Local real estate giant Thalhimer is pointing a finger at a major Richmond accounting firm for not catching the financial issues and fraud that preceded the collapse of its general contracting arm, MGT Construction.
Thalhimer on Friday sued downtown-based Cherry Bekaert for negligence and breach of contract in an effort to “recover the massive losses that Thalhimer incurred as a result of numerous auditing failures.”
The 38-page complaint filed in Richmond Circuit Court also provides further detail of an accounting scheme allegedly carried out by former MGT employees that led to the subsidiary’s collapse.
“Cherry Bekaert failed to take any one of a number of auditing steps required in the accounting profession that would have uncovered the fraud at MGT,” the suit alleges.
The lawsuit, which could trigger malpractice insurance policies held by Cherry Bekaert, claims Thalhimer has incurred more than $28 million in damages for which the accounting firm should be on the hook.
And while not named as party to the suit, three former MGT employees also are pinned with much of the blame in the narrative of Friday’s filing, particularly Michael Logan, the former longtime head of MGT, and Patrick Lindsey, who handled MGT’s accounting. Logan’s son, Michael Logan Jr., who worked in business development at MGT, is also alleged to have been involved.
Thalhimer claims MGT’s revenue had grown exponentially beginning in 2012, jumping from $14 million to nearly $50 million by 2013.
The company said it pumped millions of dollars’ worth of loans into MGT to fill what were supposedly short-term cash-flow issues due to MGT’s rapid expansion. It also guaranteed the letters of credit and performance bonds on MGT projects.
“Relying on financial statements for 2014 and 2015 audited by Cherry Bekaert, Thalhimer believe that MGT was not only a viable going concern but was also generating substantial net income for Thalhimer,” the suit states. “In fact, during 2014 and 2015, unknown to Thalhimer, MGTCC was losing money on many of its larger construction jobs and was later determined to have been insolvent as of Dec. 31, 2014.”
That insolvency was due to a scheme that Thalhimer claims was perpetrated by the Logans and Lindsey, in which they “deliberately and fraudulently” manipulated the books at MGT by shifting costs from current or completed construction jobs to new construction jobs, creating the illusion of greater profits and therefore bigger bonuses for themselves.
Logan, for example, saw his bonuses jump from $184,000 in 2011 to $418,000 in 2015, according to the lawsuit.
Thalhimer’s filing claims that Logan denied any knowledge of the scheme when questioned and that Lindsey admitted to it, was fired when confronted and eventually stated that he was directed by Logan to do it.
The suit claims Logan went as far as increasing Lindsey’s compensation to make sure he didn’t leave MGT, with Logan allegedly paying Lindsey out of his own pocket at one point and having MGT do nearly $40,000 worth of renovations on Lindsey’s home.
Thalhimer claims Cherry Bekaert was negligent in its duty to spot Logan and Lindsey’s scheme and says the fraud ultimately was discovered by a member of the Thalhimer accounting staff in November 2016.
The prospect of Thalhimer suing Cherry Bekaert already had been made public in a separate lawsuit against a handful of Thalhimer’s top brass in Richmond federal court.
That case, filed by former Thalhimer property management head Steven Brincefield, seeks to blame Thalhimer insiders for depleting the value of its employee stock ownership plan, which in large part was caused by the troubles at MGT.
Brincefield recently filed an amended complaint in that case, adding Cherry Bekaert on counts, including malpractice.
Brincefield filed the case on his own behalf but also as a shareholder derivative case on behalf of Thalhimer.
Thalhimer recently called for dismissal of derivative claims, its main argument being that a company’s board of directors has the ultimate say on whether derivative claims should be pursued on behalf of the company.
The calls for dismissal do not relate to allegations that the Thalhimer defendants violated provisions of ERISA, the federal statute that governs employee stock ownership plans. The various defendants have yet to file a response to those claims. They include Thalhimer CEO Lee Warfield, former longtime Thalhimer head and Chairman Paul Silver, executive vice president Evan Magrill, CFO David Dustin and Jeff Bisger, former head of what’s now Thalhimer Realty Partners.
Thalhimer is represented in the Cherry Bekaert case by Willcox Savage attorneys Gary Bryant, Brett Spain and Jason Ohana.
Reached last week regarding the motion for dismissal, Warfield had no comment other than to reiterate his previous statement that he’s confident Thalhimer will prevail in the various legal disputes. He did not return a call or email Monday regarding the Cherry Bekaert case.
Cherry Bekaert did not respond to a request for comment.