To convince the Kentucky Supreme Court to reinstate a robust punitive damages verdict against international accounting firm Grant Thornton over its fraudulent promotion of tax shelters, attorney George Vinci Jr. had to convince the court to look beyond the circumstances of his wealthy clients.
And when Kentucky’s court of last resort reinstated a $100 million verdict against Chicago-based Grant Thornton, the world’s sixth-largest accounting firm, it was more as a deterrent against future misconduct than out of sympathy for the plaintiffs.
In Yung v. Grant Thornton, the state Supreme Court affirmed a finding that the accounting firm was liable for marketing a scheme to avoid taxes on millions of dollars transferred from the Cayman Islands to the U.S. The plaintiffs in the case were a trust that owns Columbia Sussex Corp., an owner and operator of hotels; William Yung, part-owner and president of Columbia Sussex, and his wife, Martha.
The Supreme Court reinstated a verdict consisting of $20 million in compensatory damages and $80 million in punitives against Grant Thornton. A trial judge issued the award after a two-month trial in 2013. But an appellate court reduced the punitive damages to $20 million, finding that anything exceeding a 1:1 ratio with compensatory damages was excessive.
On appeal to the Supreme Court, Vinci, of Philadelphia’s Spector Gadon & Rosen, representing the Yungs and their company, faced questions about the need for a punitive award since the plaintiffs recouped their losses in the compensatory portion of the verdict. What’s more, the jurists asked Vinci whether a mega-verdict on punitives was warranted in light of the fact that the victims of the accounting firm’s fraud were not financially vulnerable, but were wealthy individuals with considerable business experience.
The Yungs were made whole by the $20 million compensatory award, which compensated them for the $900,000 fee they paid to Grant Thornton for the tax shelter, and roughly $19 million in taxes, interest and penalties they paid to the IRS after the tax shelter was disallowed.
Vinci also faced questions from the court about whether due process principles were offended by a proportionally large punitive damages award to a large company. Case law on punitive damages in the commercial sector generally favors a lower ratio of punitives to compensatory damages than a court might use in an award to a garden-variety personal injury plaintiff.
Vinci dealt with his dilemma by focusing the court’s attention on Grant Thornton’s conduct.
“My position to the court was, you have to punish this type of pervasive fraud. To prevent the type of conduct that occurred in this instance, the $80 million was justified,” Vinci said.
Vinci cited Grant Thornton’s efforts to mislead Yung and his company into believing that Procter & Gamble and General Electric had used the same tax shelter. He also emphasized the tax shelter put the plaintiffs in a difficult spot with the IRS because the Yung family operates casinos in some of their hotels in the Cayman Islands, and casino regulators closely scrutinize an operator’s problems with taxing authorities.
Vinci also reminded the Supreme Court that the trial judge who first entered the $100 million in damages, Patricia Summe, is a respected jurist who ruled after hearing testimony from 40 witnesses, and then taking a year to produce her 200-page opinion.
The ruling “establishes that courts in Kentucky will recognize that a 4:1 ratio in a punitive damages setting is appropriate. It sends a good message. The whole idea is to prevent this type of conduct from occurring again,” Vinci said.
Grant Thornton advised the Yungs and their businesses on taxes from 1990 to 2007. In 2000, the Yungs purchased a tax shelter called Lev301 to move $30 million from the Cayman Islands to the U.S. The scheme called for shareholders in the Yungs’ Cayman Islands corporations to move money into the U.S. by borrowing money from a bank, and then purchasing Treasury notes, which served as security for the debt. The Cayman Islands corporations then paid off the debt within six months to a year, but the Yungs did not report that income on their tax returns.
But as Grant Thornton was developing Lev301, the U.S. Treasury Department was conducting a crackdown on abusive tax shelters. And the plaintiffs claimed Grant Thornton was aware of an advisory from recognized tax law authority Lee Sheppard that predicted the IRS would disallow an Arthur Andersen tax shelter that was similar to Lev 301.
In 2004 the IRS conducted an audit of the Yungs’ use of the Lev 301 tax shelter, and in February 2007 the parties reached a settlement. The Yungs filed their suit against Grant Thornton a short time later.
Grant Thornton said in a statement that it is “disappointed with the most recent decision regarding this matter, which dates back almost 20 years, and is reviewing its options for appeal.”
Vinci’s firm represented the 1994 William J. Yung Family trust along with Gerald Dusing of Adams, Stepner, Wolterman & Dusing in Covington, Kentucky, and Michael Risley of Stites & Harbison in Louisville, Kentucky. Grant Thornton was represented by Frost Brown Todd of Cincinnati.