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May 9, 2003


The opinion of the court was delivered by: Milton Pollack, Senior United States District Judge.


Defendant BDO International B.V. seeks an order: (1) pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure to dismiss the Second Consolidated Amended Class Action Complaint*fn1 on the grounds that the Court lacks personal jurisdiction over it; or (2) pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Rule 9(b) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4 (1997) to dismiss said complaint on the grounds that the allegations against Defendant lack the particularity necessary to state a claim.

According to Plaintiffs' allegations in the complaint and supporting materials, BDO International B.V. is the corporate entity through which BDO International operates, Cpt. ¶ 36, and BDO International, through its regional offices, offers a full range of auditing, accounting, tax, financial and management advisory services, and ranks number six on the list of the worlds' largest multinational accounting and consulting services. Cpt. ¶ 29, 194.*fn2 As detailed by the Plaintiffs, International's business was the business of its member firms and it operated through its member firms, including defendants BDO Minas Iannou, International's Cyprus member firm, and BDO Seidman LLP, International's United States member firm.

International certified that the financial statements of A.C.L.N. Limited ("ACLN" or the "Company") were fairly presented in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") and that it had reached that determination based on audits that had been conducted in accordance with U.S. Generally Accepting Auditing Standards ("GAAS"). Cpt. ¶¶ 4, 247. According to the complaint, however, ACLN was permeated with financial fraud.*fn3 Plaintiffs aver that International's "clean" audit reports were false and that International knew, or, but for its recklessness, would have known that they were false. Cpt. ¶¶ 4, 58-175, 197-202, 234-263, 274, 284, 313. International is charged herein with violating Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.15b-5, promulgated thereunder. Additionally, the Complaint alleges that International is liable for violation of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as a control person of the member firms that worked on the ACLN engagement.

In response to the allegations of the Complaint, Defendant asserts that the audit reports were not prepared by BDO International B.V. Defendant claims that BDO International B.V. exists only to license the name "BDO International" and the "BDO" acronym. Yet BDO International B.V. is clearly alleged to be the corporate entity through which BDO International operates, Cpt. ¶ 36, and as such is alleged to have held itself out as a leading multinational accounting and consulting organization (with more than 58% of its revenues coming from audit and accounting services) that, through its principal offices in Brussels, Belgium, imposes strict quality control and uniform standards on its member firms. Cpt. ¶¶ 265-268, 270-274. It was significant to investors that audits of foreign companies trading on U.S. exchanges be issued by an international accounting firm, as opposed to a local foreign firm and the Complaint charges that International used its name and marketed itself accordingly. Cpt. ¶¶ 194, 265-272 (See Hansen Decl. Ex. 1; audit reports on U.S. traded companies signed by BDO International; Hansen Decl. Ex. 2, other audit reports signed in the name of local accounting firms.) While characterizing itself on its website and in its annual reports as a "leading global firm" providing accounting and auditing services, BDO International B.V. now claims to be a mere administrative functionary with no connections to any of the International member firms in respect to audits conducted under the "BDO International" name.*fn4


A. Background Of The Action

This certified class action is brought to recover damages suffered by persons who purchased ACLN common stock during the Class Period as a result of an alleged fraud perpetrated on the investing public.*fn5 On December 21, 2001, a news article appeared that contradicted the Company's prior SEC filings by revealing that ACLN did not own the shipping vessel, Sea Atef, which it had recognized as a major asset, and detailed numerous inconsistencies, inadequate disclosures and discrepancies in ACLN's public statements, including its filings with the SEC, with regard to, among other things, the Company's revenues, purported ownership of the Sea Atef, and its selling, general and administrative expenses. Cpt. ¶ 153. On this report, the price of ACLN shares fell dramatically — a one-day drop of 63%. Cpt. ¶ 158. The SEC began an investigation (Cpt. ¶¶ 160-161) which culminated in the halting of trading in ACLN stock on March 18, 2002, and its subsequent de-listing (Cpt. ¶¶ 163, 169). Following these events, ACLN's stock price declined further. Cpt. ¶ 173. The accounting irregularities at ACLN called into question not just the amounts reflected in the financial statements but the very existence of assets recognized. Cpt. ¶ 167.

B. International's Statements

"Clean" audit reports on ACLN's financial statements for its fiscal years ended December 31, 1999 and 2000, respectively, were included in ACLN's Forms 20-F for 1999 and 2000 filed with the SEC.*fn6 Each of these audit reports was signed "BDO International." Those reports stated:

We conducted our audits in accordance with generally accepted auditing standards in the United States and Cyprus. . . .
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects the financial position of ACLN Limited . . . in conformity with accounting standard generally accepted in the United States.
The Complaint charges that the audit reports were materially false and misleading and that International knew or, but for its recklessness, would have known that they were materially false and misleading. Cpt. ¶¶ 58-175, 197-202, 234-263, 274, 284, 313.

