George Batchelor thought he found a sure thing when he decided to invest in Grand Court Lifestyles, a company that operated senior citizen communities. Little did he know that the company was on the verge of bankruptcy. Now a Florida jury decided that Grand Court's accounting and auditing firm, BDO Seidman, should be held liable because it fraudulently concealed the company's true finances. Batchelor, who died before the suit was complete, maintained that he had relied on those audit documents when investing.
Batchelor's attorney claims that Grand Court had previously hired another major accounting firm to audit its financials. Apparently they did not like what that company uncovered and then went "opinion shopping." BDO Seidman was ultimately hired and provided the company an essentially clean bill of health. They either did a very poor job of auditing or agreed to look the other way. Either way, a Miami jury said they were liable to third party investors who relied on their audited financials.
The award consists of $36 million in actual damages and $55 million in punitive damages. For its part, BDO says the court made "numerous errors" during the trial. They promised an appeal of the award.
Why did Batchelor sue the auditing firm? Grand Court Lifestyles went bankrupt shortly after Batchelor's investment. When a company goes under, there usually isn't enough money left to pay all creditors and claims. More and more, investors are suing third parties that recommended the investment, facilitated it, or in the case of BDO - gave a clean bill of health to its finances.
The term for this type of lawsuit is "gatekeeper" litigation. Rating agencies, auditing firms, accountants and others have a duty to insure that they provide accurate and unbiased financial information for the companies they audit or rate. They can be sued if they do not and others reasonably relied on their reports or ratings.
Because the auditing firms are paid by the companies they audit, an inherent conflict of interest always exists. Some auditors try to "sugar coat" bad financials in the hopes of getting more work. Mislead others who rely on their opinions, however, and they can be held responsible to the company's creditors if the company fails.
The economic meltdown of 2008 has filled the courts with hundreds of new gatekeeper claims as investors scramble to recover their losses.
In the Batchelor case, George Batchelor died before the jury's verdict. He has left any monies his estate collects from the suit to his charitable foundation.
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