On August 13, 2007, Sullivan & Cromwell partner Steven Thomas and four members of his trial team passed up the five-star culinary options of Miami’s South Beach for dinner at a Denny’s in Coral Gables. It was an odd place for a gathering of high-powered lawyers. But Thomas, who was raised in Carl Junction, a small town with no stop lights in southwestern Missouri, was not a typical Am Law 100 partner. Throughout the case, he took pleasure in introducing his team members to chain restaurants in South Florida, says colleague Emily Alexander.
And Thomas had more than 100 million reasons to savor the pancakes, scrambled eggs, bacon, sausage, and grits of his Grand Slam. After a four-month trial, a six-person Florida state court jury had just awarded $170 million in compensatory damages to his client, Banco Espirito Santo, S.A. The Portuguese bank had sued Chicago-based BDO Seidman, LLP-the U.S. unit of the world’s fifth-largest accounting firm, BDO Global Coordination B.V.-claiming the firm had bungled the audits of a corrupt Espirito Santo subsidiary. The next day, the jury awarded $351.7 million in punitive damages to Espirito Santo. That brought BDO’s total liability to $521.7 million, the largest verdict ever against a U.S. accounting firm.
But just as Sullivan & Cromwell partners don’t usually find themselves dining at Denny’s, they don’t usually find themselves sitting at the plaintiffs table suing major accounting firms, as Thomas had. Nor do they do so on partial contingency, as did Thomas against BDO. At a firm that usually defends America’s corporate elite, Thomas’s victory was, well, awkward. The end result was acceptable-while Thomas and S&C wouldn’t comment on their cut of the mammoth award, even a 20 percent fee would net the lawyers more than $100 million-but the carnage was unsettling. Given BDO’s gross U.S. revenue of $589 million last year, the gargantuan verdict could threaten the accounting firm’s survival.
Two months after the verdict, Thomas and Sullivan & Cromwell parted ways. In a year when there was no shortage of partners with eight-figure books of business changing firms, Thomas was certainly one of the few to leave with a potential nine-figure fee attached to his resume. His departure was, of course, handled decorously and with a whiff of inevitability. “I started a contingency fee practice at S&C about six years ago, when the actual billing policy said, ‘We don’t do contingency fees,’ ” says the 40-year-old Thomas. “So my practice didn’t seem to really fit.”
Thomas’s new three-lawyer firm, Thomas, Alexander & Forrester, based in a beach house in Venice, California, specializes in representing businesses as plaintiffs in commercial litigation. “My [former] partners still think I’m out of my mind,” Thomas says. But for someone who went from Carl Junction to the top of The Am Law 100, Thomas is used to the road less traveled.
Even by Miami standards, the Espirito Santo case was rich in color, conflicts, and corruption. Espirito Santo bought into a factoring business owned by two Argentine financiers. (Factoring involves buying accounts receivable for less than face value, eventually collecting, and then pocketing the difference.) But the Argentines had vastly inflated the value of their holdings. A federal jury convicted them on fraud charges in 2006. Left holding a reeking investment, Espirito Santo went looking for someone to blame and settled on BDO Seidman, claiming it failed to uncover the swindle.
Founded in Portugal in 1920 by the Espirito Santo family, Luxembourg-based Espirito Santo Financial Group, S.A., has operations in a dozen countries and nearly $6 billion in revenue. In April 1998 its U.S. subsidiary, Espirito Santo Bank of Florida, went into business with Bankest Capital Corporation, an investment firm formed in 1986 by two wealthy Argentine brothers, Eduardo and Hector Orlansky. Bankest owned a company called Bankest Receivables Factoring Finance Company. “The bank was supplying money for [BRFFC], liked what it saw, and wanted in on it,” says Bruce Lehr, name partner at Miami’s Lehr Fischer & Feldman and a lawyer for Hector Orlansky.
Espirito Santo and Bankest formed a new factoring company called E.S. Bankest, LLC. Eduardo and Hector became president and vice president of the joint venture, respectively, with control of the board split between representatives of Espirito Santo and Bankest Capital. In September 2002 the Orlanskys bought out Espirito Santo’s interests for $10 million. But they failed to find new financing to keep their company afloat-and couldn’t make their payments to the bank.
Between 1998 and 2002, Espirito Santo had sold $140 million in E.S. Bankest debenture notes to its clients, while making another $30 million in loans to E.S. Bankest as part of a shareholder agreement. After the joint venture’s dissolution, Espirito Santo bought back the debt rather than let its customers take the hit.