Securities Law - Accounting and Legal Malpractice Claims

True Value, as a public company, is required to file its financial statements with the SEC pursuant to the Exchange Act. According to the SEC, there were accounting errors in the financial statements of True Value of about One Hundred Thirty Million Dollars ($130,000,000) and that for the year 1999 such loss was to be recognized. Accordingly, such statements had to be recast. Undoubtedly, the True Value stock which is publicly traded, took a hit when the news became public. That was only the start of True Value’s problems.

Management of True Value decided to pursue a remedy against its former accountants, Ernst & Young and decided that it would interview two law firms to sue Ernst & Young. The Firm of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. made the successful presentation to True Value and was selected. The Goldberg Firm filed an arbitration claim against Ernst & Young. The Ernst & Young Engagement Agreement with True Value required arbitration.

After four years and expenses of approximately twelve million dollars ($12,000,000) an arbitration panel ruled against True Value and ordered that True Value pay the fees and costs incurred by Ernst & Young. The panel found that True Value, through the Goldberg Firm’s actions, had exhibited “bad faith” because it failed to consider the extent of the audit work done by Ernst & Young and pressing its lawsuit on several issues where it had no chance of success. True Value opposed an Eighteen Million Dollars ($18,000,000) fee demand by Ernst & Young and ended up by paying about Eleven Million Dollars ($11,000,000) to Ernst & Young and new counsel. True Value then in December 2009 sued the Goldberg Firm in the Circuit Court of Cook County for legal
malpractice.

According to the Complaint, among other things, the Goldberg Firm advised True Value to sue its former auditors for accounting malpractice and, also, that the Goldberg Firm failed to analyze the merits of the claim and did not obtain at an early point an accounting expert.

Also True Value alleged that the Goldberg Firm failed to advise True Value that if it did not prevail in the case, it could be liable for the costs and fees to defend the accounting malpractice case. It alleged that the Goldberg Firm failed to inform True Value at an early stage that the malpractice claim would have to be arbitrated in accordance with the engagement letter and that the arbitration panel likely would consist of auditors.

The current lawsuit against the Goldberg Law Firm seeks to impose the costs incurred by Ernst & Young on the Goldberg Firm and seeks approximately Twenty Million Dollars ($20,000,000) in damages. Also, Goldberg, according to the Complaint gave negligent Securities Law advice, contributing to the above damages for which Goldberg was charged about One Million Dollars. True Value also seeks a recovery of that expense.
What started as an almost routine need to restate earnings ended up in a protracted arbitration by True Value against its former accountants and, now, in furtherance of the fiasco, True Value sues its former lawyers for legal malpractice.

Edward X. Clinton, Sr.
Copyright 2010