Investment group sues accounting firm for $51M
Washington Business Journal (Washington DC)
October 23, 2006 Monday
BYLINE: Ben Hammer
An investment fund is suing accounting firm Goodman & Co. for $51 million, claiming that the firm made it possible for government contractor Telos to withhold $31 million from its shareholders.
The fund, New York-based Costa Brava, stated in court filings that Goodman gave a clean audit to an inaccurate 2004 annual report that Ashburn-based Telos filed with the Securities and Exchange Commis-sion.
Costa Brava says the financial report understated a dividend owed to it and other preferred shareholders by $31 million and inaccurately reported the dividend as not being due in 2005.
The investment fund sued Goodman in Fairfax County Circuit Court in December 2005, but the case only recently moved forward after Goodman lost its motions to dismiss and later to stay the suit. A hearing is scheduled for Oct. 20 on Costa Brava's motion to compel Goodman to respond to discovery requests.
Costa Brava holds 16 percent of the preferred shares that it claims are owed total dividends of $115 mil-lion. Telos' 2005 annual report stated the dividends owed totaled $84 million.
Goodman says in court filings that its audit opinion was correct, no conspiracy occurred and even if its opinion is wrong, the audit wouldn't have enabled Telos to ignore any obligation to pay dividends.
Goodman and Costa Brava declined to comment.
Telos says its SEC filing was correct, but declined to comment on the Goodman suit. "We deny any inaccuracy in the filings," says Warren Jones, marketing vice president of Telos, a systems integrator that specializes in information security work for the Defense Department and intelligence agencies.
Norfolk-based Goodman, which generated $62 million in revenue in 2005, has 124 employees in McLean and Rockville.
Legal experts say suits like this against accounting firms are difficult to prove.
"You have to have smoking guns," says attorney Will Ellwood of Dickinson Wright, who isn't involved in the case. "You've got to have the memos that say: 'Let's meet on the park bench and figure out how we're going to hide these liabilities.'"
Investors and others seeking damages from companies frequently go after their accounting firms, but infrequently win, he says. To win, plaintiffs must show that accountants didn't follow generally accepted ac-counting principles. "Accounting firms are not insurance firms; they're not guarantors of the performance of the firm they're auditing," Ellwood says.
Besides pursuing its case against Goodman, Costa Brava sued Telos in October 2005 in Circuit Court for Baltimore City, claiming the company's board shouldn't have approved certain executive bonuses. Telos is incorporated in Maryland. Costa Brava wants the court to force the board to recover $4.59 million in bo-nuses and 3.7 million stock options given to senior executives, according to the lawsuit.
The investment firm also is asking the court to appoint a receiver who would take control of the company to improve Telos' management, right the company's financial condition and prevent the board from giving more executive bonuses until preferred shareholders receive dividends.
Telos increased its sales from $116.3 million in 2004 to $142.6 million in 2005, but saw losses grow dur-ing that period from $3 million to $14.1 million. A hearing is scheduled in Baltimore Oct. 18 on Costa Brava's motion for the appointment of a receiver for Telos. |
