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The last big deal for Atlanta’s consummate deal maker went sour fast. Just three months after J.B. Fuqua sold Fuqua Enterprises to New York-based Graham-Field Health Products in December 1997 for $221 million, Graham-Field shocked analysts by announcing a quarterly loss of $3.9 million. The company’s stock plummeted on the news and overnight the all-stock deal was worth a lot less to the Fuqua family. Fuqua, who has bought and sold dozens of companies over his career, complained at the time to the Atlanta Journal-Constitution that he had lost $30 million suddenly and that he had been “snookered” in the 1997 transaction. Four years later, Graham-Field is mired in bankruptcy proceedings and the Fuquas and their various trusts and foundations are in Georgia’s Fulton County State Court, trying to recoup losses that now have grown to $55 million from decreases in the value of the stock. Graham-Field stock has been valued at less than a dollar for the past year. It closed Wednesday at seven cents. But the Fuquas’ Fulton target isn’t Graham-Field or its officials; it’s Ernst & Young, the accounting firm that audited Graham-Field’s books and signed off on its financial statements prior to the deal. J.B. Fuqua, his son J. Rex Fuqua and four family trusts or foundations are plaintiffs in a Fulton County State Court suit accusing Ernst & Young of negligent misrepresentation and professional negligence. Fuqua v. Ernst & Young, No. 01VS022204-J (Fult. St. Aug. 31, 2001). The Fuquas claim they relied on E&Y’s information in deciding to sell to Graham-Field in 1997. It was only later, they allege, that they discovered that Graham-Field’s financials had been “intentionally or recklessly manipulated to induce the Fuqua Shareholders into supporting and participating in the Merger Transaction.” ‘RED FLAGS’ IN ACCOUNTING While the plaintiffs point the finger at former Graham-Field officials, they claim that the accountants should have caught the misrepresentations. Instead, according to the suit, the accountants ignored numerous “red flags.” E&Y’s audits were “so deficient that they amounted to no audit at all,” the suit says. “The real story behind all this is the horrendous accounting system that was in place at Graham-Field,” says plaintiffs’ lawyer Nisbet S. Kendrick III. The system was such a mess, according to Kendrick, that, once under bankruptcy protection, Graham-Field had to pay an accounting firm $300,000 to decipher its accounts receivable records. The negligence of E&Y, Kendrick says, is exacerbated by the fact that it also performed accounting and auditing services for Fuqua Enterprises. Kendrick, a partner with Womble Carlyle Sandridge & Rice, is handling the case with firm associate Caroline B. Keller. The current suit is a refiling of a similar suit filed last year in Fulton County State Court against E&Y. That suit also alleged that the accountants aided and abetted fraud, a claim not contained in the current case. The plaintiffs dismissed the prior case without prejudice. E&Y was represented in the previous case by King & Spalding partner Joseph B. Haynes and associate Cheri A. Grosvenor. Neither attorney returned a call for comment. Les Zuke, director of public relations for E&Y, says the company “has been successful in having two other complaints they filed against us dismissed. We are confident the claims in this case have no merit.” A federal judge in New York dismissed an action alleging federal securities and state common law claims filed against E&Y by the Fuquas, according to Zuke, and the plaintiffs withdrew their prior Fulton County suit after the filing of a defense motion to dismiss. OUT OF E&Y’S HANDS In the prior litigation in Fulton County, the defense lawyers countered that if the plaintiffs had suffered any damages, those losses were the result of their own acts or omissions or the result of forces over which E&Y had no control. The accounting giant, the defense lawyers argued, denied that the Fuquas either were or could have been deceived. Instead, they added, the plaintiffs were simply looking for a ” ‘deep pocket’ on which to pin their losses.” According to the suit, at the time negotiations began on the merger, the Fuquas owned 28.5 percent of the common stock of Fuqua Enterprises, an Atlanta-based company in the business of manufacturing and distributing health care products and tanning, processing and distributing leather. Days before the deal was announced in September 1997, J.B. Fuqua, then 79, stepped down as chairman of the company, yielding the job to his son J. Rex Fuqua. J.B. Fuqua remained as vice-chairman. Graham-Field, based in Hauppage, N.Y., manufactured and distributed health care products. Among the documents the Fuqua plaintiffs relied on in voting to seal the deal with Graham-Field were numerous financial statements reviewed and prepared with the advice of E&Y, the suit says, adding that E&Y gave the plaintiffs oral and written assurances that Graham-Field’s publicly disseminated financial statements were accurate. The merger agreement provided that Fuqua Enterprises would merge with a Graham-Field subsidiary and that each share of Fuqua company stock would be exchanged for 2.1 shares of Graham-Field stock. The deal was completed in December 1997. However, the Fuqua plaintiffs didn’t know, the suit claims, that senior management at Graham-Field had overstated the consolidated income and earnings of the company for 1996 and each quarter of 1997 “for the express purpose of inducing the Fuqua Shareholders to enter into and support the merger transaction.” In the second quarter of 1997, for example, Graham-Field’s income before taxes was overstated by about 45 percent, the suit says. The problems were legion, according to the suit: losses inappropriately deferred, losses from operations inaccurately reported as merger-related expenses (from other acquisitions), fictitious sales revenue, misstated inventory valuations, and unrecorded purchases and expenses. E&Y participated in the misrepresentations, the suit says, by acting negligently or with reckless disregard for the truth and by failing to conduct its audits in accordance with accounting standards. In early 1999, Graham-Field’s new president instigated an investigation of accounting practices during 1996 and 1997, bringing in a team of lawyers and the accounting firm of Arthur Andersen. The company announced March 23, 1999, that accounting irregularities and errors required a restatement of previously issued financials for 1996 and 1997. The Fuquas, as Graham-Field’s second-largest shareholders, sued the New York company in 1999, just days before Graham-Field filed for Chapter 11 bankruptcy protection. Any settlement of the litigation, according to Kendrick, is subject to bankruptcy court approval.

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