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Lgt !ԀCarnegiesotherclaimsforpunitivedamagesweredismissedbeforetrial.#! Lgtr# 4 <s$..      @XXX@XXXX@XXXX  1    _  0 XLgt  0ԀPriortotrialPlaintiffsGableand_Farkas_Ԁchosenottopursuethedefamationclaims.#0  LgtV##X 07#hold     >!..      @XXX@XXXX@X  _  6  ڀ0 XXLgt  0ThematerialityofthisinformationtoCarnegieisalsobeliedbythefactthatCarnegiehiredGoldsteinin  February,1999.CarnegiehiredGoldsteinwhilehewasemployedwithGrantThorntonandafterhehad  performedsubstantialworkonCarnegiesaccount.AtthetimeCarnegiehiredGoldstein,hewasthe U AuditPartnerforCarnegie.Ifhisconductwasunsatisfactory,Carnegiewould,presumably,havehired d someoneelsetoserveinthesignificantpositionofCFOatCarnegie.#0  Lgt##XX 0#LX=XXXLgt XLX=  <s$..      @XXX@XXXX@XXXX  11    _L=XXLgt XL=ԀPearlwasCarnegiesSecretary.PriortobecomingemployedbyCarnegieasitsSecretary,Pearl  practicedlawwithRichardGershberginthefirmofGershbergandPearl.GershbergandPearlservedas o Carnegie'sGeneralCounsel.AfterPearlterminatedhisassociationwithGershbergeffective .~ June30,1996,Gershberg'sfirm,GershbergandAssociates,servedasCarnegie'sGeneralCounselfrom = September1996untilapproximatelyDecember1999.ThetypesofservicesprovidedbyGershbergand  PearlandGershbergandAssociatestoCarnegieincluded:thehandlingofmosttransactions;the k preparationoflettersofintent;thepreparationofduediligencechecklists;andthepreparationofdefinitive * z agreements.Gershberg'sprincipalcontactsatCarnegiewereGableasitsCEO,FarkasasitsPresident  9 andPearlasitsSecretary.GableandFarkasdelegatedtoPearlseveralfunctionsrelatingtotheconduct   ofCarnegie'sbusiness.Pearl'sactivitieswereauthorizedby,andconductedforthebenefitof,Carnegie. g   AllsuchactivitieswereconductedwithinthescopeofPearl'semploymentoragencyforCarnegie.#L=X LgtB#L^2 !\XL=#L=X!\L^2 ##XXL=##  >!..      @XXX@XXXX@X  _  7  ڀLX=XXXԀ#XXXLX=#LX=XXXLgt XLX=Althoughthe#0  Lgt5#Lgt  0SEC#0  Lgt#Lgt  0Ԁcommentedontheindependencequestion,itdroppedthatlineofinquiry.More  important,however,isthetiming.TheSECdidnotmakethiscommentuntilitscorrespondencedated  May27,1999,whichwasamonthafterthetradinghalt.#LX=X LgtT# U U:XX(X  `PalatinoXLX=U",d 0 XX! 0 X  !,/,!"  ݀L,3V,,!,/ԀLgt ,L,3V6 4heading 2   X /%4 4 <DL/ XXXCA $VerdanaC    2( 4 <DL2 XXXS\  `&Times New RomanS   (2s$ >!..      @XKXX@XXKXX@XK  KXXXK  0  #|x($..      @X3XX@XX3XX@X3HP LaserJet 4050 Series PS0(9 Z6Times New Roman Regular $Verdana2 3#37=CIQYag1.a.i.(1)(a)(i)1)a)Fi)G2?U,  AZArial   X  F <s$..      @XXX@XXXX@XXXX  10    _Ԁ0 XLgt  0TheMarylandcourtshavenotconsistentlycitedthedoctrineofinparidelicto,buttheyhaveappliedthe  Ѐprinciple.#0  LgtD##X 0%#(/CEMU]emu}AutoList6(i)(i)(i)(i)(i)(i)(i)(i)<\l:documentbodyCA $VerdanaCXXXS\  `&Times New RomanS,cAZArial (9 Z(Times New Roman %2A`Arial)Hairline d(3<$ >!..      @XKXX@XXKXX@XK  (5hCEKQW]cioAutoList1I.I.I.I.I.I.I.I.(3<$ >!..      @XKXX@XXKXX@XK  O(i)(EhCEKQW]cioAutoList2I.I.I.I.I.I.I.I.-zAZ"Arial RegularVI.(;3$2#  0  .3  0  (O;$0  2#  a  .3  0` (#(#YI.(UfCEKQW]cioAutoList3I.I.I.I.I.I.I.I._I.(ehCEKQW]cioAutoList4I.I.I.I.I.I.I.I.aI.(b$0  0` (#(#2#   .3  0 ` (#` (#(xir$0  0` (#(#0 ` (#` (#2#(  0  )3  0 (# (# ^ <s$..      @XXX@XXXX@XXXX  2    _L=XXLuXL=Lgt LuԀAttrialandagaininitsproposedfindingsoffactandconclusionsoflaw,CarnegiedisparagesDr.Cone  withafootnoteinthecaseofBlueBonnetSavingsBankv.UnitedStates,47Fed.C.156,176n.95(Fed. o Cl.2000).ThisCourtthinksnolessofConebecauseofthatfootnote.Conewasknowledgeable, .~ prepared,forthright,andmostimportantly,credibleinthistrial.#Lu Lgt`#($0  0` (#(#0 ` (#` (#0 (# (#2#(  a  )3  0h(#(#  <s$..      @XXX@XXXX@XXXX  5    _0 XԀQgt  0AlthoughGoldman,whohadlittleSECexperience,laterbecameAuditPartner,thiswasnotamatter  knowntoGrantThornton,norcouldithavebeenknowntoGrantThorntonatthetimeofengagement. p GoldmandidnotbecomeAuditPartneruntilCarnegiehiredGoldsteininFebruary,1999.Accordingly,the / representationthatCarnegiewouldbeassignedanAuditPartnerwithSECexperiencewasnotfalsewhen > made.#Q=X Qgt"##XXQ=B#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#2#(   )3  0h(#h(#($0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#2#  0  )3  0(#(#({$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#2#  a  )3  0p(#(#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#0p(#(#2#     )3  0p(#p(# \]cdgijkxGaeimquy}Bullet ListBullets List(CEMU]emu}AutoList5(i)(i)(i)(i)(i)(i)(i)(i)  <s$..      @XXX@XXXX@XXXX  8    _L=XXLgt XL=Atthistime,(midJuly,1999)communicationsbetweenCarnegieandGrantThorntonwerelimited  becauseCarnegiehadhiredalawfirmtorepresentitrelatingtoanyclaimsitmighthaveagainstGrant o Thornton.#0  Lgt"##X 0A#  <s$..      @XXX@XXXX@XXXX  9    _ԀL=XXLgt XL=Gableand_Farkas_Ԁknewthatfederalsecuritieslaws,andtherulesandregulationsoftheSEC,imposed  additionalobligationsonCarnegiesmanagementtoensurethatinformationthatwasdisseminatedtothe  investingpublicwasaccurate,complete,andnotmisleading.#0  Lgt###X 0B#  X   X   <s$..      @XXX@XXXX@XXXX  4    _ԀL=XXLgt XL=Asusedherein,theterm TillerEntitiesisinclusiveofTillerInternationalandTillerHoldings.  <s$..      @XXX@XXXX@XXXX  12    _ԀQ=XXQgt XQ=TheCourtalsoheldthatany#Q=X QgtC#Qgt XQ=negligent#Q=X Qgt#Qgt XQ=Ԁconductbytheaccountantscouldnotbetheproximatecauseof  anydamagetothecompanyinlightofthefraudulentandnegligentactsofitsofficers.#0  Qgt$##X 0# >!..      @XXX@XXXX@X  _XLX=XXX8@@XXdd87_M/VL& %XLX=v/Vw/VCARNEGIEINTERNATIONAL#&B%%L& #L& %%&B@**  INTHE#&B%%L& #L& %%&B  CORPORATION,etal#&B%%L& L#L& %%&B  @**0  CIRCUITCOURT#&B%%L& #L& %%&BV(#(#   Plaintiffs#&B%%L& 9#L& %%&B )y @**0  FOR#&B%%L& #L& %%&BL(#(# vs.  @**0  BALTIMORECITY#&B%%L& *#L& %%&B (#(# GRANTTHORNTON,_LLP_,etal#&B%%L& #L& %%&B u   @**0  H (#(#   Defendants#&B%%L& l#L& %%&B0 0 (# (#0h(#(#0h(#h(#0(#(#CASENO.:24C00002639#&B%%L& #L& %%&B k (#(# @**  >  0   (#(# @&&@@*********************#&B%%L& #L& %%&BԈ #&B%%L& #      @4  @  @ 0 @< L& %%&B#LX=X%L& j#L_XLX=MEMORANDUM#LX=XL_ # L& %XLX= g   _(Uf83F "\3"  \3! 2Uf  I  .3  0    PROCEDURALFACTS \3! Q ݌i (#(# Ќ    OnMay23,2000,plaintiffs,CarnegieInternationalCorporation( Carnegie),E.David  Gable,andLowell#LX=X%L& W #L& %XLX=_Farkas_,broughtthisactionagainstdefendants,GrantThornton,_LLP_,and e ArthurE._Flach_.#&B%%L& #L& %%&BԀAllthreeplaintiffsallegethefollowingclaimsagainstGrantThornton:#&B%%L& #L& %%&BԀfraudand  [ deceit;interferencewithbusinessrelations;fraudulentinducement;negligence/malpractice;and  breachofcontract.Allthreeplaintiffsallegenegligence/malpracticeagainst_Flach_.#&B%%L& i #L& %%&BPlaintiff W Carnegie#LX=X%L& #L& %XLX=Ԁallegesbreachoftrustandexcessivefeesagainstbothdefendants.PlaintiffsGable M and_Farkas_Ԁallegedefamationagainstbothdefendants.5 0  1          Onmotionofbothdefendants,thisCourtdismissedthefollowingclaimsonOctober2, I  2001:(1)Gablesand_Farkas_claimsforfraudanddeceit,interferencewithbusinessrelations#&B%%L& #L& %%&B,  ?" fraudulentinducement#&B%%L& #L& %%&B,andnegligence/malpractice#&B%%L& #L& %%&B;(2)allclaimsforbreachofcontract;and(3) "$ allplaintiffsrequestsforpunitivedamagesastoclaimsoffraudulentinducement,excessive ;$& fees,andnegligence/malpractice#&B%%L& O#L& %%&B. %1!