Wednesday, February 8, 2006
The Wall Street Journal reports (here) that advertising firm Omnicom Group Inc. transferred internet assets to a "special purpose entity" in 2001 that may have been almost worthless at the time, but did not account for the decline in value by recognizing a loss. The documents came to light in connection with discovery in a shareholder suit, and show that assets in 16 entities were transferred to Seneca Investments, which may have allowed Omnicom to avoid recognizing a loss of almost $90 million that year. The company's lawyers assert that the transaction was approved by Arthur Andersen and KPMG, but the specter of transfers to an SPE brings chills to the spines of accountants and others who recall the downfall of Enron triggered by transactions with similar entities that occurred later in 2001. The SEC has initiated an informal investigation of Omnicom's accounting, but there is no indication at this time that the matter has progressed to a formal investigation or that any further action will be taken.
One interesting aspect of the case is that the documents were included in a filing by counsel for the shareholders as part of a motion to obtain communications between the company and its lawyers under the crime-fraud exception to the attorney-client privilege. The plaintiffs assert that the transactions were fraudulent, and under the applicable analysis the lawyers must have provided assistance in the transaction that was a crime or fraud, although the lawyers need not have known that the transaction was fraudulent. A judicial ruling in favor of the plaintiffs could well spark further interest from the SEC. (ph)