PwC Named in $100 Million Lawsuit
Big Four firm PricewaterhouseCoopers and co-defendant investment firm UBS Warburg LLC are being sued for $100 million by three Dallas business people who claim the accounting firm and the investment firm failed to detect and inform potential investors of fraudulent activity at San Jose, California-based HPL Technologies, Inc. Plaintiffs allege PwC failed to detect fraudulent accounting when giving clean certifications of financial statements for HPL. The financial statements in question cover the three-year period leading up to HPL's July 2001 initial public offering.
Plaintiffs in the lawsuit are three Dallas technology entrepreneurs who sold their company, Covalar Technologies Group Inc., and its subsidiary TestChip Technologies, to HPL, relying on the company's financial health as certified by PwC. In January 2002 the entrepreneurs accepted $10 million in cash and $33 million in HPL stock for the sale of their companies.
On July 19, 2002, HPL announced it was investigating internal financial and accounting irregularities and that the Chairman and Chief Executive Officer was being removed. HPL's stock, which was trading on the NASDAQ at $14.10 per share on July 18, 2002, dropped to $4 per share on July 19 before trading was stopped. The stock has since been delisted and is considered to be worth approximately $.10 per share today.
Plaintiffs claim that the accounting firm is at fault for not detecting a number of fabricated customer orders representing as much as 80% of the company's revenue. "PricewaterhouseCoopers assured our clients and the investing public that HPL Technologies was in a strong financial position even though the company's CEO provided false financial statements, completely fabricating as much as 80% of the company's purported sales," said lead attorney for the plaintiffs Mark Werbner. "Had they performed their job properly, PricewaterhouseCoopers' auditors would have detected this scheme."
The lawsuit has been filed in a Dallas County District Court. A separate lawsuit has been filed by the U.S. Attorney's office against former HPL Chairman and CEO David Lepejian claiming he fabricated customer orders. In addition, Mr. Lepejian has settled civil fraud charges with the Securities and Exchange Commission for allegedly creating nonexistent sales that resulted in a 328% overstatement of HPL's 2002 earnings.