• Banco Espirito International Ltd. v. BDO Seidman LLP
  • August 7, 2009 | Author: Joseph T. McLaughlin
  • Law Firms: Bingham McCutchen LLP - New York Office; Bingham McCutchen LLP - San Francisco Office; Bingham McCutchen LLP - Boston Office
  • On June 18, 2009, a jury in the 11th Circuit Court of Florida reached a verdict that BDO International (“International”) did not control U.S. member firm BDO Seidman, thereby exonerating International from liability for part of a $521 million verdict against the U.S. firm for accounting malpractice. See Erik Larson & Sophia Pearson, BDO Cleared of Responsibility for Seidman Verdict (Update 2) (June 18, 2009), (last visited June 30, 2009).

    Plaintiffs in this suit, Banco Espirito Santo International Ltd., Banco Espirito Santo S.A., and ESB Finance (collectively “the Banco Plaintiffs”) invested in E.S. Bankest L.C. (“Bankest”), a factoring company. See Banco Espirito Santo International, Ltd. v. BDO Int’l, B.V., 979 So. 2d 1030, 1031 (Fla. Cir. Ct. 2008). Bankest committed massive fraud, fabricating financial records in order to conceal hundreds of millions of dollars in losses. See Id.

    From 1998 to 2002, Bankest retained BDO Seidman to audit Bankest’s financial statements. See Id. Those financial statements included various accounts receivable which turned out to be false. When the Banco Plaintiffs discovered the fraud in 2004, they brought suit against the two BDO defendants alleging accounting malpractice and gross negligence, as well as asserting “that BDO International was vicariously liable as principal for the acts and omissions of BDO Seidman as agent.” BDO Int’l, 979 So. 2d at 1031.

    International initially moved to dismiss, citing a lack of personal jurisdiction. See Id. A Netherlands corporation with its principal place of business in Brussels, Belgium, International claimed that it did not have sufficient contacts with Florida to be sued in that state. See Id. The court denied the motion, finding that International utilized BDO Seidman to conduct business in Florida and that there was an “expectation that BDO [International] could be hailed into the State of Florida to answer for the allegations against its underlings.” See Id. (citing BDO Int’l B.V. v. Banco Espirito Santo Int’l, Ltd., 911 So. 2d 1246 (Fla. Dist. Ct. App. 2005)).

    International responded by filing a motion to dismiss the complaint, and again the motion was denied. See Id. The court did, however, limit the claims against International to a “theory of actual agency.” See Id. To establish agency, the Banco Plaintiffs had to show “(1) acknowledgement by the principal that the agent will act for him, (2) the agent’s acceptance of the undertaking, and (3) control by the principal over the actions of the agent.” See Id. (citing Goldschmidt v. Holman, 571 So. 2d 422, 424 (Fla. 1990)).

    In August 2007 the jury concluded that BDO Seidman was liable to the Banco Plaintiffs for $170 million actual damages and $351.7 million punitive damages. See Larson & Pearson, supra.1 The court granted a motion for a directed verdict with regard to International, finding “that the Banco Plaintiffs failed to present evidence to show that an actual agency relationship existed between BDO International and BDO Seidman.” BDO Int’l, 979 So. 2d at 1031-32.

    The Banco Plaintiffs appealed the directed verdict and in May 2008 the Florida Court of Appeals reversed and remanded, holding that plaintiffs had presented enough evidence to create a triable issue on the question of agency. BDO Int’l, 979 So. 2d 1030.

    Upon remand, the trial court ruled on June 16, 2009, that the Banco Plaintiffs were limited to seeking compensatory damages from International. See Larson & Pearson, supra. Two days later, on June 18, 2009, the jury concluded that International did not exercise sufficient control over BDO Seidman to establish the existence of a principal-agent relationship. See Id. In U.S. practice, a jury (unlike a judge) does not explain or give reasons for its verdict. Because U.S. juries do not explain their verdicts, it can be difficult to determine exactly how they reached their decisions, but the jury instructions given by the court may be instructive as to factors the jury considered.

    The jury was instructed to make three findings by a preponderance of the evidence before concluding that an agency relationship existed between International and BDO Seidman:

    “BDO Seidman was the actual agent of Defendant BDO International B.V. if you find by the greater weight of the evidence: First, that BDO International B.V. acknowledged that BDO Seidman would act on its behalf; Second, that BDO Seidman accepted the undertaking to act on BDO International B.V.’s behalf, and; Third, that BDO International B.V. had a right of control over the actions of BDO Seidman.”

    After deliberation, the jury responded “no” to the question, “Was BDO Seidman an actual agent of BDO International, B.V.?” and must therefore have concluded that the preponderance of the evidence did not support one or more of the three factors.

    While it is too early to know if the Banco Plaintiffs have appealed the jury verdict exonerating International, there are two layers of state appellate review available: the Florida Court of Appeals and the Florida Supreme Court. In short, the question of International’s liability for the actions of BDO Seidman may not be finally resolved.


    1 BDO Seidman is currently appealing the August 2007 verdict as to its liability. Id.