In Minnesota, any basketball fan knows the name Kevin Garnett. He was of the few NBA players drafted directly from high school. From there he would play 21 seasons and become both MVP and Defense Player of the Year. He spent much of his career with the Minnesota Timberwolves.
While playing ball and thereafter, Garnett hired a manager named Charles Banks to manage his financial affairs and invest his money. Banks went to prison for defrauding another NBA player and millions of dollars of Garnett’s money is gone.
That is a story by itself – private jets, expensive wine collections and living the high life while stealing from your celebrity client. Our story, however, is the one not told. It is how Garnett’s accountants could soon be on the hook for the $77 million Garnett lost.
In September of 2018, Garnett sued Welenken CPAs and partner Michael Wertheim, CPA. Both are located in Louisville, Kentucky. Notably he did not name Banks in the complaint, probably because Banks is penniless and in prison.
Why the accountants? Did they steal too?
According to court records, in 2010 Banks hired Wertheim and his firm Welenken CPAs to perform accounting work for Garnett. The original engagement letter said the accounting firm was simply preparing tax returns.
While having a well drafted engagement letter can often save an accountant from a claim of malpractice, courts and juries look at substance over form. And at least at this juncture of the case, the court refused to let the accountants off the hook.
According to Garnett’s complaint Wertheim did far more than prepare returns. Garnett says he also prepared financial statements, became the registered agent for businesses in which Garnett had an interest, and created budgets and spending limits for Garnett. Instead of simply preparing income tax returns, the accounting firm “provided accounting services to Banks, Garnett, and virtually all of the businesses Garnett shared with Banks.”
The accountants are alleged to have done financial planning work.
Of note is that Wertheim rarely ever spoke to his client, Kevin Garnett. Most of his dealings were with Banks.
After Banks went to prison for defrauding another basketball player, Garnett hired a lawyer to see what happened to his investments. The results are what you might expect. Garnett was virtually broke. His money had been taken by Banks.
According to the lawsuit,
“Garnett and his counsel obtained records from Defendants and discovered evidence that Banks had also been defrauding Garnett. For instance, Banks had siphoned money from a joint investment venture between Banks and Garnett called Hammer Holdings, LLC, (“Hammer”) a California company. Banks was Hammer’s managing member, but Garnett had been led to believe that he and Banks each owned half of Hammer, and that all the contributions made by Garnett were being matched by Banks. In reality, Banks used Hammer as an individual bank account. At one point he transferred over $14 million from Garnett’s personal bank accounts into Hammer and then borrowed almost $8 million for himself. Banks also used Hammer’s funds to pay his own credit cards, pay his mortgages, hire private jets, and make personal investments unrelated to Hammer. Banks further invested Hammer’s funds into valueless entities in which he had a personal financial interest.”
The accountants reading this post may be wondering, so what does this have to do with Wertheim?
Great question. Garnett said Wertheim knew or should have known what Banks was up to and had a duty to warn Garnett.
Despite the engagement letter indicating Wertheim’s role was limited to tax return preparation, Wertheim sent Garnett an invoice for “tax return planning, consultation, government correspondence, personal financial statement, bookkeeping and general business consultation, meeting.”
In most states, that is enough to create a fiduciary duty between the accountant and the client.
Predictably, both Wertheim and his firm filed a motion to dismiss. The accountants want to kill the case or at least get it removed from Minnesota where Garnett is a hometown hero.
On March 13th, 2019, the court said no. The case can proceed against both the accountant and the accounting firm. Moreover, the case remains in Minnesota.
There are many lessons in this case both for accountants and for those who believe they are the victim of accounting malpractice.
Jurisdiction and Venue – Where the Lawsuit Is Heard
In the perfect world, it shouldn’t matter where a case is filed. Jurors should always come to the same result if given identical facts. If you believe that, we can sell you the Brooklyn Bridge.
Some counties and areas of the country are more conservative than others. We know of a police civil rights law firm that won’t take cases in certain states. They say in some areas of the country, police officers who wrongfully shoot suspects are treated as if they are heroes. Products liability lawyers flock to places like San Francisco, Philadelphia and St. Louis to file claims.