(   AbenchtrialbeganonNovember5,2001.OnNovember8,2001,plaintiffraised,in '"* opencourt,adiscoveryissuerelatingtothenonproductionofcertainauditworkpapers.This -)}$, Courtsuspendedtrialand,followingbriefing,byorderdatedJanuary11,2002,appointedJuliet *#&. w/V wXX w  A._Eurich_,Esq.asaSpecialMasterforpurposesofinvestigatingthecircumstancesrelatedto  theallegednonproductionofthesepapers.TheSpecialMasterheldanevidentiaryhearing V andfiledarecommendationonAugust12,2002.OnAugust20,2002,plaintiffsfiled L exceptionstotheSpecialMastersreportandrecommendation.Followingfurtherbriefing,this   CourtbyorderdatedFebruary14,2003#&B%%L& l#L& %%&B:(1)deniedeachofplaintiffsexceptions,exceptasto H  FindingsofFactNos.183and233;(2)acceptedtheSpecialMastersReportand  >  Recommendationsinallotherrespects;and(3)deniedplaintiffsmotionfordefaultjudgment   andrequestforalternativesanctions. :    The#&B%%L& u#L& %%&BcaseresumedtrialonoraboutMarch3,2003andcontinuedthroughApril4,2003. 0  Subsequently,testimonywaspresentedbydepositions.TheCourthasconsideredthe  depositiontestimonyofthefollowingwitnesses:Stuart_Agranoff_,Arthur_Flach_,MortGoldman, ,| Joseph_Graziano_,Gary_Illiano_,Stanley_Krosin_,CraigMiller,_Hillel_Ԁ_Moerman_,Edward_Nusbaum_, " ThomasRafter,Edward_Raskin_,Steven_Corso_,Perry_Peregoy_,_J.W._ԀStarr, _Lashra_Ԁ_Caruthers_, x Scott_Caruthers_,GaryA_Dahne_,AndrewM.Hermann,GeraldKirby,FredRudy,DavidPearl, n DonnaGableRuff,EDavidGable,Jr.,Lowell_Farkas_,Perry_Peregoy_,FrankT.Simpson,David  _Stinson_,JamesSheldonBlair,Joseph_Trammell_,FredRudy,andDaniel_Zardorozny_. j  F(#38_  Plaintiffsanddefendantsproposedfindingsoffactandconclusionsoflawwere#&B%%L& 1#L& %%&BԀfiledon `  June13,2003.  "   OnoraboutJuly1,2004thedefendantsfileda MotiontoSupplementtheRecord.It \"$ willbedenied#&B%%L& ^ #L& %%&B.#&B%%L& n!#L& %%&B $R&   II.0  FINDINGSOFFACTBACKGROUND N'"*(#(#    CarnegieisaColoradocorporationthatmaintainsitscorporateofficeinMaryland. (D$, #&B%%L& !#Z& %%&BCarnegieInternationalCorporationcameintoexistence,bythatnameonMay22,1996when *%. A&WCorporation(A&WCorporationwaspreviouslyknownas_Solenergy_ԀCorporation.) @,'0 changeditsname.#&B%%Z& ##L& %%&BԀA&WCorporation( A&W)hadbeenashellcorporationthatwasnot -6)2 v/V vXX v  engagedinanybusinessactivities.#&B%%L& [$#L& %%&B#LX=X%L& #L& %XLX=    OnSeptember12,1996,GablewaselectedasCarnegiesChiefExecutiveOfficer.On V May21,1997,GablewaselectedChairmanofCarnegiesboardofdirectors.Carnegiehired L _Farkas_ԀasitsPresidentinMay1997._Farkas_ԀwasalsoamemberofCarnegiesboardof   directorsfromSeptember2,1997.DavidPearlbecameCarnegiesSecretaryon#LX=X%L& %#L& %XLX=#&B%%L& h%#L& %%&BԀ H  September12,1996.PearlservedinthatcapacityuntilheresignedonJanuary21,1999.  >  Followinghisresignation,PearlperformedconsultingservicesforCarnegieandmaintainedan   officewithinCarnegiesoffices.#&B%%L& )(#L& %%&B#LX=X%L& '#L& %XLX= :    Gableand_Farkas_Ԁshareddualresponsibilityfordischargingthedutiesofachief 0  financialofficerforCarnegieuntilSeptember1998.FromSeptember1998untilFebruary1999,  RichardGreene,acertifiedpublicaccountant,servedasCarnegieschieffinancialofficer. ,| GreenealsoservedasCarnegiesSecretaryfollowingPearlsresignationinJanuary1999.#LX=X%L& )#L& %XLX=#&B%%L& )#L& %%&BԀOn " February15,1999,BennettGoldstein,acertifiedpublicaccountant,becameCarnegiesChief x FinancialOfficer( CFO).GoldsteinservedinthatcapacityuntilSeptember10,1999.Priorto n becomingCarnegiesCFO,GoldsteinwasapartnerintheBaltimoreofficeofGrantThornton.#LX=X%L& +#L& %XLX=#&B%%L& <,#L& %%&B    GrantThorntonisanIllinoislimitedliabilitypartnershipwithofficesthroughouttheUnited j States.GrantThorntonmaintainsanofficeinBaltimore,Maryland._Flach_ԀistheManaging `  PartnerofGrantThorntonsBaltimoreoffice.Stanley_Krosin_ԀwastheQualityAssurancePartner  " fortheBaltimoreoffice.#LX=X%L& -#L& %XLX=#&B%%L& '.#L& %%&B \"$   GrantThorntonhasaNationalOfficeofAssuranceServicesandRegionalDirectorsof $R& AssuranceServices.TheRegionalDirectorsprovideassistancetoGrantThorntonsoperating % ( officesby(_i_)consultingwiththepersonnelinthoseofficesonmattersrelatingtoaccounting, N'"* auditingandtherulesandregulationsofregulatoryagencies,suchastheSEC,and(ii)#LX=X%L& >0#L& %XLX=#&B%%L& 0#L& %%&B (D$, respondingtotechnicalinquiriespertainingtoclientengagements.GrantThorntonsBaltimore *%. officeisintheNortheastRegion.Joseph_Graziano_ԀwastheRegionalDirectorofAccounting @,'0 andAuditingServicesfortheNortheastRegionwhenGrantThorntonconductedtheauditof -6)2 M/V MXX M  CarnegiesDecember31,1997financialstatements.Gary_Illiano_ԀwastheRegionalDirectorof  AccountingandAuditingServicesfortheNortheastRegionduringtheperiodwhenGrant V ThorntonconductedreviewproceduresonCarnegiesForm10SBandtheauditofCarnegies L December31,1998financialstatements.#&B%%L& 2#L& %%&B#LX=X%L& 2#L& %XLX=     InMarch,1996,A&WenteredintoanExchangeAgreementwithaBritishVirgin H  Islandscorporation,_Grandname_ԀLimited.A&Wagreedtoexchangeitscommonstockforthe  >  stockofElectronicCardAcceptanceCorporation( _ECAC_),aVirginiacorporation,andDAR   ProductsCorporation( DARProducts),aMarylandcorporation.Thistransactionclosedon :  May3,1996making_ECAC_ԀandDARProductswhollyownedsubsidiariesofA&W.On 0  September10,1996,Carnegie,_Grandname_ԀLimited,_ECAC_ԀandDARProductsenteredintoa  SettlementAgreementwhereinthepartiesagreedtotheallocationofvarioussecurities, ,| includingsharesofCarnegiestock,amongtheownersof_ECAC_ԀandDARProductsand " _Grandname_ԀLimited. x    FortheyearendingDecember31,1996,Carnegiereportedanetlossof$709,347.#LX=X%L& 6#L& %XLX=#&B%%L& 6#L& %%&B n   OnApril16,1997,_ECAC_ԀsoldaportionofitsmerchantaccountstoFirstUSAMerchant  Services,Inc.( FirstUSA)forcashintheamountof$3,700,000.OnSeptember15,1997, j CarnegiesboardofdirectorsapprovedaplantospinoffDARProductstoCarnegies `  shareholders.ThespinoffwascompletedinOctober1997.Priortothespinoff,DAR  " Productsdidnotproduceanyrevenues.EffectiveinAugust1997,CarnegieacquiredaVictoria \"$ StationRestaurantinFlorida. $R&   OnSeptember29,1997,CarnegieacquiredthestockofProfitThruTelecommunications % ( (Europe)Limited( PTT),aUnitedKingdomcorporation,and_Talidan_ԀLimited( _Talidan_),a N'"* BritishVirginIslandscorporationinexchangeforCarnegiestock,optionsandwarrants.PTT (D$, wasasoftwarecompanythatwasengagedindevelopingaseriesofinteractivevoiceresponse *%. softwareproducts._Talidan_Ԁwasinthebusinessofprovidingadultentertainmentservices.#&B%%L& L<#L& %%&B#LX=X%L& <#L& %XLX=Ԁ @,'0   FortheyearendingDecember31,1997,CarnegiereportedinitsForm10SB,which -6)2 7_ 7X 7  wasfiledwiththeSecuritiesandExchangeCommission( SEC)onOctober28,1998,thatit  earnednetincomeof$1,579,835.TheresultsfromoperationsofCarnegiesthreeindustry V segmentswere:(_i_)financialservices(_ECAC_)!$3,123,989inincomebeforetaxes;(ii) L telecommunications(PTTand_Talidan_)!$65,567inincomebeforetaxes;and(iii)restaurant   (VictoriaStation)!$5,310inincomebeforetaxes. H    Butfor_ECAC_ssaleofthemerchantaccountstoFirstUSA,fortheyearending  >  December31,1997,Carnegiewouldhavereportedanetlossfromallofitsconsolidated   operations. :    During1998,Carnegiereportedthatitsoldandacquiredseveralbusinesses: 0   m\]cdgijkl(y3F0  0` (#(#  (_i_) ` Carnegiesoldthestockof_ECAC_Ԁ(Europe),Ltd.toAlpinaToursLLCon  January6,1998fora$250,000promissorynote;Y` (#` (#  O(/8ym\]cdgijkl! !  "\3"  \3PI2/(  ii  )3  0 `   Carnegiesoldthestockof_ECAC_ԀtoValuePartnersonJanuary30,1998\3PI}I݌O` (#` (# Ќ     ` forcashintheamountof$100,000; "   (iii) ` Carnegieacquired_ACC_ԀTelecom,aresellerofequipmentandbusiness x    ` telephonesystems,onFebruary1,1998; K 0  0` (#(#  (iv) ` Carnegiesoldaportionoftheassetsof_Talidan_Ԁknownasthe printmedia A businessto_Westshire_ԀTradingCompany,Inc.( _Westshire_),aBahamas  corporation,onJune22,1998fora$2,340,000promissorynote;` (#` (#  _(Uf88O! !  (v)0 ` CarnegieacquiredVoiceQuest,Inc.( VoiceQuest),adeveloperandprovider = ofspeechrecognitionandvoicemailtechnologyproducts,onNovember20, `  1998;#LX=X%L& A#L& %XLX=#&B%%L& A#L& %%&B3!` (#` (#   (vi)0 ` Carnegieacquired_RomNet_ԀSupportServices,Inc.( _RomNet_),anebusiness !# andtechnicalsupportservicescompanyonDecember1,1998;and\"$` (#` (#   (vii)0 ` Carnegiesoldsoftwareandtherightstodistributecertainsoftwareproductsto $R& TillerInternationalinRussia,onDecember8,1998,inexchangeforthe $% ' relinquishmentofcertainputoptionrights.% (` (#` (#   FortheyearendingDecember31,1998,Carnegiereportedthatitearnednetincomeof N'"* $2,660,927.Thisreportedincomeincludedgains,netofcosts,of$1,596,273onthesaleof (D$, _Talidan_sprintmediaassets;$1,391,881onthesaleof_ECAC_Ԁand_ECAC_Ԁ(Europe);and *%. $3,107,564onthesaleofthesoftwareanddistributionrights.Forthisyear,Carnegiereported @,'0 theresultsofoperationsofitsothersubsidiariesasfollows:(_i_)VictoriaStation!$134,150in -6)2 incomebeforetaxes;(ii)_ACC_Ԁ!$68,787inincomebeforetaxes;(iii)_RomNet_Ԁ!$16,501loss;  and(iv)VoiceQuest!$11,991loss.Withoutincludingthereportedgainsonthedispositionsof V thestockorassetsof_ECAC_,_ECAC_Ԁ(Europe),_Talidan_ԀandtheMAVISsoftwarerights,forthe L yearendingDecember31,1998,Carnegiewouldhavereportedanetlossfromconsolidated   operationsofseveralmilliondollars.Q#&B%%L& iO#L& %%&B#LX=X%L& 'O#L& %XLX= H    InDecember1997,CarnegieengagedGrantThorntontoauditCarnegies  >  December31,1997financialstatements.GrantThorntonperformedthefollowingservicesfor   Carnegie: :   n(88_"\3"    \3Y2(  i  )3  0 `   GrantThorntonauditedCarnegiesDecember31,1997financialstatements.As 0  partofthisengagement,GrantThorntonalsoauditedCarnegiesDecember31,  1996financialstatements.GrantThorntonissuedanunqualifiedopinionstating  thatCarnegiesDecember31,1997and1996financialstatementspresented Y fairly,inallmaterialrespects,theconsolidatedfinancialposition,consolidated ,| resultsofoperations,andcashflowsofCarnegieanditssubsidiariesforthose O periodsinconformitywithGenerallyAcceptedAccountingPrinciples( _GAAP_). @N" \3YY݌"` (#` (# Ќ  "\3"    \3W]2(  ii  )3  0 `   GrantThorntonperformedreviewproceduresonCarnegiesForm10SB,which x CarnegiefiledwiththeSEConOctober28,1998.TheForm10SBattached K CarnegiesDecember31,1997and1996financialstatements,whichGrant n Thorntonaudited,andfinancialstatementsforthesixmonthperiodending A June30,1998,whichwerenotauditedbyGrantThornton.#&B%%L& W#L& %%&B#LX=X%L& W#L& %XLX=\3W]]݌` (#` (# Ќ  0  "\3"  \3u`2(  iii  )3  0` (#(#  GrantThorntonassistedCarnegieinrespondingtocommentsmadebytheSEC j staffonCarnegiesForm10SB,Form10SB/AandForm10_KSB_.\3u``݌=` (#` (# Ќ  "\3"    \3 b2(  iv  )3  0 `   GrantThorntonperformedreviewproceduresonCarnegiesForm10SB/A, 3! whichCarnegiefiledwiththeSEConFebruary12,1999.TheForm10SB/A  " attachedCarnegiesDecember31,1997and1996financialstatements,which !# GrantThorntonaudited,andfinancialstatementsfortheninemonthperiod \"$ endingSeptember30,1998,whichwerenotauditedbyGrantThornton.\3 bBb݌/#%` (#` (# Ќ  "\3"    \3d2(  v  )3  0 `   GrantThorntonauditedCarnegiesDecember31,1998financialstatements. $% ' GrantThorntonissuedanunqualifiedopinionstatingthatCarnegiesDecember % ( 31,1998financialstatementspresentedfairly,inallmaterialrespects,the {&!) consolidatedfinancialposition,consolidatedresultsofoperations,andcashflows N'"* ofCarnegieanditssubsidiariesforthatperiodinconformitywith_GAAP_. !(q#+ CarnegiesDecember31,1998financialstatementsandCarnegiesDecember (D$, 31,1997financialstatements(restated)wereattachedtoitsForm10_KSB_,which )%- wasfiledwiththeSEConApril27,1999.\3dd݌*%.` (#` (# Ќ  Y  CarnegieterminatedGrantThorntononSeptember23,1999.#&B%%L& _#L& %%&B#LX=X%L& `#L& %XLX= -c(1   AdditionalandmoredetailedfindingsoffactarepresentedthroughouttheCourts  discussion.#&B%%L& i# V  a(eh88n! ! "\3"         \3j2eh  III  .3  0    L& %%&BDAMAGES\3jDk݌ (#(# Ќ    A.CarnegieFailedtoProveCompensatoryDamages  J    Carnegieallegesthat Grantmadenumerousandseriousauditerrorsinits1997and  @  1998Carnegieaudits,failedtofollowtheGenerallyAcceptedAccountingPrinciples("_GAAP_")#&B%%L& k#L& %%&B   andGenerallyAcceptedAuditingStandards#&B%%L& m#L& %%&B( _GAAS_),causedCarnegietofilerestatedfinancial <  statements,andcausedthetradingofCarnegiestockontheAmericanStockExchangetobe 2  halted.ThisinturncausedthevalueofCarnegiestocktoplummet,causedCarnegietolose  profitsandopportunitiesfrompendingbusinessdeals,andcausedmillionsofdollarsofdamage .~ toCarnegie.PlaintiffsProposedFindingsofFact&ConclusionsofLaw( PlaintiffsProposed $ Findings)atp3.AssumingthetruthofCarnegiesassertionsofGrantThorntonsfailings, z Carnegiesclaimsfailforlackofproofofcausationandlostprofitsandopportunities.  p *!&%%L&   L& %%!&*Tq  󀀀UnderMarylandlaw,aplaintiffbearstheburdenofprovingitsdamageswithreasonable  certainty.SeeRoebuckv._Steuart_,76Md.App.298,314,(1998)(citationsomitted).Damages l whicharebasedonconjecture,orareuncertain,contingent,orspeculative,cannotserveasa b  basisforrecovery.See,e.g.,_Asibem_ԀAssoc.v.Rill,264Md.272,27681(1972)("[_I]f_  " compensatorydamagesaretoberecovered,theymustbeprovedwithreasonablecertainty, ^"$ andmaynotbebasedonspeculationorconjecture.")(citationsomitted). Itisthegeneralrule $T& thatonemayrecoveronlythosedamagesthatareaffirmativelyprovedwithreasonable % ( certaintytohaveresultedasthenatural,proximate,anddirecteffectofaninjury.Empire P'"* RealtyCo.Inc.v._Fleisher_,269Md.278,284(1973)(citationsomitted).#&B%%L& n##XX%&B[i#&B%XXԀ*Tqq݌ (F$, ЌL& %%&B  QL:& %(X  `Palatino%L& Q8  Marylandcases...areallconsistentinrejectingthepropositionthatthejury *%. mayformajudgmentorconclusiononthebasisoftestimonywhichadmitsof q+&/ merepossibilitiesandhavestatedinvariouscasesthatthetesttobeapplied, D,'0 whetherthequestioninvolvedistheexistenceofaninjuryoritscause,is -g(1 reasonableprobabilityorreasonablecertainty.Thus,evidenceofprospective -:)2 damagesmustbeintermsofthecertainorprobableandnotofthepossible.In  thelaw,asistrueincommonusage,probabilityexistswhenthereismore  evidenceinfavorofapropositionthanagainstit;merepossibilityexistswhen V evidenceisanythingless.)y   UL:& %(X  `Palatino%L& /wUwQL:& %(X  `Palatino%L& QDavidsonv.Miller,276Md.54,62(1975)(citationsomitted).#L& %%L& l{#  QL:& %(X  `Palatino%L& Q  Carnegiearguesthatlostprofits,measuredbythe relaxedstandardsetforthinthe u  contractcaseofM&RContractors&Builders,Inc.v.Michael,215Md.340(1958),arethe  k  propermeasureofdamagesforGrantThorntonsactions.M&RContractors,anaction    addressinglostprofitsinsalescontracts,isinapplicabletothefactsofthiscase.However, g  evenifthisCourtweretoacceptthestandardadvancedbyCarnegie,includingtherelaxed  ]  standardpermitting theextentortheamount[ofdamageto]belefttoreasonableinference,  Carnegiewouldnothavemetitsburdentoprovedamagesastoanyoftheclaimstried. Y *!