• Deloitte and Litigation – Ya Win Some, Ya Lose Some

    By • Jun 20th, 2008 • Category: Deloitte, Grant Thornton, Liability Caps, Parmalat, Subprime

    Deloitte is in the news for some significant litigation issues.  

    First the winner.

    This ruling, I think, will have a big impact on the auditor subprime cases to come.  Many of these cases, when it comes to the auditors liability, will be based on whether auditors should have been more diligent, thorough, and hard on banks and mortgage companies with regard to their valuation models and estimates for loan losses and reserves.  
    Were any of the banks or mortgage companies already insolvent or in a “deepening insolvency” and the mistakes, negligence or outright “aiding and abetting” on the part of the auditors to prop them up by holding off on “going concern” or other negative opinions only prolonged the eventual misery to investors’ detriment?  

    Deloitte Is Protected in “Insolvency” Ruling
    A Pennsylvania judge says that a firm that improperly keeps a company out of bankruptcy may not be liable, unless it is negligent in other ways, too.

    A recent Pennsylvania Court ruling favoring Deloitte & Touche seems to restrict a company’s ability to win a case against an accountantcy for actions that lead to the company’s “deepening insolvency,” unless the accountant is negligent in other ways as well.

    The issue arose in a lawsuit that Reliance Insurance Co. filed in the state’s Commonwealth Court against Deloitte & Touche, over allegations that the accountancy improperly certified that the insurer’s loss reserves in 1999 was reasonable. That caused Reliance to take underwriting losses on payments that it could not really make, to avoid the wrath of regulators, and to go deeper into debt when it should have declared bankruptcy, according to The Legal Intelligencer newspaper.

    Now the losers.
    Looks like the Parmalat folks are still not letting Deloitte off the hook. Deloitte keeps settling and paying, but obviously, since they have not proven their “innocence” in a court, the shareholders, bondholders and others seeking damages will still keep going after the firms considered, “deep pockets.” And what’s to dissuade them when the firms are still willing to reach into those pockets and pay rather than go to trial?
    Former auditor Deloitte has reached a settlement in an ongoing court case in Milan to reimburse some 16 million euros to former holders of Parmalat bonds. The agreement however has to be approved by the court in a hearing that will be held on September 19, Italian daily Il Sole added.

    The report said that so far 88 percent of the bond-holders, mostly members of the Sanpaolo Committee, accepted the settlement and will receive some 14 million euros, while another two million euros will be paid to bond-holders belonging to other associations. Deloitte has already paid an additional 8.9 million euros on the bank accounts of 11,179 investors who have filed a civil claim.

    Parmalat Suits Target Deloitte, Grant
    Looking to milk more from the Italian dairy’s accounting scandal, investors also eye Citi and Bank of America, as well as the two auditors

    In another round of lawsuits stemming from the Parmalat accounting scandal, individual investors claiming losses from the Italian dairy giant’s 2003 collapse plan to sue Deloitte & Touche and Grant Thornton, along with Citigroup and Bank of America. The plaintiffs will probably demand more than $77 million in damages in litigation filed in Milan, according to a Reuters report quoting Vincenzo Somma, head of legal and economic studies at Altroconsumo, an independent consumer protection association. A majority of the more than 6,000 retail investors are Italian, but they will be joined in the suit by a number of European institutional investors based outside Italy, according to Somma.

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    3 Responses »

    1. […] that day, the Wall Street Journal Law Blog reported on an important ruling in the Parmalat fraud case: New York Judge Puts Possible Bulls-eye on Deloitte Touche New York federal judge Lewis Kaplan […]

    2. […] deepening insolvency arguments have been shot down by no less than Judge Posner whose pernicious pragmatism forces him to engage in the self-delusion […]

    3. […] wrote in March of this year: “The deepening insolvency arguments have been shot down by no less than Judge Posner whose pernicious pragmatism forces him to engage in the self-delusion […]

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