to protect its relationship with StrataSys. “It
showed BDO had an interest in giving a clean
audit [to E.S. Bankest],” Alexander says.
When BDO recalled Lenner as a witness
during the first stage, Thomas struck again, getting Lenner to say that an auditor had a duty to
detect fraud. Bitar says Lenner was “inartful” in
his answer and that Lenner’s so-called admission was merely a “snippet taken out of context” by Thomas. Although Lenner tried to correct himself on cross-examination, Bitar says,
Thomas made sure that jurors did not forget
the earlier gaffe, bringing it up again in opening arguments for the second stage of trial.
Likewise, Thomas seized on a slip by defense expert witness Robert Temkin, head of
the Massachusetts Board of Public Accountancy and a 38-year veteran of Ernst & Young
L.L.P. Temkin testified that a business relationship with a nonclient—like StrataSys—
was not necessarily a conflict for an accounting firm. He also said that accounting rules
state that management had a duty to detect
fraud, and that an audit, through selective
testing, is no guarantee of detecting fraud.
But when Temkin testified on cross-examination that auditors needed to be “independent
actors,” Thomas lured him into a trap, asking if that meant “independent like a judge.”
Temkin replied that he didn’t know whether
judges had to be independent.
“That kind of stuff just doesn’t go over well
with a jury,” says Thomas, adding that the successful cross-examinations of Temkin and other
BDO witnesses convinced him to call only two
experts in the first stage of trial (and none in the
second). It’s rare to rely so heavily on the other
side’s experts, Thomas says: “But the two things
I thought we won on were credibility with the
jury and the crosses of their witnesses.”
Bitar and Cole say that Thomas’s team used
what they call “sound bites” like the Temkin slip
to win over jurors. “Temkin was not qualified
to answer that question,” Cole says. “He was
there to opine on [generally accepted accounting principles and generally accepted auditing
standards], nothing else.” Defense lawyers sigh
when they recall how Thomas claimed in later
arguments that BDO stood for “blame and defame others.” The plaintiffs tarred BDO with
earlier corporate scandals, Bitar says. “There
was a lot of pandering to jurors’ fears,” she says.
“[The plaintiffs] weren’t allowed to say ‘Enron,’
but they did everything but.”
After two months of testimony—and less
than three hours of deliberations—the jury
found BDO grossly negligent. (The jurors
could not be reached for comment: Florida
law prevents counsel from interviewing jurors
after a trial and courts are prohibited from
divulging jurors’ names. According to several
sources, the six-member jury consisted of
three Hispanic women, including a banker, a
telephone operator, and one woman who was
unemployed; one Hispanic man, a mechanic; one African American man, a bus driver;
and one white woman, a school administrator.)
In the second phase, the same jury took
up the question of whether BDO’s negligence
had harmed Espirito Santo. BDO contended
that the bank should bear some of the blame
for failing to detect the fraud: It had not done
enough due diligence in partnering with the
Orlanskys, and the suspiciously large sums
of money flowing in and out of E.S. Bankest
accounts should have raised red flags.
But on August 13 the jury gave Thomas
exactly what he had asked for: a comparative
damages award of $170 million. In punitive
damages hearings the next day, Thomas argued that Espirito Santo should be awarded
$521.7 million in punitives—the total amount
of fake receivables BDO certified as real during its five years conducting audits for E.S.
Bankest. The jury returned a few hours later
with a verdict of $351.7 million. With the
$170 million in comparative damages added
in, the total verdict was $521.7 million. “So
the punitives in this case were not some
number picked out of the air,” Thomas says.
Sources close to BDO say that dividing
the trial into three parts proved to be a major stumbling block for the defense: Instead
of streamlining the case, the arrangement
forced the defense to call the same witnesses
two or three times, trying the jury’s patience.
At the end of the trial’s final phase, one juror
remarked to the judge, “I think I’m going to
cry if you tell me there’s another phase.”