&%%L&   L& %%!&*    Carnegiecalledtwoexpertstotestifyondamages.Dr.MarciaKramerMyeraddressed O causation.Sheopinedthat1)benefitsinuretocompanieslistedonthevariousstock  exchangesand2)_delisting_Ԁcausesadeclineinacompanysstockprice.Shedidnotofferany K opinionastothemeasureofthesedamagesinCarnegiescase.**݌ A ЌL& %%L&   *!&%%L&   L& %%!&*o    CarnegiereliedalmostexclusivelyontheopiniontestimonyofexpertDr.DavidI._Tabak_,  Ph.D._Tabak_ԀprofferedtwomethodologiesforquantifyingCarnegie'sallegeddamages.The = firstmethodologywasanefforttoquantifytheprofitsclaimedtohavebeenlostinthefailed 3! expansionofCarnegiesbusiness(NegotiationsensuedbetweenElectronicDataSystems,Inc. !# ( EDS)andParamountInternationalTelecommunications,Inc.( Paramount)priortothe /#% tradinghalt.)andofCarnegieslossofexistingbusiness._Tabak_Ԁopinedthatdamagesunder $% ' thisfirstmethodofcalculationwere$123,610,759and$21,924,374,respectively,foratotalof {&!) $145,535,133.ThesecondmethodologypurportedtomeasureCarnegieslostmarket !(q#+ capitalizationasaresultofthetradinghalt._Tabak_Ԁopinedthatdamagesunderthissecond )%- methodofcalculationwere$446,603,758.UL:& %(X  `Palatino%L& 9|U*oڂ݌ m+&/ ЌL& %%L&    0   (#(#  -6)2   1.CarnegieFailedToProveItSufferedTheLossOfAnyExpansionOpportunity   *!&%%L&   *6  L& %%!&  _Tabak_'sopinionastothelossofexpansionofCarnegiesbusinessunderthefirst V methodologyiscontingentuponfactualdeterminationsthat1)Paramountwouldhaveentered L intoatransactionwithEDStoplacebroadbandinternetaccessintohotelrooms,butforthe   tradinghaltand2)thesuccessofthetransactionwouldhavemirroredtheprojectionsmadeby H  EDS.Neitherofthesenecessarypredicatesweresupportedbycredibleevidence.#!&%%L& #*6݌  >  ЌL& %%!&  *!&%%L&   *  L& %%!&  NocontractbetweenParamountandEDSwaseverexecuted.Thecredibleevidenceon   thispointwasfromDaniel_Zadorozny_,attorneyforEDS,andtheindividualresponsiblefor :  draftingthecontractfortheproposedtransaction.Hetestified,andtheCourtfinds,thatEric 0  Nelsonneversupplied_Zadorozny_Ԁwithcrucialtermsforthecontract,includingpricingtermsand  adescriptionofservicestobeprovidedbyeachoftheparties.TheCourtalsofindsthatbyJuly ,| 1999,anyconceptofprofitsharingbetweenEDSandParamounthadbeeneliminatedfromthe " proposedtransaction.Asofthattime,EDSwasagreeingonlytosellservicestoParamount. x TheCourtfindsthatNelsonneverattemptedtoobtaintherequiredapprovalsfromEDSfora n jointventurearrangement.#!&%%L& #*ь݌  ЌL& %%!&  QL:& %(X  `Palatino%L& Q  ThetestimonytothecontrarywasnotcredibleandcameprincipallyfromNelsonwho j hadnoauthoritytobindEDS.NoonewithauthoritytobindEDStestifiedthattherehadbeen `  anagreementbetweenParamountandEDS.Carnegieproducedoneofseveraldrafts.The  " draftproducedcamefromNelsonshomeofficewherehestoreditafterhelefttheemployof \"$ EDS.NeitherthedraftnorNelsonstestimonyconvincedthisCourtthattheoperativeterms $R& hadbeenagreedupon.Therewasnosuchdealandnobasistocomputedamagesonthe % ( negotiationswhichmay,ormaynot,haveultimatelyresultedinacontract. N'"*   _Tabak_ssecondpremiseforthisdamagecalculation(lossofexpansionofbusiness)also (D$, failsforlackofafactualfoundation.Therewasnocredibleevidencethatthesuccessofthe *%. proposedtransactionbetweenEDSandParamountwouldhavemirroredtheprojectionsmade @,'0 byEDS._Tabak_sopinionwasnotpremisedonanysignificantresearchintothebroadband -6)2 hotelmarketandhedidnotverifytheaccuracyoftheprojectionsuponwhichhebasedhis  calculations._Tabak_ԀreliedontheprojectionsmadebyDavidMoodyandNelsonofParamount V andEDS,neitherofwhomconvincinglydescribedthebasisfortheseprojections.Those L projectionswereshowntobeunrealisticbycredibleevidenceestablishingthat_Tabak_s   projectionofprofitsforthissingleproposedventureexceededthosefortheentireindustryin H  2000and2001.  >  ܑ  GrantThornton'sdamagesexpert,Dr.KennethCone,madeastudyofthebroadband   hotelmarketandtestifiedconvincingly.Basedonhistestimonyandthatofothers,theCourt :  acceptstheopinionthatthehighspeedinternetaccessbusinesswasanewanduntried 0  businessventureatthetime.Thebusinessmodeloftheproposedventurewasunrealisticand,  ifimplemented,wouldnothavebeensuccessful._Tabak_'sprojectionsextendedintothe ,| indefinitefutureandthereisnoevidencetosupportanindefinitetermagreement.Accordingly, " theCourtfindsthatCarnegies/_Tabak_'sfirstmethodofcalculatingdamages,basedonthe x proposedtransactionbetweenParamountandEDS,lacksasufficientbasisinfact,andistoo n speculativeanduncertaintopermitanawardofdamages.    Theremainingportionof_Tabak_'sfirstmethodforcalculatingdamagesisvariouslystated j bythepartiesasinvolvingapurportedreductioninCarnegie'sfuturecashflows(Grant `  Thornton),andalossofongoingprofits(Carnegie).  "   _Tabak_scalculationofdamagesusingthismethodologyisflawedand,therefore,not \"$ accepted._Tabak_Ԁfocusedonaperiodoftime,longafterthetradinghalt,thatproducedthe $R& highestpossibledamagefigure.If_Tabak_Ԁhadchosentocomparetheperiodpriortothetrading % ( haltwiththeperiodafterthetradinghalt,thecalculationofdamageswouldhavebeennearly N'"* zero.Moreover,thetimeperiodusedinthismethodofanalysisdifferedfromthetimeperiod (D$, _Tabak_Ԁusedinhismarketanalysis(whichusedthestockpriceonthedateofthetradinghalt). *%.   NearlyalloftheeffectsonCarnegie'scashflowsfoundby_Tabak_Ԁcanbeexplainedby @,'0 thedropinParamount'sbusinessfrom1999to2000.Thatdropresultedfromanincreasein -6)2 theuseofcellphonesbyhotelcustomersandnotfromanythinghavingtodowiththetrading  halt._Tabak_scalculationwasalsoflawedbecausehemadenoattempttodisentangleother V negativenewsaboutCarnegieunrelatedtothetradinghaltfromthenegativenewsofthe L tradinghaltitself.Seeinfraat12.     Inshort,_Tabak_sopinionastothissecondmeasureofdamagesisunconvincing.The H  CourtdeclinestoaccepthisopinionthatCarnegiesuffered$21,924,374forlossofexisting  >  business.Thesedamageswerenotprovedtoareasonabledegreeofcertaintybecause   _Tabak_'sprojectionsaretoospeculative. :  h 0  2.CarnegieFailedtoProveLostMarketCapitalizationResultingfromtheTrading 0  Halt (#(#   _Tabak_'ssecondmethodofcalculatingdamageswasbasedonanallegeddeclinein Y Carnegie'smarketcapitalization.Thismethodassumed(_i_)thatthepriceatwhichCarnegie's O stocktradedontheAmericanStockExchange( AMEX)(onApril28,1999)wasanaccurate  reflectionofthemarket'sexpectationsofCarnegie'sfuturecashflows,and(ii)thatalossin K marketcapitalizationconstitutesharmtoacompanyratherthantothecompany'sshareholders. A Usingthistheory,_Tabak_ԀcalculatedadropinCarnegie'smarketcapitalizationof$446,603,758.    _Tabak_'ssecondmethodologyassumesthattheamountofthereductionofmarket = capitalizationisaharmtoCarnegie.Thecredibleevidence,however,fromthetestimonyof 3! KramerMayerandConewasthattheeffectsoftradingandliquidityareprimarilyabenefitto !# theshareholders.Carnegie,therefore,cannotrecoverforanysuchreduction. /#%   Additionally,thissecondmethodisflawedbecause_Tabak_Ԁfailedtotakeinto $% ' considerationmaterialinformationthatartificiallyinflatedthepriceofCarnegie'sstockpriorto {&!) thetradinghalt.HefailedtoadequatelyconsidertheeffectsofCarnegie'serroneous !