The Eleventh Circuit Court of Appeals put its foot down on using the Business Judgment Rule as a scapegoat in this case. TSG sued its former CFO (Bencini) and accounting firm (D&D) for breach of fiduciary duty, fraud, securities fraud, and breach of contract. Bencini prepared financial statements for TSG in 2000 showing that the company was earning a profit for the first time. D&D reviewed the statements and came up with an even bigger profit for the company. Management and the Board of Directors took a look and believed the company had “turned a corner.” In May of 2001, Bencini noticed that the cash flow was flowing the wrong way, and a closer look revealed that the 2000 financial statements were just plain wrong—the company was still in the red. The President of TSG was informed of the cash flow issue, but not the 2000 accounting errors, so he proceeded to the annual meeting, and told investors the good news about making a profit. Bencini didn’t jump in to correct the misunderstanding.
A month later, the directors had to act quickly to avoid a lien on one of TSG’s projects. Investors and Directors opened their own pockets to support TSG, thinking this was an unfortunate blip on the upward trip to continued profitability. But that profit had never existed—it was the product of numerous accounting errors. The District Court granted Bencini summary judgment on the basis that the Business Judgment Rule applied because Bencini relied on outside experts (D&D). The Appeals Court didn’t buy it. Reliance on outside experts is not determinative, but simply weighs in favor of a finding that there was no abuse of discretion. The totality of the facts must be considered. In addition, the Appeals Court disagreed with the District Court’s assessment that there was no fact issue as to whether Bencini acted fraudulently, in bad faith, or in an abuse of his discretion. There were indications of collusion between Bencini and D&D, and evidence that Bencini stood to gain from an inaccurate picture of TSG’s finances. He sat on his hands at the board meeting instead of correcting the President when the news of profit was announced, and his spreadsheets induced investors to prop up the company with their own cash. The Appeals Court put it all together and decided Bencini did not deserve summary judgment in his favor.
So now we know that invoking the Business Judgment Rule and relying on experts will not blindfold Lady Justice, at least not in the Eleventh Circuit.
Comments