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For the second time in less than a month, Deloitte & Touche on Wednesday found itself the defendant in another major lawsuit — Adelphia Communications Corp. has charged the auditing firm with professional negligence, breach of contract and fraud. According to the complaint filed in the Philadelphia Court of Common Pleas, Adelphia was forced to file for bankruptcy protection in New York as a direct result of Deloitte’s own wrongful conduct. Adelphia terminated its contract with Deloitte in June of this year. In mid-October, M. Diane Koken, the Pennsylvania insurance commissioner, filed suit against Deloitte in her capacity as liquidator of Reliance Insurance Co., accusing the actuarial firm of causing financial harm to Reliance and contributing to its insolvency. That complaint, also filed in Commonwealth Court, accuses Deloitte and Jan A. Lommele, an actuary for Deloitte, of professional negligence and malpractice, misrepresentation, breach of contract, and aiding and abetting breaches of fiduciary duty. But Dechert litigation chairman Robert Heim, who represents Adelphia, said that the suit he filed on behalf of his client should not be tied to the Reliance case. “It is a natural tendency to want to tie this to other major corporate self-dealing cases, but I don’t think that is right,” Heim said. “This case stands alone and stands on its own facts.” David Boies of Schiller & Flexner in New York also represents Adelphia. The suit seeks compensation for resulting injury to the company and seeks punitive damages but does not name a specific damage amount. “The complaint essentially charges that Deloitte either knew or, in the exercise of professional care, should have known of much of the Rigas family’s self-dealing and that [Deloitte] didn’t do their job. … The case will turn on whether Deloitte lived up to its responsibilities under the appropriate professional standards for auditors. … The complaint says, essentially, that Deloitte fell asleep at the switch,” Heim said. According to the complaint, Deloitte’s actions resulted in billions of dollars of losses for Adelphia that were “preventable if Deloitte had acted consistently with its professional responsibilities as Adelphia’s outside auditor.” Earlier this year, the U.S. Securities and Exchange Commission launched an investigation of Adelphia after its disclosure in March of off-the-books borrowing by the family of founder John J. Rigas and by family-controlled partnerships. The company has since estimated the off-the-books debt at $3.1 billion, and said it expected to restate financial reports for three years to include portions of the debt as liabilities. In March, the company disclosed that it had guaranteed billions of dollars in loans made to the Rigas family and family-owned partnerships that had not been reported on its books. Much of the money was used to buy Adelphia stock, which has since plummeted in value. The Rigas family gave up control of Adelphia in late May of this year. Adelphia, based in Coudersport, in rural northern Pennsylvania, filed for Chapter 11 bankruptcy protection a month later. Adelphia is one of the largest cable television companies in the country. According to the complaint, the Rigas family’s self-dealing was not concealed from Deloitte, but Deloitte never disclosed the family’s actions to members of Adelphia’s auditing board. “The Rigas family never could have accomplished their acts of self-dealing had Deloitte fulfilled its professional responsibilities to Adelphia by, among other things, disclosing the corporate abuses that it knew and should have known were taking place,” the complaint reads. “Moreover, despite the years of massive looting and other wrongdoing taking place for the Rigas family’s benefits and to the detriment of Adelphia, Deloitte performed its audits and certified Adelphia’s financial statements without ever qualifying its audit reports and always rendered a favorable opinion on Adelphia’s ability to continue as a going concern.” The complaint alleged that, throughout the period of the Rigas family’s conduct, Deloitte had both a professional responsibility and a contractual obligation to follow professional standards to ensure the accuracy of Adelphia’s financial statements, but that Deloitte failed to uphold these standards. Adelphia’s professional negligence claim alleges that the audits Deloitte performed were done negligently and carelessly. “They were not performed with the degree of skill and care commonly applied in the community by the major accounting firms. They were not performed with the degree of expert skill and care that Deloitte held itself out as possessing and they were not performed with the degree of skill and care called for in Deloitte’s own internal standards,” the complaint reads. Deloitte was also negligent in its failure to discover the Rigas family’s self-dealing, and, if it did know of the dealing, it was negligent in not disclosing the family’s