(q#+ accountingforthe_ECAC_,_ECAC_Ԁ(Europe),_Westshire_,andRussiantransactions,andtheeffects )%- ofCarnegie'sfailuretodisclosethesevereproblemswith_Talidan_,eventuallyresultinginits m+&/ shutdown._Tabak_Ԁalsofailedtoconsider1)theeffectsofCarnegie'sfailuretodisclosethatit -c(1 wasnotprofitablein1998;2)theeffectsofCarnegie'sfailuretodisclosethatitsmajorsource  ofcashwasitsdealinginitsownstock;3)theeffectsofCarnegie'sfailuretodisclosethat V MAVISwasnotamarketableproduct;and4)theeffectsofCarnegie'sfailuretodisclosethat L VoiceQuestand_RomNet_Ԁwerenotsuccessful.   ɧ  Themarketsetsstockvaluebasedonexpectedfuturecashflows.Thesourcesof H  Carnegie'scashflowswerenotfromitsoperations.Thesourceswerefromsalesofitsown  >  stock.Suchacircumstancedoesnotcreateanyrealvalue,anditdoesnotsupportthe   market'sexpectationsoffuturecashflows.Accordingly,Coneopinedthatthestockprice_Tabak_ :  usedashisstartingpointtocalculatethelossofmarketcapitalizationdamagesdidnotreflect 0  Carnegie'sfundamentaleconomicvalueandwasnot,therefore,anappropriatestartingpointfor  thecalculationofdamages.Coneopinedfurtherthat1)thedropinCarnegiesstockprice,after ,| thetradinghalt,simplyeliminatedanartificialvaluationand2)thedropwasnotanaccurate " depictionofalossinmarketcapitalization.UL:& %(X  `Palatino%L& UQL:& %(X  `Palatino%L& QԀTheCourtacceptshisopinions.e 0  2      ׀UL:& %(X  `Palatino%L& XUQL:& %(X  `Palatino%L& Q x   Thereisnoreasonablebasisintherecorduponwhichtofind,asdid_Tabak_,that n Carnegiewouldhaveearnedover$100,000,000inthefutureorwouldhaveobtainedamarket  capitalizationofover$400,000,000. j   dFinally,_Tabak_Ԁneglectedinbothofhismethodologiestoconsiderthetrackrecordfor `  businessventuresCarnegieattempted.Carnegieshistorywasoneoffailure.Conedelineated  " thosefailures.First,DARProductswasoneofthetwocompaniesCarnegieinitiallyacquiredin \"$ approximatelyMay1996.NoproductscoveredbythepatentsownedbyDARProductswere $R& eversold,andCarnegieabandonedthislineofbusinesswhenitdecided,inSeptember1997, % ( tospinoffDARProductstoitsshareholders.Second,Carnegiesoldmostof_ECAC_Ԁinorabout N'"* May1996,withinayearofacquiringit,duetoitsdecliningprofitmarginsandincreased (D$, competition.Carnegiethensoldtheremainderofthisbusinessfor$100,000cashinJanuary  1998.Third,VictoriaStationessentiallybrokeevenfortwoyears,butultimatelywascloseddue V tolackofbusiness.Fourth,PTTneverproducedanyrevenues,anditsMAVISproductwas L nevercommerciallyviable.Fifth,_Talidan_Ԁinitiallyproducedsomerevenues.Byearly1999,   however,thebusinesswasexperiencingseveredifficulties,andafewmonthslaterCarnegie H  shutdown_Talidan_'soperationscompletely.Sixth,_ACC_ԀTelecom( _ACC_)andVoiceQuestwere  >  toutedashavingsynergywithMAVIS,buttheVoiceQuestproductwasdeterminedtobe   incompatiblewithMAVIS.By1999,Carnegiedescribedthe_ACC_Ԁdealas"disappointing." :  Seventh,_RomNet_Ԁwasnotprofitable. 0     Inaddition,Carnegieannouncedtransactionsthatwereunsuccessful,includingonewith : the_Alltel_ԀCorporation( _Alltel_)._Alltel_Ԁterminatedthecontract.Theannounceddistributionof  MAVISinRussian,ItalianandSwissdidnotresultinanysalesoftheproduct.The_BCT_/_Telus_ 6 dealwithParamount,whichCarnegiedeclaredashighlyprofitable,wasrejectedby_BCT_/_Telus_ , asnoteconomicallyviable.    Carnegie'sonlyprofitableyearofoperationswas1997whenCarnegieearned  $1,579,835innetincome.Absentthegainonthesaleofthemerchantaccountsof_ECAC_Ԁto 2 FirstUSA,however,whichwasaonetimetransaction,Carnegiewouldhavereporteda (  substantiallossin1997. ~!"   Conetooktheabovefactsintoaccountinexpressinghisopinionthat,assuming #$ Carnegiecouldproveliability,Carnegiesufferednodamages.Coneopinedthatthevalueof .%~ & Carnegiewasinflatedbyoverlyoptimisticprojectionsandthedisseminationofincorrect &$"( informationregardingitsrevenuesandproducts.Oncethemisinformationwasfullydisclosed, z(#* themarketvalueofCarnegiesstockfelltoitsproperlevel.Carnegie'sstockpricefellbecause  *p%,  thetruthaboutCarnegie'sbusiness(andthetruesourceofrevenues)wasdisclosed.The +'. CourtacceptstheopinionofCone.Undersuchcircumstance,thereisnobasistocalculateany  damagesresultingfromthetradinghaltortheactivitiesofGrantThornton. V    Carnegiefailedtoprovetoareasonabledegreeofcertaintythatitsufferedany ` damages.CarnegiefailedtopresentsufficientevidenceuponwhichtheCourtcouldbaseany  V awardofdamagesagainstGrantThornton.Carnegie'sclaimeddamagesarebasedon   conjectureandareuncertain,arecontingentoraretoospeculativetoserveasabasisfor R   recoveryunderanyoftheclaimsbroughtagainstGrantThornton. H     B.CarnegieCannotRecoverPunitiveDamages  R    Carnegieseekspunitivedamagesforitsclaimsforfraud,breachoftrustand_tortious_  \ interferencewithitscontract. Lgt %L& ! Lgt    ^ran!&%,!L& %J!&   4 0  3      ׀    Marylandlawprovidesforanawardofpunitivedamagesonlyifthereisanawardof   compensatorydamagesandtheplaintiffestablishes,byclearandconvincingevidence,thatthe b defendantactedwith"actualmalice."PhillipMorrisInc.v._Angeletti_,358Md.689,773(2000); X Alexander&AlexanderInc.,336Md.635,64952(1994);_Caldor_Ԁv.Bowden,330Md.632,661  (1993).Carnegiefailedtoproveeitheroftheprerequisitesforapunitivedamageaward. T   First,assetforthabove,Carnegiehasfailedtoproveentitlementtocompensatory J damages.Second,thereisnocredibleevidencethatGrantThorntonactedwithactualmalice.    "Actualmalice"requiresthatthedefendantactwithanevilmotive,anintenttoinjure,illwillor F"" fraud.See_Ellerin_Ԁv.Fairfax_Sav_.,_F.S.B._,337Md.216,234(1995). #<$   CarnegieinvitesthisCourttofindan inferenceofGrantsactualmalicein1)thealleged %F!& egregiouslyfraudulentmisrepresentationsofitspersonnelspubliccompanyauditingand '"( SecuritiesandExchangeCommission( SEC)regulatorycomplianceexpertisebeforeinception B)$* oftheCarnegieengagement;2)theallegedsequentialactsofcoverupofitsnegligenceafter *8&, theApril30,1999stocktradinghalt;and3)GrantThorntonsallegedintentionalinterference  withthe_Westshire_Ԁnoterepaymentandrelatedbreachoftrust.PlaintiffsProposedFindingsat V 210. L   ThisCourtfindsthatGrantThorntondidnotmisrepresentitsexpertise,infraat3639,   didnotcoverupanynegligence,infraat4344,didnotintentionallyinterferewiththe_Westshire_ H  noterepayment,infraat44,didnotcommitabreachoftrust,infraat3941,anddidnotengage  >  inanyother_tortious_Ԁorfraudulentconduct.Accordingly,thereisnobasistoconsideranaward   ofpunitivedamagetoCarnegie. :  "\3"  \32eh  IV  .3  0    GRANTTHORNTONWASNOTNEGLIGENT\3݌N(#(# Ќ    UnderMarylandlaw,aplaintiffassertingacauseofactioninnegligencemustprove,by   apreponderanceoftheevidence,that(_i_)thedefendantowedadutytotheplaintiffwhich b requiredconformancetoacertainstandard,(ii)thedefendantbreachedtheduty,(iii)theplaintiff X sufferedactualinjuryorloss,and(iv)thelossorinjuryproximatelyresultedfromthedefendant's  breachofduty._Shofer_Ԁv.StuartHackCo.,124Md.App.516,528(1999)(citingW.Page T _Keeton_Ԁetal.,_Prosser_Ԁand_Keeton_ԀontheLawofTorts,30,at16465(5thEd.1984); J Rosenblattv.Exxon,335Md.58,76(1994));SuburbanHosp._Assn_Ԁv._Mewhinney_,230Md.    480,48485(1963). F""    A.GrantThorntonCompliedWithApplicableStandardsofCare  P$$   Anindependentauditorhasadutytousethatdegreeofcareandskillthatareasonable, &"& competentindependentauditoractinginsimilarcircumstanceswoulduse.SeeRestatement d(#( (Second)ofTorts,299A("Unlessherepresentsthathehasgreaterorlessskillorknowledge,  *Z%*  onewhoundertakestorenderservicesinthepracticeofaprofessionortradeisrequiredto +', exercisetheskillandknowledgenormallypossessedbymembersofthatprofessionortradein  goodstandinginsimilarcommunities."). V    ThecredibleevidenceisthatGrantThorntonhelditselfouttopossesstheskilland ` knowledgenormallypossessedbymembersofitsprofessionandthatithadexperiencewiththe  V rulesandregulationsoftheSEC.Tocomplywithitsdutyinthiscase,GrantThorntonwasthus   obligatedtoperformitsworkforCarnegieinaccordancewith_GAAS_Ԁandwiththatdegreeofskill R   andcarethatareasonable,competentindependentauditor,familiarwiththerulesand H  regulationsoftheSEC,woulduseinsimilarcircumstances.   