In October, BDO posted a $50 million
bond, although Thomas says he plans to ask
the appeals court to force BDO to post a
higher bond, in excess of $600 million. The
accounting firm hopes that the appeal will be
heard during 2008. “We will prevail. I believe
we have a very meritorious appeal,” Bitar says.
FIA ?A@F:E 38F7D his big victory, Thomas
left S&C’s offices in a Century City, California, skyscraper to hang the shingle of
Thomas, Alexander & Forrester outside his
new beachfront headquarters. Joining him
were trial team colleagues Alexander and
Forrester. Forrester had left S&C three
years earlier for family reasons, and Alexander, a senior associate up for partner, says
that she wanted more autonomy and flexibility. “I’d been on red-eyes [between Los
Angeles and Miami] almost every week for
two years,” Alexander says. “I wanted to see
my kids again.” For Thomas, the decision to
leave S&C was anything but fiscally motivated. “It’s not like you’re going to go somewhere else and make more money,” he says.
Several lawyers who worked with Thomas
on the BDO trial say they were not shocked
by the move. “In many ways I’m surprised
[Thomas] lasted as long as he did,” Alexander says. Adds Mitch Berger: “Sometimes a
firm’s strategic initiatives don’t meet what a
lawyer wants to achieve—the Cravath and
David Boies situation comes to mind.” (Berg-
er worked with Boies representing Al Gore
in the 2000 Florida recount dispute.) But
Robert Sacks, the managing partner of S&C’s
Los Angeles office, rejects that comparison.
“Steve’s at a totally different stage of his career than David Boies was,” Sacks says. “I
think where Steve’s diverged—and I think it’s
a recent phenomenon—is that he’s become
passionate about doing plaintiffs contingency work.” Doing such work at S&C is not
impossible, Sacks says, but it can be difficult.
Thomas says he saw the writing on the
wall in October, when he flew to New York
and met with S&C chair Cohen, head of
litigation David Braff, and litigation partner
Gandolfo DiBlasi. They explained the kind
of litigation practice that they wanted to see
him develop. “First I was told you can’t sue
Big Four accounting firms because it doesn’t
fit with [S&C’s] tradition and M&A practice,”
Thomas says. “And then I was told you can’t
sue any accounting or law firm for any kind of
malpractice and that you can’t bring antitrust
actions on the plaintiffs side because it would
be inconsistent with other positions.”
Thomas got the message. “It’s not like they
were mean about it—they’re a defense-ori-ented, old-line firm—and I was getting a lot
of interest for other cases after this one, so I
had to choose between taking on those cases
or not,” he says.
“Steve decided he wanted to be a plaintiffs
lawyer and start his own practice,” Sacks says.
“This is a friendly parting.”
Thomas will continue working with his
old firm during a transition period on an antitrust matter for Brussels-based chemicals
manufacturer Solvay SA, and Thomas and
Sacks say the division of fees stemming from
a final disposition in the BDO case have been
worked out “mutually and amicably” among
Thomas, S&C, and Espirito Santo. While
the bank will remain an S&C client in other
areas, Thomas’s firm will handle the appeal
and any further litigation against BDO. And
Thomas says he’s already representing one
new client—The Batchelor Foundation, Inc.,
in Florida—in an accounting fraud and malpractice case against BDO and Deloitte &
Touche LLP. “I expect our business-to-busi-ness dispute practice to grow—mostly from
the plaintiffs side—and we’ll work out fee
arrangements that tie the client’s success to
our success,” Thomas says. “I think there’s a
market for that, because most of the big firms
have the same view as [S&C].”
As for Espirito Santo, Thomas is confident
that BDO can pay any final judgment. “Just
the other day, the head of BDO international said that they had a 20 percent growth in
profits worldwide and that they thought the
Big Five would be reborn again,” Thomas
says. “They know they can pay.” Spoken like a
true plaintiffs lawyer.
