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June 24, 2010

BDO cleared of Banco Espirito damages

BDO US will not have to pay Banco Espirito Santo investors $522
million in punitive damages for failing to detect fraud after a US
appeals court overturned the original verdict.

The Florida Third District Court of Appeal determined the Banco
Espirito Santo case should be re-tried because the jury could
potentialy have been confused due to an unusual three-part trial
over four months in the Miami-Dade County Circuit Court.

This means BDO has been cleared of the original punishment and
the case will be re-tried at the Miami-Dade County Circuit Court
but by a different judge, John Schlesinger, who presided over the
related vicarious liability case involving BDO International.

BDO’s attorney Karen Bitar said from now on the case will be
tried on a level ‘playing field’.

“All the parties and all the actors are going to have the facts
and the story woven together so that the jury can interpret
everybody’s conduct vis-à-vis each other. Also, they are not going
to have the benefit of a super witness receiver coming in saying a
bunch of things that we felt were improper,” she said.

“They also won’t be able to put orders in front of juries that
take away from their fact finding function because they say other
people made certain determinations and evading the province of the
jury. So what will happen now is if that person does ever take the
stand again they will be severely curtailed.

Bitar also said if Banco wants to assert the claims of the
investors, then all the investors will have to provide evidence
that they relied on BDO’s work in their decision making.

She confirmed the ruling also means BDO
has been cleared of the punitive damages previously sought because
the appeals court considered the damages as excessive for an
accounting firm that earns annual revenue of $620 million.

“Based on the unbelievable amount the jury awarded, [the court
said] even if it had decided to keep the verdict standing it still
would have lowered the amount because the original judge committed
an error by not lowering the amount. As based on its net worth, it
is much too high for BDO,” Bitar added.

The next step is for Banco’s legal team to ask the appellant
court to reconsider their decision, which could drag on for several
months. Bitar does not expect a new trial to begin before next
year.

Background

In 2007 a jury verdict found BDO, formerly BDO Seidman, as
grossly negligent in its audit of ES Bankest between 1998 and 2002,
and failed to detect a fraud that led to the bankruptcy of the
Miami financial services company. Banco Espirito Santo partly owned
Bankest.

BDO was originally ordered by the court to pay $522 million in
punitive and compensatory damages following a jury verdict in the
Miami-Dade County Circuit Court.

The Court of Appeal also said:

  • The evidence of reliance on BDO’s audit opinions was
    insufficient to sustain the claims of the Bankest investors, except
    the one individual who testified at trial; and,
  • The Trial Court improperly allowed into evidence prejudicial
    hearsay testimony and documents which further served to deprive BDO
    of a fair trial.

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