k   1.RussianTransaction      0 `  a.InitialAccounting /` (#` (#   Carnegieallegesthat Grantcommittedmyriad_GAAP_Ԁand_GAAS_Ԁviolations,most M importantofwhichwasitserroneousaccountingfortheputfeatureliabilityandproperrevenue C recognitionintheRussiantransaction.PlaintiffsProposedFindingsatp.144.Carnegie,  however,hasfailedtoprove,byapreponderanceoftheevidence,anybreachofdutyentitlingit ? torelief. 5   Carnegiereported$3,100,000onitsDecember31,1998auditedfinancialstatementsas ? againontheRussiantransaction.TheSECquestionedthatreporting,aswellasotheraspects   ofthosestatements.Carnegieclaimsthat theRussiantransaction,frombeginningtoend, ;"! shouldatalltimeshavebeenreportedasanequitytransaction,withnorevenuecapableof #1# beingrecognized.Grantknew,atleastasofNovember21,1998,thatthetransactionwas % % structuredtoeliminatetheputfeatureliability.PlaintiffsProposedFindingsatp.67.Carnegie -'}"' alsoclaimsthatthiserroneousreportingofrevenuewastheprimarycauseoftheSECs (#$) concerns,thereasonitsstafftelephonedthestaffoftheAMEXwithitsconcerns,andthe y*%+  ultimatecauseofthehaltinthetradingofCarnegiesstock. ,o'-  XOnSeptember29,1997,CarnegieacquiredPTTand_Talidan_.Itnegotiatedthe   transactionwithanoverseasentityknownasTillerHoldings.Asconsiderationforthe V acquisition,theownersofPTTand_Talidan_ԀandvariousentitiesaffiliatedwithTiller(collectively L  TillerEntities)receivedstock,options,andwarrantsfromCarnegie.x 0  4      ׀Thestockoptionscarried   bothaputandacalloption. H  Theputandcalloptionswererelated.AsthemarketpriceofCarnegiestockincreased, R   thenumberofsharesthatcouldbeacquiredbytheoptionholdersthroughexerciseofthecall H  optionsdecreased.Asthepricefell,thenumberofsharesthatcouldbeacquiredincreased.   Theholdersoftheoptionsinsteadcouldelecttoexerciseaputoptionthreeyearsfromthedate D  ofCarnegiesacquisitionofPTT.Thenumberofsharesthatwouldbeacquiredandthenput : backtoCarnegiealsowasdeterminedbyaformula.Thevalueofthesharesatthedatethe  putscouldbeexercised,however,wasalwaysequalto$5,000,000. 6 OntheadviceofGrantThornton,Carnegierecordedaliabilityfortheputs("PutOption @ Liability")onitsDecember31,1997financialstatements.Thisaccountingtreatmentwasproper 6 underapplicableaccountingprinciplesbecauseitwasprobablethattheputswouldbe  exercisedinsteadofthecalls.Thiswasprobablebecause,inexercisingthecalls,theoption 2 holderreceivedsharesofCarnegiestockthatwererestricted.Therefore,theeconomically (  logicalthingfortheoptionholderstodowaswaitandexercisealloftheputsandthenputthe ~!" sharesbacktoCarnegiefor$5,000,000.Ifthepersonswhoexercisedtheputswishedtoown $#t$ sharesofCarnegiestock,theycouldthenusethe$5,000,000topurchase"freetrading"shares $ & ofCarnegiestockatthatpointintime. p&!( OnApril27,1998,Goldstein,whileapartneratGrantThornton,draftedamemorandum z(#* totheauditfilethatexplainedthebasisforthePutOptionLiabilityandtheamountatwhichthat  *p%, liabilitywascarriedonCarnegie'sbooks.Basedonthediscountedvalueoftheliability,thePut +'. OptionLiabilitywas$3,756,574asofDecember31,1997.GoldsteinalsodiscussedthePut  OptionLiabilityissuewithGable,_Farkas_ԀandPearl,allofwhomagreedthatitwasmorelikely V theputswouldbeexercisedthanthecalls.Thus,GrantThorntonsadviceregardingCarnegie's L treatmentoftheputoptionasaliabilitywasproperunder_GAAP_.   InOctober1998,GablemetwithAnthony_Georgiou_ԀoftheTillerEntitiestodiscussa   restructuringoftheshares,optionandwarrantsthathadbeenissuedtovariousentities R   affiliatedwithTilleraspartoftheconsiderationpaidbyCarnegietoacquirePTTandTalidanin H  September1997.   Asaresultofthesediscussions,GableandGeorgiouagreedtoatransactionwhereby:   (i)CarnegiewouldfindathirdpartytopurchasemostoftheTillerEntities'shares,optionsand N warrantsfor$2,500,000;and(ii)CarnegiewouldgrantTillertherightstodistributeMAVISin D RussiainexchangefortheTillerEntities'relinquishmentoftheirputoptionrights.Atthe  conclusionofthemeeting,Gablebelievedthathehadadealandthattherewasnodoubtthat @ Georgiouwouldarrangefortherelinquishmentoftheputoptionrights.Moreover,Gable 6 thoughtthatCarnegiewouldgetthePutOptionLiabilityextinguishedasaresultofthisdeal.  OnNovember20,1998,GableandFarkasinquiredofGoldstein,stillaGrantThornton  partneratthetime,aboutrevenuerecognitiononthedealGablehadfashionedwithGeorgiou, <   thatis,thesaletoTillerEntitiesoftherightstodistributeMAVISinRussiatobepaidforbyTiller !2" Entities,Carnegiestock,andtherelinquishmentoftheputoptionrights.Goldsteininformed #$ Gable,FarkasandPearlthat,ifthetransactioninvolvedanexchangeofCarnegiestockforthe .%~ & distributionrights,GAAPprohibitedrevenuerecognition. &$"( % 6 %6CarnegieandTillerEntitiesnegotiatedaHeadsofTerms,whichwasexecutedon (.$* November28,1998,settingforththetermsofthetwotransactions.Therewerenosubstantial *%, changestotheverbalagreementthatGablehadnegotiatedwithGeorgiouinOctober1998. *,z'. TheHeadsofTermsthusprovidedforthesaleoftheTillerEntities'stock,optionsandwarrants - )0 for$2,500,000andforthegrantbyCarnegietoTillerEntitiesoftherightstodistributeMAVISin  RussiafortherelinquishmentoftheputoptionrightsownedbytheTillerEntities.Theprimary V purposeoftheHeadsofTermswastoeliminateCarnegiesexisting$5,000,000putfeature L liability.   TheTillerEntitiesexecuteddocumentslaterinDecember1998surrenderingtheirput   optionrights.ThesedocumentsweredeliveredtoCarnegie.UL:& %(X  `Palatino%L& sUQL:& %(X  `Palatino%L& Q R   OnDecember9,1998,andagainonDecember10,1998,Carnegieissuedapress \  releaseannouncingthedealtodistributeMAVISinRussia,asthesaletoTillerEntitiesof1,000 R  copiesofMAVISsoftwareintheRussianandEnglishlanguages,forapriceof$3,700,000.   ThesepressreleasesdidnotmentionCarnegiestockasanypartoftheconsiderationforthe N deal. D ThisDistributionAgreementstatedthattheconsiderationreceivedbyCarnegieforthe N grantofthedistributionrightstoTillerEntitieswasthesurrenderoftheputoptionsthathada  facevalueatmaturityof$5,000,000.UL:& %(X  `Palatino%L& :UQL:& %(X  `Palatino%L& QThus,bythetermsoftheDistributorAgreement,Carnegie J hadeliminatedasubstantialliability(intheformofthePutOptionLiability)fromitsbalance @ sheetasofDecember8,1998.UL:& %(X  `Palatino%L& UQL:& %(X  `Palatino%L& Q  InaletterdatedFebruary12,1999,CarnegieinformedtheSECstaffoftheRussian    transaction.TheDistributorAgreement,datedasofDecember8,1998,betweenCarnegieand F"" TillerEntitieswasattachedasanexhibittoitsForm10SB/AfiledbyCarnegiewiththeSECon #<$ December8,1998. % & OnFebruary27,1999,Goldstein,astheCFOofCarnegie,forwardedacopyofthe '"( DistributorAgreementtoGrantThorntonalongwithamemoranduminwhichhestatedthat B)$* revenuerecognitionontheRussiantransactionwasappropriate.Shortlythereafter,inMarch, *8&, 1999thefieldworkbeganonthe1998audit.ItcontinuedthroughmidApril1999.CraigMiller, ,'. themanageronthe1998auditteam,reviewedtheDistributorAgreement,and,onMarch5, 4.)0 1999,hepreparedamemorandumdeterminingthatonemonthofrevenueshouldbe  recognizedontheRussiantransactionfor1998.