International stressed the quality of its global network and the stringent standards and quality controls imposed and implemented by International on each member firm and the quality of its member firms. Cpt. ¶¶ 265, 268-273. These representations are claimed to be false and misleading. Cpt. ¶¶ 199-202, 234-256, 274-282. The auditors in Cyprus, who worked on the ACLN engagement, were not qualified; they had no training or proficiency in the application of U.S. GAAP or U.S. GAAS. Cpt. ¶¶ 234-246, 274.

C. International's Statements Or Deceptive Practices

International is alleged to have issued false audit reports on ACLN's financial statements and made other misrepresentations. According to its Annual Reports, International is one large global firm that provides a full range of accounting and auditing services and operates as a single entity with uniform and stringent quality controls strictly imposed on each of its member firms. Cpt. ¶¶ 268-272, 277, Hansen Decl. Exs. 5-7. As noted, BDO International B.V. presents itself to the world as "BDO International" (Cpt. ¶ 194) and has its principal offices in Brussels, Belgium. International represents to the public that its member firms are its representatives. Cpt. ¶ 266. It has a significant presence in the United States through its representative practice, conducted by its member firm BDO Seidman, which has 35 offices throughout the country. Cpt. ¶ 267. International is charged with intentionally creating and fostered the belief in the investing public, including the Class herein, that the audit reports issued by International should be relied upon because they were backed by the expertise of its global network of member firms — expertise that was ensured by the strict quality controls imposed and implemented by International. Additionally, ACLN's listing application to the NYSE stated that "[t]he Company has engaged BDO International as its independent public accountants since 1996." ACLN's filings with the SEC, that were reviewed by International through its representatives at BDO Seidman and BDO Minas Ioannou, stated that ACLN's auditors were BDO International. ACLN stated that "[t]he financial information set forth below for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 has been derived from our financial statements, which have been audited by BDO International, independent auditors" and announced shareholder approval at the ACLN annual meeting of "the re-appointment of BDO International as the Company's independent auditors for the 2001 fiscal year." Hansen Decl. Ex. 9 (Form 20-F) & Ex. 10 (Form 6-K).

International represented that, through its regional offices, it offers a full range of professional auditing, accounting, tax, financial and management advisory services, and ranks number six on the list of the world's largest multinational accounting and consulting firms. International represented that it maintains in excess of 590 offices in 99 countries worldwide with its principal offices located in Brussels, Belgium. Cpt. ¶¶ 29, 194. International began in 1963 when firms from the United Kingdom, Germany, the Netherlands, USA and Canada joined together under the name Binder Seidman International Group. In 1988, as the firm continued to expand globally, the umbrella organization International was formed, to enable all of its regional offices to operate as a single global partnership or joint venture. Cpt. ¶ 194. Under the structure of International since 1988, member firms were required to identify themselves as "BDO International." Cpt. ¶ 277.

International underscores its global unity by reporting revenues on a worldwide basis. Cpt. ¶ 265. Thus, for example, its Annual Reports note the year-over-year increase in worldwide fees. International's Annual Report for 1999 at 4; International's Annual Report for 2000 at 8. As of September 30, 2001, International reported total income for the year of EUR 2.413 billion (or US $2.203 billion), almost 50% of which came from the Americas. Cpt. ¶ 265, quoting BDO International's Annual Report for 2000 at 4. Additionally, contrary to its assertion on this motion that International performs no audit or accounting services (BDOI Mem. at 5, van Elten Decl. ¶ 4), International acknowledges that "[a]udit and accounting accounted for 58% of the total fees. . . ." Cpt. ¶ 265, International's Annual Report for 2001 at 5.

Under the heading "Professional Excellence" International represents on its website that:

We take great care to ensure that every one of our member firms embodies BDO's methodology, and it is significant that we have only one member firm in each of the 98 countries in which we currently operate. The stringent conditions with which each member firm has to comply to be part of the BDO network are paramount. They not only guarantee that our high standards are met, but also enable each member firm to share information and expertise across the world.
Training plays an important role in the continuous professional development of our partners and staff but, equally, we are aware that technical excellence is, today, no longer enough. We therefore select people who, in addition to their substantial professional knowledge, also have proven business abilities, and can analyze, interpret and advise on both local and international concerns.
Cpt. ¶ 271.*fn7

Additionally, International refers to clients serviced by its member firms as "our clients," not clients of the member firm. Thus, for example, International's "Regional Profile NAFTA," which mentions the work of its U.S. member BDO Seidman, refers to seminars held in the U.S. and states:

These seminars helped to expose our clients to the many professional services that BDO can offer on either side of the border. . . . As BDO clients venture into NAFTA and other new markets, we will continue to devote our attention and resources to helping them capitalize on the many business opportunities available. . . . At BDO, we value all of our client relationships.
International specifically stressed the importance of its local offices to the provision of worldwide services in its global network. International held itself out as a highly skilled international accounting firm that benefits its clients by the interaction between its local offices throughout its global network and the synergies afforded by this structure. In describing its services to clients, International stressed the link between the local and global nature of its services. International stressed the uniform and stringent controls it imposed on member firms as a basis for the confidence and reliance that should be placed on an International audit. Cpt. ΒΆΒΆ 268-72. Contrary to the assertion that "Member Firms . . . ...

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