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

illustration of four employees happily exiting their job

Warning: long. Hopefully this helps:

BDO has sued yet another defector (see earlier: BDO Lawsuit Alleges a Defector Took the Team With Him When He Jumped Ship to Another Firm) and this time the defector, one Caleb Crandell, is fighting back.

The full counterclaim is embedded at the bottom, let’s start with the basics. Also, here’s a copy of the original complaint on Scribd and a Justia link for BDO USA P.C. v. Crandell, Case Number: 3:2024cv00012. If you want to skip past this backstory and head straight to the explosive allegations against BDO, click here to go to that part of the article.

Tax partner Caleb Crandell left BDO for Armanino in November 2023 where he’s currently leading the National Private Equity & Asset Management Tax Practice. One of his direct reports, Justin Rojas, also left for Armanino that same week (Rojas is getting sued too, we’ll cover that one in a separate article because this one is already a lot). BDO alleges Crandell raided his clients and some BDO employees on his way out, Crandell denies this and says the clients and employees left of their own accord “because of BDO’s failure to ensure that those clients were adequately serviced and its mistreatment of employees.” The firm says Crandell owes BDO thirty percent of the annual earnings of the four employees he allegedly “solicited away from BDO” plus an additional ten percent for each year of service of the employee to cover training costs. That amount totals $343,400.00 for the solicitation of the named ex-BDO employees, Rojas, Timothy Vacchi, Kaylin Koopmans, and Tara Dunphy. They all work at Armanino now.

BDO’s claim is that restrictive covenant obligations state that Crandell may not, directly or indirectly, solicit or perform accounting, auditing, tax, and/or consulting services for BDO clients for whom he directly provided substantive services during his partnership in and later employment with BDO. Crandell “admits that Plaintiff seeks to impose restrictive covenants against him” but “denies the implication that those restrictive covenants are enforceable.”

Along with the exit of the four employees, BDO’s major beef is with clients A, B, and C defecting to Armanino. One of them allegedly said they severed their relationship with BDO and went to Armanino specifically because Crandell and Rojas were there now. BDO’s complaint is in italics, Crandell’s response in bold.

On or about December 12, 2023, three BDO clients to whom Crandell and Rojas had directly provided substantive services informed BDO that they would no longer use BDO’s services.

ANSWER: Defendant is without sufficient information to admit or deny the allegation of what, if anything, three BDO clients stated to BDO on or about December 12, 2023.

One of these clients, Client A, specifically informed BDO on a call that it was following Crandell and his team to Armanino. The other two clients, Client B and Client C, are also following Crandell, Rojas, and the rest of that team to Armanino.

ANSWER: Defendant is without sufficient information to admit or deny the allegation of what Client A stated to BDO. Defendant admits Client A, Client B, and Client C left BDO for Armanino.

Further, Crandell scheduled a happy hour with Client B’s Chief Financial Officer (“CFO”) in the days leading up to his departure from BDO.

ANSWER: Defendant denies the allegations contained in Paragraph 9 of Plaintiff’s Complaint. Defendant admits that he attended a happy hour with the CFO of Client B, as was commonplace practice after certain milestones, but Defendant does not believe he scheduled it nor does he recall when this took place.

This is an email from Client B included in BDO’s suit:

Scott Grimm oversees BDO’s Tax Practice across Colorado and Wyoming, Crandell lives in Colorado.

BDO adds this allegation in their suit:

Client A told BDO that Crandell and Rojas were the reason why Client A was going to Armanino.

LOL.

On December 14, 2023, BDO sent a letter to Crandell demanding that he compensate BDO for the lost clients—Client A, Client B, and Client C—in accordance with the terms of his agreements with BDO. “Defendant admits that BDO sent a letter to Crandell falsely accusing him of violating his agreements with BDO and demanding money,” says his answer in the counterclaim. “He denies the remaining allegations contained in Paragraph 73 of Plaintiff’s Complaint, including the implication that he breached any agreement with BDO and that he was the cause of any damages to BDO.”

Specifically, the letter demanded that Crandell compensate BDO (a) $378,003.20 for the loss of Client A’s business; (b) $1,895,806.46 for the loss of Client B’s business; and (c)$346,591.43 for the loss of Client C’s business

Further into the complaint we get to the language in the BDO Partnership Agreement:

Crandell entered into an Amended and Restated Partnership Agreement (the“Partnership Agreement,” attached here to as Exhibit 1) with BDO’s predecessor, BDO USA, LLP on August 1, 2020, that contains the following client and prospective client non-solicitation covenant:

[I]f, without the specific consent of the Board of Directors, a Partner at, prior to, or within two years after, his/her termination from the Partnership:

(a) Directly or indirectly solicits or obtains for himself/herself, or for a firm with which he/she is or becomes associated, engagements to perform, or if he/she or a firm with which he/she is associated does perform, accounting, auditing, tax and/or consulting services, or related services, or any other services which the Partnership then offers directly or through an affiliate, for a client of the Partnership for whom such Partner directly provided substantive services during his/her employment by or membership with the Partnership (other than personal clients developed by such Partner only as a result of his/her independent recruitment efforts which the Partnership neither subsidized nor otherwise financially supported as parta program of client development) (a “Direct Client”), or a prospective client that such Partner directly recruited or solicited during such Partner’s employment by or membership with the Partnership (a “Direct Prospective Client”), or causes a Direct Client or any person, company, partnership or other entity who provides, has provided or would reasonably be expected to provide referrals of clients or prospective clients to the Partnership to terminate that relationship. . . the said Partner shall compensate the Partnership for any loss, damage and expense suffered by the Partnership (the “Damages”).