actions to Adelphia’s audit committee, according to court papers. The complaint also includes a breach of contract claim, alleging that Deloitte constantly breached its agreements with Adelphia by failing to perform its professional services in an agreed-upon manner. “Deloitte breached its agreements with Adelphia by failing to conduct its review of Adelphia’s quarterly consolidated financial statements in accordance with [generally accepted auditing standards]. Deloitte breached its agreements with Adelphia by failing to provide an appropriate report as to whether material modifications should be made to Adelphia’s quarterly consolidated financial statements,” the complaint reads. Adelphia’s third claim for relief alleges that Deloitte aided and abetted the Rigas family’s breach of fiduciary duty. The Rigases, the complaint states, owed a fiduciary duty to Adelphia that were breached as a result of the family’s self-dealings and other wrongful conduct. Deloitte, the complaint states, knew or should have known of this behavior. “By its reckless failure to properly audit the company as well as its abdication of its duties to properly detect and disclose the fraud of the Rigas family, Deloitte aided and abetted the breach of fiduciary duty committed by the Rigas family and provided substantial assistance to the Rigas family in their tortuous conduct by inaction and failure to disclose the wrongdoing perpetrated by them,” the complaint says. As to Adelphia’s fraud claim, Deloitte allegedly filed an unqualified audit report in 1999 and 2000. “At the time that Deloitte issued these audit reports and conducted its quarterly reviews, Deloitte knew that material representations in these audit reports and in connection with these quarterly reviews were false, or Deloitte recklessly disregarded whether these representations were true or not,” the complaint reads. Deloitte nevertheless fraudulently issued these reports, Adelphia claimed, with the knowledge and intention that Adelphia and its board of directors would rely on and use the reports. Additionally, the complaint says, the reliance by members of the Adelphia board and the audit committee on Deloitte’s representations was justified given Deloitte’s professional expertise, the relationship of trust between the parties and the fiduciary position Deloitte held with Adelphia, amounting to a claim of negligent misrepresentation. The final claim alleges that Deloitte also contributed to Adelphia’s demise, the complaint says, because Deloitte’s accounting errors could lead to Adelphia being exposed to substantial liability that would not have arisen had Deloitte properly audited Adelphia’s financial statements. “Adelphia therefore seeks contribution from Deloitte, to the extent permitted by law, for Deloitte’s share of the responsibility for the injuries or damages that Adelphia may be obliged to pay in respect of any liability determined against the company,” the complaint reads. At press time late Wednesday afternoon, Paul Marinaccio, director of firm communications for Deloitte, said that the firm had not yet seen the suit and could therefore not officially comment on it. He then released the following official statement: “However, Deloitte suspended its audit of Adelphia in May and at that time informed both the company and its audit committee that a long series of open items had to be investigated and satisfactorily resolved before we would be in a position to issue a report on the financial statements. “At that time we advised the chairman of the audit committee that we believed that certain of the matters included in the list of open items represent possible illegal acts that could be material to the company’s financial statements. Deloitte requested that the company’s audit committee conduct an independent investigation of those issues, and informed the company that we would not be in a position to issue our report until the issues were resolved. “Although there was a special committee of the company conducting the investigation, they refused to share material information with us about the investigation, while at the same time urging us to resume our audit. Since that time, Rigas family members and other employees have been indicted and an SEC complaint issued against the company and those same individuals. “The U.S. attorney and the SEC actions raise many of the same issues raised by Deloitte when it suspended its audit. The board, including its independent directors, knew and approved of many of the acts complained of. To the extent that there was fraud by people at the company, the purpose was to deceive Deloitte as well as the public. While any action Deloitte might bring against the company is currently stayed by Adelphia’s bankruptcy filing, at the appropriate time, Deloitte will seek remedies against the company and former and/or current Adelphia officers and directors who supplied Deloitte with erroneous and incomplete information.”

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