|December 11, 2007 04:21 PM Eastern Time |
Jury Finds Against Goodman & Company in Lawsuit Brought by Costa Brava Partnership
NEW YORK--(BUSINESS WIRE)--In a case highlighting the watchdog role that public accounting firms should play to protect the public, a seven-member jury returned a verdict yesterday in the Circuit Court for Fairfax County, Virginia, in favor of the claim by Costa Brava Partnership, III, L.P. that the Norfolk-based public accounting firm Goodman & Company aided and abetted a breach of fiduciary duty by Goodman’s client, Telos Corporation (Other OTC:TLSRP.PK).
Telos is a public company and government contractor providing defense oriented IT services. Among other things, Costa Brava, an investor in Telos, alleged that Goodman’s audit opinion was the centerpiece of a carefully calculated campaign by Goodman and Telos to deprive Costa Brava and others of payments due under the public preferred stock, while enriching the insiders of Telos.
Costa Brava argued at trial, among other things, that Goodman & Company misled the U.S. Securities and Exchange Commission and Telos’ former auditors, presold its opinion on going concern, and approved of a false 10-K.
Seth Hamot, the managing partner of Costa Brava, said that "Costa Brava is pleased that there now has been a public finding by an impartial jury that Goodman aided and abetted a breach of fiduciary duty by Telos and its directors.”
During the nearly two-week trial, the jury heard testimony of, among others, John Wood, the Chairman of the Board and Chief Executive Officer of Telos, Norman Byers, a former member of the Telos board and former chairman of the Audit Committee, Ambassador Langhorne Motley, also a former member of both the Telos board and audit committee, and J. Mitchell Bean, Goodman’s lead auditor for the Telos engagement, among others.
After reviewing the evidence presented to it and deliberating for more than ten hours, the jury concluded that Goodman aided and abetted a breach of fiduciary duty by Telos although it awarded no damages. The jury did not find for Costa Brava on other claims.
Daniel Fetterman of Kasowitz, Benson, Torres & Friedman, LLP, counsel for Costa Brava, said that “Costa Brava is gratified by verdict because it confirms that auditors play a critical watchdog role in protecting the public by ensuring the integrity of publicly-filed financial statements."
About Costa Brava Partnership, III, L.P.
Costa Brava is a Boston-based investment fund with investment partners located in Virginia, throughout the U.S. and internationally.
Posted on December 11, 2007 | Permalink
Costa Brava wins Telos case
The litigation strategy seems to have worked for activist investor Costa Brava Partnership III LP. Late Monday, the Boston-based hedge fund won a civil suit it launched in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense.
According to a Costa Brava release, a seven-member jury returned a verdict Monday in the Circuit Court for Fairfax County, Virginia, in favor of Costa Brava’s claim that the Norfolk-based public accounting firm “aided and abetted a breach of fiduciary duty by Goodman’s client, Telos Corporation.”
"Costa Brava is pleased that there now has been a public finding by an impartial jury that Goodman aided and abetted a breach of fiduciary duty by Telos and its directors,” said Costa Brava managing partner Seth Hamot in a statement.
The activist hedge fund alleged in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centered on Telos’ 2004 annual filing audited by Goodman.
It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol
See story from The Virginian-Pilot
See earlier story from Dealscape
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.