BDO USA Is Switching From a Partnership to a Corporation on July 1 (UPDATED)

In what amounts to a HUGE win for BDO, the Florida 3rd District Court of Appeal in Miami has ordered a new trial in the case between BDO and Banco Espirito Santo:

A Florida appeals court has thrown out a $521 million jury verdict and ordered a new trial in a dispute over audits between accounting firm BDO Seidman and a major Portuguese bank.

The Third District Court of Appeal in Miami ruled Wednesday that the 2007 trial was wrongly divided into three phases.

That meant jurors decided BDO Seidman should pay punitive damages too early in the case.

BDO Seidman was sued by Portugal’s Banco Espirito Santmed on a Miami company later exposed as a huge fraud. The bank claimed BDO Seidman was negligent for not detecting the fraud, costing the bank $170 million in losses.

Jurors awarded the bank $170 million in losses plus $351 million in punitive damages.

We reached out to the Steven Thomas, lead counsel for the Banco Espirito for his reaction:

This case has been sent back for another trial because of the procedural ‘bifurcation’ issue. We are pleased that the effort and hard work the jury put into this case was recognized by the appellate court, and we specifically note that the Court did not dispute BDO unethical conflicts of interest or its negligence. The evidence of BDO Seidman’s failures of even the most basic auditing procedures is so overwhelming that we expect a new jury will reach the same conclusion as the original jury. We look forward to trying this case and reminding everyone of BDO Seidman’s neglect of its public duty and the enormous conflict of interest they had.

Despite the overwhelming evidence, undisputed negligence cited by Mr Thomas, the mood inside BDO is one of vindication. From the firm’s press release not yet posted on the firm’s website:

The firm is pleased to announce that the Third District Court of Appeal of the state of Florida has unanimously overturned a 2007 jury verdict against the firm and ordered that the Bankest case be retried in the 11th Circuit Court. The Court of Appeal concluded that:

• The Trial Court erred in its original decision to trifurcate the trial, ruling that it was prejudicial to have allowed the case to be presented in three phases. This made it possible for the jury to find BDO grossly negligent without, at the same time, considering the conduct of other actors, including representatives of Banco Espirito Santo.

• The Appellate Court further concluded that the evidence of reliance on BDO’s audit opinions was insufficient to sustain the claims of the Bankest investors, save for the one individual who testified at trial.

• The Trial Court improperly allowed into evidence prejudicial hearsay testimony and documents that further served to deprive BDO of a fair trial.

The Appellate Court concluded, “We have carefully considered every substantive and procedural authority that might be applied to preserve at least some of the jury’s findings. In this case, no such balm is found.”

“We are very pleased that the Appeals court has reversed the lower court verdict. We have consistently stated that we were confident that the jury’s erroneous verdict in this case would be reversed on appeal. The addition of punitive damages at the time only served to emphasize the injustice that took place at the trial court,” said CEO Jack Weisbaum. “A new trial will be in accordance with the Court of Appeal’s decision and we will prove that BDO acted at all times consistent with its professional obligations and that its audit opinions were based on the proper application of generally accepted auditing standards.”

So we’ve got a new trial with a re-energized BDO and a tenacious plaintiff. It sounds like BDO will stick with its defense strategy of “we did no wrong,” so this should be fun.

Florida Third District Court of Appeal Decision [PDF]