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It was not long from midnight when Andy Rudolph found the smoking gun. Alone in his San Diego office, surrounded by 50 boxes of documents, the forensic accountant had been poring over a manufacturer’s revenue report looking for evidence of financial fraud. Midway down a page, he found it: an abrupt change in handwriting. Gazing at the disparate scripts, Rudolph felt triumphant. “We’ve got ‘em,” he thought. And indeed he did. Spurred on by the discrepancy, he requested the original document from the company and found that a piece of paper had been taped over a section of the page reporting why the company’s accounts receivable had been long overdue. “There was an innocuous explanation on the photocopied version,” recalled the 41-year-old Rudolph. But in the original document, an auditor reported that the company’s machines to filter out environmental contaminants were being sold contingent upon the buyer’s acceptance — and buyers had been returning the products. While the company — which Rudolph declined to identify — claimed it had sold millions of dollars worth of machines, Rudolph discovered it hadn’t held onto a single sale. His employer at the time, Milberg Weiss Bershad Hynes & Lerach, went on to obtain a settlement in the case. Rudolph now heads the forensic accounting department at Lerach Coughlin Stoia Geller Rudman & Robbins. For plaintiff firms like Lerach Coughlin and Milberg Weiss, forensic accountants are essential in getting a securities fraud case to trial. Toiling behind the scenes, they sift through thousands of files and e-mails to find if, when and how a corporation committed fraud. “They are like criminologists, CSI crime scene guys,” said Patrick Coughlin, a partner in Lerach Coughlin’s San Francisco office. “They reconstruct who knew what when.” Only a few plaintiff firms have forensic accountants on staff, as most firms contract the work out. Lerach Coughlin has an in-house team of 10 forensic accountants — apparently the largest of any plaintiff shop — and five investigators. Coughlin, a former Assistant U.S. Attorney, began hiring investigators and accountants in 1989 when he joined Milberg Weiss. The firm split into two entities — Milberg Weiss Bershad & Schulman and Lerach Coughlin — in May. Milberg Weiss has four forensic accountants and 15 investigators on its staff. Coughlin said the evidence unearthed by accountants and investigators has kept many cases in play. That’s been particularly true in the 9th U.S. Circuit Court of Appeals, which has stricter pleading standards than other courts. Coughlin said that Milberg Weiss lost 19 cases in a row in the 9th Circuit following that court’s 1997 ruling in In re Silicon Graphics, 183 F.3d 970, which set a high pleading standard for securities fraud cases. In the last few months, however, the firm has seen the tide turn. The 9th Circuit has reinstated suits against America West Airlines, Fluor Corp. and Oracle Corp. Coughlin attributed the firm’s success to its forensic accountants and investigators. Based on their work, the Oracle complaint quoted 44 witnesses and cited evidence of improper revenue accounting. They “put the meat on the bones” of the complaints, Coughlin said. LITIGATION EDGE While accountants have played a role in securities litigation for decades, they’ve become more crucial since passage of the 1995 Private Securities Litigation Reform Act. The law requires plaintiffs to present more detailed evidence at the outset of litigation. It also prevents lawyers from conducting formal discovery until a case survives a motion for dismissal, leaving it to the plaintiff lawyers to ferret out whistleblowers and damning documents. “In the old days, we called them paralegal accountants,” said Joseph Cotchett, of Burlingame, Calif.’s Cotchett, Pitre, Simon & McCarthy. Now their work is “much more refined.” Whereas paralegal accountants used to spend their days looking at work papers, forensic accountants work closely with investigators and even sometimes interview witnesses, he said. Cotchett, who has two accountants and two investigators on staff, said forensic accounts were the lynchpin in his 1991 securities class action against Charles Keating Jr. for the failure of the Lincoln Savings & Loan Association. The jury awarded $3.5 billion, later reduced to $1.75 billion. “The jury was spellbound by the good forensic accountants,” Cotchett said. Among other securities giants, Lieff Cabraser Heimann & Bernstein has two investigators and three financial analysts. Defense attorneys also rely on the expertise of forensic accountants. But rather than looking for damning documents, the defense hires individuals from the Big Four accounting firms or boutique shops to help analyze company financials. Nicki Locker, a partner at Wilson Sonsini Goodrich & Rosati, said her firm uses accountants to help with internal company investigations, Securities and Exchange Commission investigations and, to a lesser extent, class actions. Lerach Coughlin says its in-house staff of accountants gives the firm an edge in litigation. “They’ve literally seen the internal documents of every major financial fraud” in the last decade, said Lerach Coughlin partner Michael Dowd. “Pretty much any financial fraud that anyone can come up with, they’ve seen.” Accountants help identify instances in which a company has failed to follow generally accepted accounting principles. Jorge Amador, the director of forensic accounting at Milberg Weiss, said his team tries to pinpoint when an accounting discrepancy occurred so investigators can hone in on a specific time period when they question witnesses. The job requires great patience in sifting through an avalanche of documents for a red flag — such as a letter from a CFO to a buyer agreeing to take back any products the buyer can’t sell. Rudolph said that in one recent case he discovered that a company had made an arrangement with a bank to get a loan and keep it off the balance sheet. “If you’re lucky, you find a smoking gun,” Rudolph said. “Most of the time, you have to put the puzzle together.” BOTTOM LINE It’s an expensive puzzle. Coughlin said it can cost hundreds of thousands or millions of dollars to do an investigation. But he said the work ultimately saves his firm money since it can be more precise in the data it goes after. The federal judge overseeing a Milberg Weiss securities complaint against The Boeing Co. recognized the role forensic accountants played in the litigation. “Boeing’s unique manufacturing and accounting practices presented a steep learning curve for class counsel,” Seattle U.S. District Judge Thomas Zilly wrote in a 2002 order setting attorney fees. “The significant reliance on Milberg Weiss’s forensic accountants actually kept costs down by avoiding the substantially greater fees charged by outside experts.” Law firms pay forensic accountants a flat salary. While neither Lerach Coughlin nor Milberg Weiss would reveal the compensation level of their accountants, Coughlin said salaries are in the range of the partners. In his order, Zilly noted that Milberg Weiss was paying $3 million in salaries to in-house experts, the vast majority of which was going to its forensic accountants. In any given case, devoting forensic accountants to the job creates a financial risk. Milberg Weiss partner Melvyn Weiss said firms may have to eat the cost of doing the initial legwork on a case if another firm is appointed lead counsel. “We do the front-end investigation and prepare a complaint at great cost to us,” Weiss said. And then another firm “with a bigger client than ours” can come in and take the case over. That’s what happened, he said, in a recent securities complaint against Royal Dutch Petroleum Co. For many accountants, the in-house gig adds drama to their careers. “It’s a very exciting environment,” said Milberg Weiss’s Amador. Working with former FBI agents and New York detectives “creates a great dynamic.” Rudolph said the wave of corporate scandals led by Enron Corp. has cast his work in a new light. “I used to go to seminars and give speeches and almost get booed” by other accountants and company CFOs, Rudolph said. “The pendulum has swung. Now people want to hear about fraud.” He also gets a different reaction at social events when he tells people he’s a forensic accountant. “Is it like CSI?” people ask. Although he doesn’t analyze blood spatters and bullet trajectories, Rudolph pieces together a different kind of puzzle. “I love it because it’s like chasing a bank robber down the street,” he said, “but with documents.”

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