Suit Against Accountants Latest Twist in J. David Case
The latest legal battle in the never-ending fallout from the J. David & Co. collapse may not be nearly as spicy as the $40-million out-of-court settlement reached earlier this year between former J. David investors and the Rogers & Wells law firm, which handled much of J. David’s legal work.
But, in a business sense, it may be more interesting.
The issue, as the civil lawsuit brought by at least five former J. David investors nears its May 13 trial date, is whether Laventhol & Horwath, the respected national accountancy firm, act properly by hiring Rogers & Wells to inspect the J. David books.
Laventhol & Horwath later used the findings of Rogers & Wells to complete an audit of one of J. David’s many enterprises--La Jolla Partners.
La Jolla Partners invested much of its money in J. David Banking, the so-called interbank foreign currency fund that was the main attraction in J. David (Jerry) Dominelli’s claims of annual returns of as much as to 40%.
But J. David Banking, supposedly based in the tiny Caribbean island of Montserrat, was off limits to accountants, Dominelli insisted. Lawyers could inspect the books, however, because they were covered by an attorney-client privilege and couldn’t be forced to reveal the identity of investors or the amount invested.
As a result, Laventhol & Horwath hired Rogers & Wells and its local partner, Norman Nouskajian, for $2,700. Nouskajian subsequently rendered an opinion, on which Laventhol & Horwath based its audit of La Jolla Partners.
Former investors claim that the accounting firm is now culpable for at least a portion of the $82 million in J. David losses. Laventhol & Horwath maintains that it followed accepted accounting principles.
A conference on Monday failed to produce an out-of-court settlement, but did yield a strict admonition from a panel of judges: Don’t discuss the case with the press.
That will be a neat feat indeed.
On Friday, Laventhol & Horwath general counsel Barry S. Augenbraun breezed through San Diego on a tour de force of the local press, pitching his firm’s line that “the facts are all in and we’re confident that we didn’t do anything to hurt anybody.”
Ironically, Augenbraun said that he was telling Laventhol & Horwath’s story because “it doesn’t do us a whole lot of good for people to say nasty things about us and for us to say, ‘No comment.’ ”
(Interestingly, the Gable Agency, a local public-relations firm, is handling the Laventhol & Horwath account, and dealing with J. David is nothing new to owner Tom Gable. The agency once represented Rogers & Wells and attempted to help the law firm tell its side of the J. David saga to the press and the public. Gable also represents First National Bank, which handled the J. David Banking account and which has been named a defendant in hundreds of lawsuits brought by former J. David investors.)
Augenbraun said Friday that his firm’s resolve was so strong that he was confident a trial would occur, and he was “puzzled” as to why settlement talks were being held.
Moreover, he said, he was continuing with his claim that the case should be dismissed, and presented his motion for a summary judgment, which is scheduled to be heard on Friday.
Nonetheless, further settlement talks are scheduled for Wednesday and Thursday, according to sources close to the case.
However, the sources said, hopes for a settlement remain dim. Laventhol & Horwath reportedly has $50 million in insurance coverage; the lawsuits ask for $100 million plus punitive damages.
The basic issue remains unresolved, however: Can an accounting firm, told by the client that it cannot review the financial books, hire and then rely on that client’s own lawyer to inspect the books?
“The biggest problem is hindsight,” said Augenbraun. “Rogers & Wells is one of the most prestigious law firms in the world. So if you put yourself back then and ask if it made sense to rely on Rogers & Wells’ opinion, you have to ask How are we at fault?”
Plaintiffs’ attorneys, hungry for “deep pocket” remedies to their clients’ losses, maintain that the accounting firm is at fault. They contend that the firm knew “at an early stage” of improprieties at J. David.
Accepted accounting procedures are cited by both sides as evidence that each is in the right.
Auditing standards allow an accountant to rely on the client’s attorney for important issues in an audit, Augenbraun argued.
“There was discussion of using Rogers & Wells” among the Laventhol & Horwath staff, but the firm “concluded it was OK,” Augenbraun said.
But hiring the “subject of the audit’s lawyer destroys any independence of the audit,” insisted one of the plaintiffs’ attorneys, who asked to remain anonymous.
An independent San Diego certified public accountant, who also asked that he remain unidentified, opined: “It appears that the inability to audit J. David Banking may have been a material limitation of scope . . . imposed by the client.”
In lay terms, that means that an “unrelated” outside party--not Nouskajian, who was already working with J. David--”is preferable,” said the accountant.
In a related J. David development, Superior Court Judge Wesley B. Buttermore Jr. ruled Friday that there is a “substantial probability” that Wiles Circuit & Tremblay and its former attorney, Michael Clark--who did work for J. David--aided and abetted the scheme.
That clears the way for the lawsuits to proceed against the law firm and Clark on May 13, and for each entity to produce audited financial statements.