#L& %%L& Z#ԀThismemorandumwassenttotheother V membersoftheauditteamandtoIllianoasRegionalDirectorofAccountingandAuditing L ServicesforGrantThornton.Millernotedinhismemorandumanumberofassumptionshehad   madeandseveralopenquestionshehadaboutthetransaction. H  OnMarch8,1999,MortonGoldman,GrantThornton'sauditengagementpartner,sent R   anemailtoGoldsteinraisingseveralissuesconcerningtheaccountingfortheRussian H  transaction.OnMarch9,1999,GoldsteinsentGrantThorntonamemorandumrespondingto   Goldman'squestionsandprovidingadditionalinformationaboutthetransaction.Inthe D  memorandum,GoldsteinrepresentedthatallaspectsoftheDistributorAgreementhadbeen : satisfiedbyCarnegieandthatrevenuerecognitiononthetransactionwasthereforeproper.He  alsostatedthataccountingforthetransactionwasgovernedbytheStatementofFinancial 6 AccountingStandards(SFAS)45. , UnderAccountingPracticeBulletin29,inaccountingforatransactionofthisnature,the 6 transactionisvaluedbydeterminingthevalueofwhatisgivenuporthevalueofwhatis  receivedbythecompany.Inthisinstance,thevalueofextinguishingtheputswasreadily 2 ascertainable,sothatvaluewasusedbyCarnegieandGrantThorntontodeterminethevalue (  oftheRussiantransactionandtheamountofrevenuetobereported. ~!" Inordertorecognizerevenue,however,theRussiantransactionhadtobefully #$ completedin1998,andCarnegiealsocouldnothaveanycontinuingobligationstoTiller .%~ & Entitiesinthefuture.AfterdiscussionswithGoldstein,asCFOofCarnegie,andareviewofthe &$"( relevantaccountingliterature,GrantThorntonpreliminarilyagreedthatCarnegie'saccounting z(#* fortheRussiantransactionwasreasonableandappropriateunderGAAP.AtthistimeGrant  *p%, ThorntonwasawareoftheDistributorAgreementitself,CarnegiespressreleasesinDecember, +'. 1998anditsFebruary,1999lettertotheSEC. l-(0 GrantThorntonreceivedrepeatedrepresentationsfromCarnegiethattheRussianand  EnglishlanguageversionsoftheMAVISsoftwarehadbeendeliveredtoTillerEntities.The V performanceofthisobligationwasaconditionprecedenttorevenuerecognitiononthe L transaction.Carnegiesrepresentationsinthisregardwerefalse.   OnApril8,1999,_Georgiou_Ԁfaxedto_Farkas_ԀacopyofanAmendedDistributor   Agreement._Georgiou_ԀacknowledgedinwritingthatTillerEntitieshadreceivedtheMAVIS R   softwareonDecember18,1998.ThecoversheetofthisApril8,1999fax,however,madeit H  clearthattheAmendedDistributorAgreementwassignedaroundApril8,1999andthat,asof   thatdate,nosoftwarehadbeendeliveredbyCarnegieorPTTtoTillerEntities.Althoughthe D  acknowledgmentofsoftwarereceiptwasgiventoGrantThornton,reviewedbyit,andrelied : uponbyit,thecoversheetofthisdocumentwasnotshowntoGrantThornton.Basedonthe  acknowledgment,andwithoutknowledgeofthecoversheet,GrantThorntonconcludedthat 6 revenuerecognitionontheRussiantransactionwasreasonable. ,  X   b.AccountingAfterDiscoveryofCallOptionExercises 󀀀 6   Duringthecourseoftheaudit,GrantThorntonreviewedthe1998stocktransactionsand  discoveredthattwentyfivepercent(25%)ofthecalloptionshadbeenexercisedinNovember 2 1998,priortothedateCarnegieclaimedthattheDistributorAgreementhadbeenexecuted. (    Carnegieallegesthatthisexerciseoftwentyfivepercent(25%)ofthecalloptions !2" changedtheprobabilityanalysisunderEmergingIssuesTaskForce(_EITF_)84-5.Itclaimsthe #$ PutOptionLiabilityshouldhavebeentreatedasanadditiontoequity.ItclaimsGrantThornton .%~ & failedtoproperlyaudittheRussiantransactionbecauseitdidnotreconsidertheaccounting &$"( treatmentofthePutOptionLiabilityunderEITF845orobtainsufficientcompetentaudit z(#* evidenceregardingthetransaction.  *p%,  X   Theeffectoftheholdersexercisingtwentyfivepercent(25%)ofthecalloptionswasto *,z'. eliminatetheabilityofthoseholderstoexercisetheassociatedputoptionrights.Thus,the - )0 amountoftheputsremainingasofthepurporteddateoftheDistributorAgreementwas  seventyfivepercent(75%)andtheassociatedliabilityforthoseremainingputoptionswas V seventyfivepercent(75%)ofthetotalPutOptionLiability.Asaresult,twentyfivepercent L (25%)ofthevalueofthePutOptionLiabilitywascreditedtoadditionalcapital/equity,theeffect   ofwhichwastoreducethediscountedamountofthePutOptionLiabilityto$3,100,000.This H  reducedamountwastheamountthatCarnegiereportedinitsDecember31,1998financial  >  statementsasagainontheRussiantransaction.   ЀOnMarch15,1999,Goldstein,asCFOofCarnegie,sentacopyofthestockoption :  agreement(fortheacquisitionofPTTand_Talidan_)toBrookeTucker,anappraiserwithAMEX. 0  GoldsteininformedTuckerthattwentyfivepercent(25%)ofthecalloptionshadbeenexercised  onNovember25,1998.OnMarch24,1999,GoldsteinsentamemorandumtoGoldman ,| reportingthatAmericanExpressopinedthatthevalueoftheputoptionswas$3,100,000.On " April22,1999,GrantThorntonreceivedacopyoftheappraisaldatedMarch29,1999from x AmericanExpress.Asexpected,theappraisalconcludedthatthevalueoftheseventyfive n percent(75%)oftheputsrelinquishedinexchangeforthesoftwareandthegrantoftherights  todistributeMAVISwas$3,100,000.Threemillion,onehundredthousanddollars($3,100,000) j wastheamountoftheremainingPutOptionLiabilityafterdeductingthevalueoftwentyfive `  percent(25%)oftheputsthathadbeenextinguishedwhentwentyfivepercent(25%)ofthecall  " optionshadbeenexercisedinNovember1998.ThedateforwhichAmericanExpress \"$ determinedtheappraisedvalueoftheremainingseventyfivepercent(75%)oftheputoptions $R& wasDecember8,1998,thedateontheDistributorAgreementandthedateCarnegie % ( representedasbeingthedatetheRussiantransactionwascompleted. N'"*   UnderGAAP,aftertheexerciseoftwentyfivepercent(25%)ofthecalloptions,Grant X)$, Thorntonwasnotrequiredtorevisitthequestionoftheprobabilityoftheremainingseventyfive *N&. percent(75%)oftheputsbeingexercisedbecausethenatureoftheoptionsalwaysmadeit ,'0 moreprobablethattheputoptionswouldbeexercisedthanwouldthecalloptions. J.)2 Additionally,theremainingputoptionrightsassociatedwiththeotherseventyfivepercent  (75%)oftheoptionshadbeensurrendered,eitherbyvirtueoftheHeadsofTermsorthe V DistributorAgreement,priortotheexerciseoftheremainingcalloptions.Thus,theexerciseof L twentyfivepercent(25%)ofthecalloptionshadnoeffectontheprobabilitythattheremaining   seventyfivepercent(75%)oftheputswouldbeexercised. H    TherecordationofthePutOptionLiabilitywasproperunderapplicableaccounting R   principles,includingunderEITF845.Theputoptionfeatureofthecalloptionswasan H  indebtednessthatwaslikelytocomedueinthefutureandthereforethePutOptionLiabilitywas   properlyrecordedintheDecember31,1997financialstatements.Carnegieofferednocredible D  evidence,includingnoopiniontestimony,tothecontrary. :   Lateintheaudit,GrantThorntonsHillelMoermandiscoveredthatalloftheremaining D seventyfivepercent(75%)ofthecalloptionshadbeenexercisedonDecember23,1998.  