a floating interest rate based on the Secured Overnight Financing Rate plus 6%. As of December 31, 2023, this resulted in an interest rate of 11.36%. BDO guaranteed and is required to make contributions to the ESOP sufficient to pay all loan payments due, thereby reducing BDO’s future cash flows by the amount necessary to service the ESOP’s Transaction debt. Had Defendants provided truthful information concerning BDO’s past and future financial performance and ensured that the ESOP trustee conducted the rigorous due diligence required by ERISA, the ESOP would not have purchased 42% of the Company’s stock for $1.3 billion while obtaining no control of the Company.

I linked it already but just in case: Let’s Look at Apollo’s 10-Q to Get Specifics on Their Deal with BDO.

The day before BDO put out a press release about the ESOP, Financial Times wrote that “BDO partners [are] in line for windfall after $1.3bn debt deal with Apollo Global Management.”

The civil suit complaint says:

Rather than find an arm’s-length purchaser for their shares that would scrutinize BDO’s financial position and wrest control of the Company from their hands, the Company’s executives created a captive buyer for their shares through the creation of the ESOP. The BDO employees who were the intended beneficiaries of the ESOP were not permitted to negotiate the terms or purchase price of the Company stock that executives would offload into employees’ retirement accounts. Rather, the Company’s Board of Directors selected a trustee that they believed would acquiesce to the Board’s will.

Despite the ESOP purchasing Company stock, neither employees nor the ESOP obtained control over the Company’s future cash flows or strategic direction. Even worse, the Board adopted an ESOP governance structure such that the ESOP itself was controlled by BDO’s executives shortly after the ESOP Transaction. BDO’s Executive Team thus retained control and power over the ESOP including the right to vote all shares held by ESOP. As a result, BDO executives received $1.3 billion for selling 42% of their BDO stock but did not give up control over the Company.

Defendants in the suit are BDO USA, P.C., the Board of Directors of BDO USA, P.C., BDO USA CEO and “key architect” of the transaction Wayne Berson, and BDO ESOP Trustees Catherine Moy, Stephen Ferrara, Mark Ellenbogen, Matthew Becker, William Eisig, and Patrick Donaghue. The ESOP plan has approximately 10,000 participants.

The plaintiff retained counsel from Cohen Milstein Sellers & Toll PLLC who can be reached via this contact form or hit them up at these emails:

• myau@cohenmilstein.com
• dsutter@cohemilstein.com
• rwheeler@cohenmilstein.com
• cbressman@cohenmilstein.com

If you have something to add to this story you may contact GC via email or text. Tipsters are anonymous, always.

BDO ESOP Class Action by Adrienne Gonzalez on Scribd