The Partnership Agreement also contains the following employee non-solicitation agreement:

[I]f, without the specific consent of the Board of Directors, a Partner at, prior to, or within two years after, his/her termination from the Partnership. . .(b) Lures away or causes an employee or Partner of the Partnership to leave its employ. . . the said Partner shall compensate the Partnership for any loss, damage and expense suffered by the Partnership (the “Damages”)

The damages for a breach of either of the non-solicitation covenants are set forth in the Partnership Agreement as follows:

(i) For any engagements lost by the Partnership under (a) above an amount equal to one hundred fifty percent (150%) of the fees charged by the Partnership either(x) during the last full fiscal year during which the Direct Client was a client of the Partnership or (y) during the twelve (12) month period prior to the last date upon which the Partnership performed services for the Direct Client, whichever is greater;

(ii) For Direct Prospective Clients, one hundred fifty percent (150%) of the proposed fee;

(iii) Under (b) above, an amount equal to thirty percent (30%) of the annual earnings of each employee or Partner who leaves, to cover recruiting replacements, plus an additional ten percent (10%) for each year of service of the employee to cover training costs.

This part is hilarious:

31. In exchange for his consent to the Partnership Agreement, Crandell was made a Partner at BDO USA, LLP and received significant compensation, benefits, and access to confidential and trade secret information. ANSWER: Defendant denies the allegations contained in Paragraph 31 of Plaintiff’s Complaint

OK, now the juicy part. A tipster helpfully summarized the items outlined in Crandell’s counterclaim:

  • BDO refused to repay Crandell his capital of $151k but reported the proceeds in his income tax form
  • BDO leadership made false and misleading statements to get the ESOP vote to pass
  • BDO misled the partnership that there was no private equity transaction
  • BDO delayed partner retirements and reactivated retired partners to garner sufficient votes
  • BDO didn’t allow partners sufficient time to sign new employment agreements
  • BDO forced Crandell to inflate revenue to prop up the firm’s valuation ahead of an ESOP deal that was only announced to the partnership a week ahead of any voting in Orlando [Ed. note: this checks out with information we’ve been given from multiple sources inside BDO]
  • BDO refused to promote high performing directors, prompting them to look elsewhere

This is directly quoted from said counterclaim:

In the summer of 2023, the Board of Directors and majority partners of BDO USA LLP convinced the partners to vote to approve the conversion of the partnership to a professional corporation by making false statements and materially misleading omissions, including that the conversion would benefit all partners, including the minority partners and, further, that there was no private equity transaction on the table. In early June 2023, Wayne Berson, CEO, provided false information on an all- partner call stating that the conversion was intended to simplify tax filings and specifically stated that there were no discussions with private equity and there were no private equity transactions in the works

Upon information and belief, BDO reactivated retired partners right before the ESOP transaction and delayed the retirement of several partners to obtain additional votes to obtain enough votes to secure the ESOP transaction. However, a few weeks after the conversion, the majority partners were told that Plaintiff had been in conversations with private equity investors for months. In order to sweeten the deal for the private equity investors and some (but not all) of the partners, Plaintiff began to pressure Defendant to overinflate revenues. Defendant refused. On or about June 10, 2023, Plaintiff presented Defendant with the BDOPartner/Principal Employment Agreement, Exhibit 2 to the Complaint, setting forth the terms and conditions of his employment with BDO USA, LLP. BDO only gave Defendant 10 days to sign the agreement in violation of Colorado law [Ed note: Reminder, Crandell is a resident of Colorado]

In early August 2023, the firm held an all-partner meeting in Orlando, Florida and at this meeting a representative from State Street, investment bank, and Apollo, private equity lender, thanked Mr. Berson for partnering with them over the last 15 months to complete the transaction. Clearly this statement represented that BDO had misrepresented to their partnership the purpose of the ESOP transaction and corporate conversion.

See our earlier coverage: Let’s Speculate Wildly About Why All the BDO USA Partners Are Getting Together for a Secret Meeting in Florida (UPDATE)

Partially as a consequence of the substantial debt Plaintiff incurred in connection with the conversion and adoption of the (ESOP), Plaintiff began to hemorrhage money. It undertook substantial cost-cutting measures, including not providing employees with raises and previously promised bonuses.