The amount of money awarded by juries is much higher in some urban areas than in rural areas which are more conservative and more miserly with their purse strings. And there are people like Kevin Garrett who wisely decided that they would fare better in front of a hometown jury.
There are rules as to where a lawsuit may be filed. You can’t simply file where you live or pick what you believe to be a favorable venue such as St. Louis. In most states, lawsuits can get filed where a defendant resides or where the wrongdoing took place.
Let’s look at an example. A Texas accountant can have a Florida client but unless the accountants had a physical presence in Florida or did something wrong in Florida, the client may be forced to sue the accountants on the accountant’s home turf in Texas. We run into this frequently in Texas legal malpractice cases where Texas law often favors the legal profession.
In Garnett’s case, the accountants said they never did anything in Minnesota, all their work was done in Kentucky and therefore the Minnesota court had no jurisdiction.
We think the accountants were wrong on the facts. Wertheim apparently traveled to Minnesota to watch Garnett play and discussed business with his wife while at the game. Believe it or not, that one business related trip into Minnesota was probably enough to establish jurisdiction.
The court went much further in its analysis, however. Accountants should take heed. The court looked at the accountants’ inactions in determining whether Minnesota had jurisdiction.
In the typical accounting malpractice case, the accountants are accused of giving bad advice or making mistakes on a return. These are affirmative acts.
The thrust of Garnett’s lawsuit is that the accountants did nothing. They stood by silently while Banks embezzled tens of millions of dollars. And according to Garnett, his investigation revealed that the accountants had actual knowledge of the wrongdoing.
The court relied on a federal appellate court decision from Texas involving a legal malpractice claim. The gravamen of that case was the attorney’s failure to disclose a conflict of interest.
In that case, the court found personal jurisdiction because the underlying claim was “based on a failure to disclose material information, the defendant had communicated into the state by mail and phone, and the defendant had met with the plaintiff in person in the forum state but failed to divulge his conflicts.”
Later the judge in Kevin Garnett’s case noted, “a failure to perform a legally required act within a forum can establish personal jurisdiction.” That suggests that even if an accountant never sets foot in the state where his or her client resides, the accountant may still be sued in the client’s home jurisdiction by the mere fact that the accountant failed to do something in that state. [Remember Garnett’s case is one involving fiduciary duty. Absent such a duty it may be more difficult to sue the accountant in the client’s home jurisdiction unless some element of the wrongdoing took place there.]
Don’t Forget Who the Real Client Is
We suspect that because Banks had hired the Welenken firm and handled all the dealings with them, the firm may have forgotten who was owed their duty of their loyalty.
According to the engagement letter, Kevin Garnett was the client. He may not have had any interactions with them and may not have been involved in their hiring but Garnett – not Banks – was the true client.
Accounting Malpractice 101 Actions Speak Louder than Words
In the beginning, the accounting firm probably really was just hired to do returns. And under most state law, simple return preparation doesn’t trigger a fiduciary duty.
Over time, relationships change. There is often a “creep” in professional relationships where the relationship expands over time. First the accountants just prepare returns and then one day the accountants may give some advice here, help with planning, etc. The next thing you know, the firm does have a fiduciary duty. Here no matter what the engagement letter said, if Garnett is correct, his accountants owed him a fiduciary duty and should have warned Garnett if they knew what was going on.
While engagement letters are important – I once taught a CPE class for CPAmerica on engagement letters – they don’t trump reality. Especially when that reality includes invoices that refer to tax or business planning.
This case is still in its infancy. Simply because the judge refused to dismiss or move the case doesn’t mean the case is over. Kevin Garnett will still have to prove his case.
There is a lot on the table, Garnett says he lost $77 million. Despite there being no evidence of Wertheim or his firm embezzling or stealing, they could be on the hook. And Banks probably will never pay a dime in restitution.
If you are the victim of accounting malpractice and lost $1 million or more, give us a call. We handle professional negligence cases throughout the United States. For more information, visit our accounting malpractice page.
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