Friday, January 20, 2005
C.A. Revives Suit Against Accountants in Title Company Scandal
By DAVID WATSON, Staff Writer
The First District Court of Appeal yesterday revived false claims and unfair competitions claims brought by San Francisco against auditors who issued a clean bill of health to Old Republic Title Company despite evidence the escrow company was mishandling funds.
San Francisco Superior Court Judge Stuart R. Pollak erred in dismissing the city and county’s claims, brought on behalf of the public, against PricewaterhouseCoopers LLC, formerly Coopers & Lybrand, the court’s Div. Four said.
Pollak ruled the accounting firm could not be held liable in the wake of revelations that Old Republic was treating millions of dollars in unclaimed funds, which should have been reported to state officials for escheat, as income. The mismanagement came out in 1997 after a company lawyer turned in an executive, Donald Barr, for embezzling more than $1 million.
Barr eventually pled guilty to tax evasion charges and implicated other Old Republic executives in the financial misconduct.
The company eventually paid the disputed funds—some $9.5 million in unclaimed funds and $7.7 million in interest—to the state controller. Pollak allowed San Francisco to recover $7.5 million from Old Republic based on the treble damages provision of the False Claims Act and an additional $2.2 million under the Unfair Competition Law.
But the judge granted PwC’s motion for summary judgment on the FCA cause of action and sustained its demurrer on the UCL claim.
Under the FCA, Pollak said, the city and county could not recover from PcW because its actions were not material to the failure of the controller to collect the unclaimed funds. The auditor’s report went to the state Department of Insurance, and the plaintiffs failed to establish that the DOI would have alerted the controller to the improprieties, Pollak ruled.
Writing for the appellate panel, Justice Timothy A. Reardon disagreed.
“Without question the [Controller’s Office] is the primary enforcer of our escheat laws, and without question such disclosures would not, in the natural course of DOI business, be relayed to that office,” he wrote. “Also without question, in the past no insurer or underwritten title company had ever been denied a license or subjected to disciplinary or investigative action or examination for failure to comply with the UPL. However, notwithstanding PwC’s arguments to the contrary, although DOI is not the primary UPL enforcer, it does have statutory authority and practices and procedures for enforcing laws, including the escheat laws, that impact insurance companies. Moreover, with the wheels of its internal procedures and practices humming properly, disclosure of Old Republic’s escheat violations would have a natural tendency to influence DOI action.”
Instead of focusing on “actual historical practices,” Reardon said, Pollak should have looked at “the extant structures and authority that would support ferreting out the financial wrongdoing and taking action to stop it.”
“With this lens we conclude that the totality of evidence submitted in opposition …defeated summary judgment in PwC’s favor. PwC did not overcome the materiality element of the FCA cause of action and therefore was not entitled to judgment as a matter of law.”
In sustaining PwC’s demurrer, Pollak ruled that failure to comply with generally accepted auditing standards was not actionable under the UCL.
That ruling was also erroneous, Reardon said.
“The complaint alleged numerous violations of GAAS in preparing and submitting ‘clean’ audit reports for ORTC, based on PwC’s alleged knowledge that (1) the company’s inflated earnings from unescheated funds was material under GAAS; (2) the company’s escheat practices were possible ‘illegal acts’ by the client as defined by GAAS; (3) the company had never escheated money to the state as it was required to do; and (4) throughout the course of the engagement the company’s total escheat obligation including penalties was growing. The complaint further alleged that the violations permeated the engagement in that year after year PwC issued unqualified opinion letters for ORTC. These allegations were sufficient to state a cause of action under the UCL.”
He rejected PwC’s contention that the action was barred by the 1992 decision in Bily v. Arthur Young & Co., 3 Cal.4th 370, a case in which state Supreme Court ruled that only client’s could recover for an accountant’s negligence.
The UCL action was not a professional negligence claim, Reardon pointed out, adding that even if +Bily+ applied, the state insurance commissioner was “within the universe of potential plaintiffs defined” by that ruling, since the audit was performed to satisfy regulatory requirements. Since the city and county were suing in the name of the people of the state, their action was “for all practical purposes…indistinguishable from a suit by the Commissioner, an intended recipient of the allegedly offending reports,” Reardon explained.
Justice Patricia Sepulveda and Presiding Justice Barbara J.R. Jones concurred. The case is State of California ex rel. Harris v. PricewaterhouseCoopers LLP, A095918.
Copyright 2005, Metropolitan News Company