Wells Fargo, along with three others companies, have filed suit in Jefferson County Circuit Court against Warren Averett Kimbrough & Marino, a certified public accountant firm based in Birmingham. It was alleged that the firm was guilty of wrongdoing in the auditing of bankrupt furniture maker Meadowcraft Inc. The lawsuit alleges that Warren Averett failed to exercise adequate professional judgment and skepticism in auditing Meadowcraft in 2006 and 2007. Meadowcraft filed for bankruptcy in 2009 and its inventory was sold at auction.
The suit says Warren Averett’s failure to detect millions of dollars of overvalued inventory led the lenders to extend additional loans that kept the company in business after it was in weak financial shape. It’s alleged that those loans simply prolonged the company’s inevitable spiral into bankruptcy at a cost of at least $18 million to the banks. The Plaintiffs claim that Warren Averett’s gross negligence, recklessness and fraud caused their losses. Other lenders joining Wells Fargo in the suit are Webster Business Credit Corp., Burdale Financial and RZB Finance.
Meadowcraft, which was privately owned, made outdoor furniture sold at mass merchandisers such as Wal-Mart Stores Inc. In 2009, plants in Birmingham, Selma and Wadley were closed. It’s alleged in the suit that the company failed after the president and the chief financial officer faked assets and inventories in 2006 and 2007. Each year, inventory was reported at about $40 million, when it was actually less than half that, according to allegations in the suit. The Plaintiffs say that the fraud made things look better than they were, qualifying Meadowcraft for the additional loans extended by the lenders. But the Plaintiffs say that the subterfuge should have been detected by the accounting firm. Generally accepted auditing standards require accounting firms to accurately observe and audit inventory numbers. The suit contends that obsolete and diminished goods were being carried at full value, and that this should have been discovered by the auditing firm.
The suit seeks compensatory damages of at least $18 million and punitive damages of at least $10 million. When I read in the Complaint that the Plaintiffs were asking for punitive damages I was shocked. It’s rather interesting – to say the least – that major players in Corporate America, such as Wells Fargo, believe that other corporate wrongdoers should be “punished.” I have never run into that belief in any of the cases our firm has filed on behalf of individuals against large corporations. Regardless of how bad the conduct may have been, the corporate Defendants never liked punitive damages and didn’t even believe a corporate wrongdoing should be punished. This is indeed a most strange world in which we live!