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The Georgia Court of Appeals has reinstated a $44 million verdict against Chicago-based BDO Seidman, which an acquisition group claims misled it into paying too much for a scrap metal company. The ruling is the second reversal in a back-and-forth struggle that started in 1993. While the case is unrelated to the allegations being made against Enron Corp. and Arthur Andersen, it demonstrates the high stakes and crucial legal questions posed when investors blame a financial loss on someone else’s accountants. Attwoods, a British company, hired BDO in 1993 to audit the inventory of Mindis Consolidated Corp., a scrap metal company. Relying in part on the BDO audit for Attwoods, a Georgia-based buying group, Mindis Acquisition Corp., bought Mindis for $40 million. However, a subsequent audit by Mindis Acquisition — two officers of which had started the scrap metal company before selling it to Attwoods — showed that BDO had overestimated the value of Mindis’ inventory by $70 million, according to the appeals court decision. This significantly lower number ruined the buying group’s plans to rebuild the company — and burst its “cushion” in case of a problem, says Mindis Acquisition lawyer Oscar N. Persons of Alston & Bird in Atlanta. VERDICT REVERSED Mindis Acquisition sued BDO in Fulton Superior Court in Georgia for negligent misrepresentation, and in 1999 a jury awarded the company $44 million. But in late 1999, Fulton Superior Court Judge Alice D. Bonner granted BDO a judgment notwithstanding the verdict. She held that Mindis Acquisition was not justified in relying on BDO’s figures because the buying group’s officers who used to own Mindis knew or should have known BDO’s estimate was questionable. The Jan. 18 decision, by Appeals Court Presiding Judge J.D. Smith and Judges Anne E. Barnes and Herbert E. Phipps, reinstates the award, plus the possibility of prejudgment and postjudgment interest. The interest now stands at about $11 million, says Persons. In an opinion for the panel, Barnes wrote that while the evidence could have supported a verdict for BDO, “because this is not a plain and undisputable case, the question of whether MINDIS ACQUISITION should have protected itself by the exercise of further diligence was for the jury to decide.” Mindis Acquisition Corp. v. BDO Seidman LLP, BDO Seidman LLP v. Mindis Acquisition Corp., Nos. A01A1774 and A01A1775 (Ct. App. Ga. Jan. 18, 2002). BDO General Counsel Scott M. Univer, says the accounting firm will ask the Georgia Supreme Court to review the case. “The court of appeals didn’t recognize the basis for [Bonner's] decision below,” he says, which was the fact that some of the buying group’s officers thought the BDO audit was wrong. BDO outside lawyer, Peter J. Anderson of Washington, D.C.-based Sutherland, Asbill & Brennan, adds that the decision “might have a real chilling effect on business in Georgia” if companies are allowed to hold an accounting firm responsible for decisions the companies’ officers thought were wrong. Persons responds, “The jury heard those arguments and decided the facts didn’t fit. � Professionals who go about their work in a professional manner don’t have any reason to fear.” Persons says he is pleased the panel reaffirmed the doctrine upholding claims against professionals even when plaintiffs were not the professionals’ clients. Moreover, Persons, who litigated the case with partner Theodore J. Sawicki and senior associate John H. Gosselin II, noted the judges had decided a matter of first impression on the calculation of damages in a negligent misrepresentation case. FIGURING DAMAGES Damages in most negligence matters are measured by a plaintiff’s out-of-pocket losses, according to Barnes’ opinion. Using the out-of-pocket measure, Persons says Mindis Acquisition would have been entitled to approximately $24 million — calculated by subtracting the $16 million inventory from the $40 million Mindis Acquisition paid for the company. However, Barnes wrote that negligent misrepresentation cases should be viewed as fraud cases, in which damages are in terms of what the plaintiff expected by relying on the bad information. Using that measure, Mindis Acquisition said the difference between what it expected the company was worth and what it actually received was $44 million, which is what the jury awarded in 1999. VIEWS ON MISREPRESENTATION Anderson says courts should view negligence misrepresentation cases as contract cases and award out-of-pocket damages. William J. Carney, a corporate law professor at Emory University, says 50 years ago, third parties who relied on accounting firms could not win negligent misrepresentation cases, but that over the years the doctrine has evolved into allowing such suits. Indeed, in a decision unrelated to the Mindis case, the Court of Appeals affirmed a ruling Bonner made granting BDO summary judgment against investors who claimed the firm’s audits misled them into supporting a company that financed insurance premiums for high-risk drivers. Judge John J. Ellington, writing for then-Chief Judge Edward H. Johnson and Judge John H. Ruffin Jr., wrote that allowing the suit to go forward would make the auditor “in effect, an insurer of not only the financial statements, but of bad loans and investments as well.” White v. BDO Seidman LLP, 249 Ga. App. 668 (2001).

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