The bad blood between a local real estate firm and its former accountant has led to yet another legal battle.
Richmond-based accounting giant Cherry Bekaert last month sued Thalhimer, as the two sides continue to blame each other in the wake of the 2018 collapse of Thalhimer’s general contracting arm, MGT Construction.
Cherry Bekaert threw the latest jab, filing a lawsuit two days before Christmas in Richmond Circuit Court, claiming Thalhimer owes it at least $600,000 for expenses the auditing firm has incurred while dealing with various MGT-related matters.
“In the months leading up to this lawsuit, Thalhimer sought not only to lay the blame for its own wrongdoing on Cherry Bekaert, but also to shirk its clear contractual obligations to Cherry Bekaert,” the suit claims.
Last month’s filing follows Thalhimer’s initial blow last year, when it sued Cherry Bekaert for malpractice and nearly $30 million in damages, claiming the auditor is to blame for not catching the financial issues and fraud that preceded MGT’s demise and ultimate bankruptcy.
Cherry Bekaert served as Thalhimer’s outside auditor from 2014 to 2016. Thalhimer claims its own employees discovered the fraud in 2016.
Reached Tuesday, a Cherry Bekaert spokesman said the firm doesn’t comment on active litigation.
Thalhimer CEO Lee Warfield reiterated in an emailed statement to BizSense the company’s claims against the accounting firm.
“Not surprisingly, Cherry Bekaert has filed this claim in an attempt to deflect attention from the multi-million dollar malpractice lawsuit filed against them by Thalhimer,” Warfield said. “Uncovering fraud is a basic contractual responsibility of any auditor. Over a 3 year period while employed as Thalhimer’s audit firm, Cherry Bekaert failed to take the necessary and appropriate steps to discover the accounting fraud occurring at MGT.”
Thalhimer has worked its way out of much of the lingering legal issues related to MGT. Last month it finalized a settlement with the trustee overseeing the MGT bankruptcy by paying $1.5 million, about half of which comes from insurance proceeds. That deal frees the company and its employees from any further scrutiny from the trustee.
The deal with the trustee also included a provision allowing Thalhimer to pursue claims against certain firms that provided it legal and accounting services prior to MGT’s collapse. The provision frees it up to potentially reignite its suit against Cherry Bekaert, which had been put on hold in recent months while the two sides attempted to resolve the situation out of court.
Cherry Bekaert’s suit shows that the coming to terms may be on hold at least for now, as it argues that the case is a result of “Thalhimer’s refusal to fulfill its contractual obligations to Cherry Bekaert.”
“Thalhimer management stood by silently for years as MGT – which Thalhimer controlled completely – booked fictitious revenue, inflating Thalhimer’s supposed profitability by millions of dollars,” the suit claims. “Now the fraud is public knowledge, MGT is in bankruptcy, and the government opened a criminal investigation.”
That’s a reference to an investigation opened last year by the FBI, IRS and U.S. Postal Service into the accounting fraud at MGT. While no criminal charges have resulted, Cherry Bekaert claims it has incurred costs responding to two subpoenas from the government and that its contract with Thalhimer requires the client to indemnify and reimburse the auditor in such instances.
That includes instances in which the accounting firm incurred costs resulting from misrepresentations from an employee of Thalhimer or MGT. It claims that the accounting fraud carried out by MGT employees triggers that indemnification provision.
“As a result of those misrepresentations and the fraud they were designed to conceal, Cherry Bekaert has incurred significant costs – including responding to two lawsuits and providing information in connection with a federal criminal investigation relating to Thalhimer,” the suit continued.
Cherry Bekaert also had to defend itself in a suit filed against it, Thalhimer, and others by a former Thalhimer employee. Cherry Bekaert successfully argued to be dismissed from the case, while Thalhimer ultimately put it to rest with a settlement.
Cherry Bekaert is represented in the case by attorneys Matthew Bosher, Eric Feiler and Brian Wright of Hunton Andrew Kurth in Richmond.
The MGT bankruptcy case, meanwhile, is ongoing. The trustee continues to search for assets to disperse back to creditors, many of which are smaller subcontractors who were left hanging by MGT.
The case’s two largest creditors – Thalhimer and Hartford Insurance – agreed to drop their debt claims as part of last month’s settlement with the trustee.
Hartford, which provided insurance bonds on many MGT construction projects, claimed it was owed potentially as much as $68 million. That made it the largest creditor in the case by far.
Thalhimer was next in line, claiming it was owed $15 million, money it said it pumped into MGT to try to prop up the then-faltering subsidiary and try to prevent its collapse after the accounting scheme and financial troubles were fully discovered.