On October 23, 2023, Scott Grimm, Tax Market Leader, drafted an email to BDO leadership Matthew Becker, Hoon Lee and Brent Hagerman explaining that both Tim V and Justin Rojas can double their salaries by leaving. He further explained that if BDO cannot get them close to $400K some of BDO’s largest relationships will be at risk. He goes on to state that if BDO cannot secure Rojas he does not think that the PE work will stay at BDO.

Oh look, a picture of that email:

I can transcribe the text of this email later.

As the email reveals, Scott Grimm advises BDO leadership that BDO will lose its key people based on how they had been treated by BDO, in that BDO had failed to support them,recognize their tireless work and compensate them according to market demand. Because Plaintiff misrepresented the corporate conversion, lacked operational transparency, and pressured Defendant to inflate revenues leading up to the ESOP, Defendant decided to resign from BDO.

On the clients, Crandell says it’s BDO’s own fault the firm lost them when he left.

On or about October 23, 2023, Defendant provided advance notice to BDO that he was resigning. He offered to remain with BDO for three months to assist BDO with transitioning his work to other employees and thus ensure a smooth transition that protected not only BDO, but also the clients for whom Defendant was providing services.

A smooth transition was particularly necessary for Clients A, B, and C, as those clients were in the middle of important and complicated transactions.

BDO rejected Defendant’s offer to assist his clients with the transition and, instead,cut off his access to his computer and all BDO related documents and removed him from the premises on or about November 4, 2023.

BDO’s decision to reject Defendant’s offer to assist with client transition negatively affected its clients. For instance, the following email was sent to Scott Grimm by one of the clients referenced herein:

“Hey Scott, please give me a call. We have a transaction closing next week and need the tax analysis that Justin was working on ASAP. I spoke with Tim yesterday and he let me know about Caleb and Justin being let go over the weekend. He said that you guys were getting into their accounts and would not miss a step, but I showed up for our weekly BDO tax call at 9am this morning with nobody on the line. We have $50M dividend recap transaction on our most complicated investment that is closing next week. I’m in shock that we can have a transaction like this going on and its being lost in the shuffle. How can you cut off my team from communication without a plan to transition the immediate work that is due? Let me know when you can speak.”

Defendant had a long-standing relationship with Clients A, B, and C. Upon information and belief, those clients were happy with his services.

Clients A, B, and C were unhappy with BDO’s services after Defendant’s departure and particularly BDO’s failure to provide for a smooth transition because it could have resulted insignificant financial ramifications to the clients. As a result, BDO’s own actions jeopardized its relationship with its clients.

But wait, there’s more! Crandell says BDO owes him money.

Plaintiff has refused to pay the $151,112.52 it admits it owes Defendant in connection with two promissory notes representing his share of the profits and losses of the former BDO USA, LLP (a Cash Capital Promissory Note and an Undistributed Earnings Promissory Note) and his share of the amounts owed him related to the operation and sale of BDO Wealth Advisors, LLC BDO Wealth Advisors to Choreo Advisors following BDO USA, LLP’s conversion to a professional corporation.

Plaintiff owes Defendant $151,112.52 allocated as follows: $49,769.00 for the sale of BDO Wealth Advisors; $56,302.52 for his portion of the BDO Capital Account on the date of the conversion of the partnership to a corporation; and $45,041.00 for his portion of the undistributed earnings account of BDO USA, LLP as of the date of the partnership’s conversion to BDO USA, P.A.

The proceeds from the BDO Wealth Advisors sale were distributed at the end of January 2024. Defendant learned about the distribution because it has been identified as taxable income in his tax documents, however BDO has withheld the distribution from Defendant.

Plaintiff provided defendant with certain tax records and other documents admitting it owed him $151,112.52. Those records contain personal financial information and are not attached to this Answer and Counterclaim.

In an email dated January 28, 2024, Defendant requested the amounts owed him, but Plaintiff refused to pay him.

The counterclaim then says after getting a letter from Crandell’s lawyer, BDO “informed him that it was unilaterally refusing to pay him the money because it claimed he violated the unenforceable restrictive covenants in the BDO USA, LLP Amended and Restated Partnership Agreement and the BDO/Partner/Principal Employment Agreement and that it had the right to ‘withhold or defer payment of proceeds from the sale of BDO Wealth Advisors and the two promissory notes to Mr. Crandell.'”

Whew. So that’s it. Keep you posted.

BDO v. Crandell, Crandell A… by Adrienne Gonzalez

Contact the editor. Text tips to 202-505-8885, tipsters are always anonymous.

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

  1. I only have Minnesota as an example, but the courts here have largely viewed non-compete agreements where the employee doesn’t get too greedy as unenforceable. I’m not sure whether this would qualify for that, but wouldn’t be surprised either way.

  2. The fact that they hung the client out to dry because they refused the partner-offered transition and immediately cut off access for the partner is very damaging to BDO.

    1. I believe Crandell was soliciting clients on his way out the door. Very difficult to not cut-off the access if a partner acts like this.

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  3. So rather than the take the partner up on his offer to stay on for a few months to transition the client work and provide good service to the client which could possibly make the client think staying with BDO will be okay, they left the client in the lurch during a significant transaction, which gave them no chance to keep the client. Smart business.

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