ThesecalloptionswereexercisedbyoronbehalfofTreasureBay,whichreceivedtheoptions @ byassignmentfromtheTillerEntities.Thefactthattheremainingseventyfivepercent(75%)of 6 thecallshadbeenexercisedonDecember23,1998,didnotaffecttheaccountingforthe  Russiantransaction.TheTillerEntitiesalreadyhadagreedtosurrendertheirputoptionrights 2 priortothatdate.AsCarnegierepresentedthefactstoGrantThornton,theaccountingforthe (  transactioncompliedwithGAAP.TheauditevidencereviewedbyGrantThornton,includingthe ~!" stockoptionsagreements,theDistributorAgreement,thememorandafromGoldstein,the $#t$ acknowledgmentofreceiptofthesoftwarebyTillerEntitiesintheAmendedDistributor $ & Agreement,theAmericanExpressappraisalandtherepresentationsbyCarnegies p&!( management,wassufficientforGrantThorntontoconcludethatrevenuerecognitiononthe (f#* RussiantransactionwasreasonableandappropriateunderGAAP. ) %,   Carnegiedidnotmeetitsburdentoprove,byapreponderanceoftheevidence,that +'. GrantThorntonbreachedthestandardofcareinauditingtheRussiantransaction. l-(0 _ _0  2.ValuationofRestrictedStock   (#(#   AttrialCarnegieassertedliabilitypremisedonotheraspectsofGrantThorntons   performancerelatedtothe1997and1998audits.TheCourtaddressesthoseotherissueshere.#LX=X%L& v#L& %XLX= `   OnSeptember29,1997,Carnegieacquiredtwocompanies,PTTand_Talidan_,bymeans j  ofastockexchangetransaction.Asaresultofthetransaction,theexcessvalueofthestock  ` usedforthepurchaseofPTTand_Talidan_ԀwasrequiredtoberecordedonCarnegiesbooksas    goodwill,anintangibleasset. \    OnMarch16,1998,Goldstein,thentheGrantThorntonpartnerassignedtothe1997 f  audit,reviewedworksheetsprovidedbyCarnegieandquestionedwhetherthefiguresusedby  \ Carnegieforintangibleassetswereovervalued.Goldsteintookthreeactions.Hesuggested  thatthevalueofthestockusedtoacquirePTTand_Talidan_Ԁneeded tobeadjusteddownwardto X accountforthefactthestockwasrestricted;herecommendedthatCarnegieobtainan N appraisal;andhesentCarnegiesmanagementamemorandumrecommendingthatthestock  beappraised.GoldsteinspecificallyinformedCarnegiesmanagementthatCarnegieneededto J makethevaluationandthatGrantThorntoncouldnotbeinvolvedintheprocess. @ 8  OnMarch18,1998,GoldsteindraftedanothermemoranduminformingCarnegies J managementofexistingstudiesonrestrictedsecuritieswhichdiscountedsuchstockbyarange    oftwentypercent(20%)toninetypercent(90%).Goldsteinperformedthisresearchinorderto F"" obtainindependentinformationregardingtheproperamountofdiscounts.Goldsteinalso #<$ spokewithPhillip_Matz_,acertifiedpublicaccountantandavaluationexpert,andrecommended % & toCarnegiethatithire_Matz_.GoldsteinwarnedCarnegiesmanagementthattheappraisal 8'"( couldbethesubjectofscrutinybytheSEC. (.$* ?  OnMarch19,1998,Gary_Dahne_,anemployeeofCarnegie,draftedamemorandum *8&, summarizinginformationhehadgatheredregardingdiscounts.Dahneconcludedthatthestock ,'. shouldbediscountedasmuchasseventyandsevententhspercent(70.7%)._Dahne_Ԁalso 4.)0 notedthat"[_l]arger_Ԁdiscountscanbeappliedforlargerquantitiesofstock..."_Dahne_Ԁsentthis  informationtoRichardGreene,acertifiedpublicaccountantwho,atthattime,provided V accountingconsultingservicestoCarnegie._Dahne_smemorandumwasforwardedby L CarnegiesGeneralCounselto_Talidan_'ssolicitorsinLondonfortheirreview.   C  OnMarch27,1998,CraigMillerofGrantThorntonnotedinamemorandumthatthe   stockhadbeendiscountedseventypercent(70%)byCarnegie'smanagement.Goldstein,still R   withGrantThorntonatthetime,discussedthediscountwith_Matz_ԀandMichaelEganof_Legg_ H  Mason.Inamemorandumtotheworkpapers,heconcludedthatmanagement'svaluationof   thestockappearedtobereasonable.InamemorandumdatedApril3,1998,Goldstein D  reportedthatCarnegie'smanagementagreedtodiscountsbetweeneightypercentandeighty : fivepercent(8085%)basedonitsdiscussionswith_Matz_.Goldsteinwastoldthat_Matz_Ԁwould  prepareaformalappraisal.Hedidnot. 6     GrantThorntondidnotdisputethereasonablenessofthatdiscount,butitdidnotrelyon @ anyappraisalindeterminingthattheamountofthediscountultimatelyadoptedbyCarnegie 6 (eightyfiveandsevententhspercent(85.7%))wasreasonable.GrantThorntonaffirmedthe  reasonablenessofthediscountbydoingacashflowanalysiswhichproducedasimilar 2 valuation. (    OnApril28,1998,GoldsteininformedCarnegie'smanagementthatKrosinofGrant !2" ThorntonsBaltimoreofficehadrequestedthatGrantThornton'sNewYorkofficereview #$ Carnegie'sDecember31,1997financialstatements.Theyweresoreviewedby_Graziano_,the .%~ & RegionalDirectorofAccountingandAuditingServices._Graziano_ԀrequestedthatCarnegie &$"( obtainaformalappraisaltosupportthevaluationofthestock.GoldsteinwrotetoCarnegies z(#* managementonMay1,1998,advisingitthatthe1997auditwascomplete,exceptforthe  *p%, appraisal. +'.   OnMay5,1998,Carnegiesentto_Matz_,Goldstein'ssuggestedlanguageandother - )0 supportforanappraisal.GoldsteinimmediatelyremindedCarnegiesmanagementthat  Carnegieneededtoobtainanappraisal._Matz_Ԁneverperformedanappraisal,butCarnegies V managementinformedGoldsteinthat_Matz_ԀagreedwithGoldstein.Goldsteinhaddoneno L appraisal.Rather,hehadagreedthatCarnegiesmanagementsdeterminationofthediscount,   asinformedby_Matz_,albeitwithoutaformalappraisal,wasreasonable. H  F  OnMay7,1998,CarnegieobtainedanotherappraisalfromJoseph_Luongo_Ԁwho R   concludedthatadiscountofeightyfivepercent(85%)wasproper.GrantThorntonreviewed H  _Luongo_scredentialsandatthistimeGrantThorntonandCarnegiebothbelievedthatCarnegie   hadproperlydeterminedtheamountofthediscount.Theeightfivepercent(85%)discountwas D  usedinpreparingCarnegiesDecember31,1997financialstatement.Theeffectofusingthe : eightfivepercent(85%)discountwastoreducethegoodwillofPTTand_Talidan_Ԁfrom  approximately$17,000,000to$6,000,000. 6   Carnegiedidnotpresentanycredibleevidencethatthiseightfivepercent(85%) @ discountwasnotreasonableorthatGrantThorntonfailedtoadhereto_GAAP_Ԁbyusingthis 6 discountinpreparingCarnegies1997financialstatements.      3.ChangeIntheDiscountontheValuationofStock    d XBeginningDecember30,1998andcontinuinguntilGrantThorntonwasdischarged,the    SECscrutinizedCarnegie'sacquisitionofPTTand_Talidan_.TheSECinitiallyscrutinizedthe F"" transactionasapossible"reverseacquisition."TheSECdroppedthisconcernonlyafter #<$ CarnegieandtheSECcametoanegotiatedagreementthattheamountofthediscountwould % & befifteenpercent(15%). 8'"(   AftertheSEChadexpressedconcern,Goldsteinsentthe_Luongo_ԀappraisaltotheSEC (.$* staffonApril13,1999.Twodayslater,theSECaskedCarnegietoexplainhowitreacheda *%, valueof$.11ashareforthestockusedtoacquirePTTand_Talidan_.Carnegierespondedwith *,z'. asuggestionthatthestockbevaluedat$.53ashare.TheSECrefusedtoacceptadiscountin - )0 excessoftenpercent(10%).Shortlythereafter,onApril22,1999,CarnegieandtheSEC  agreedthatCarnegiewoulduseafifteenpercent(15%)discount. V RTheDecember31,1997financialstatementswererestatedtoreflecttheuseofafifteen L percent(15%)ratherthananeightyfivepercent(85%)discount.Carnegiefileditsrestated   financialstatementswiththeSEConApril27,1999initsForm10_KSB_.AlthoughCarnegie H  acceptedthisnegotiatedfigureoffifteenpercent(15%),neitherit,norGrantThorntonbelieved  >  thatthefifteenpercent(15%)discountwasacorrectvaluationofthestock.Carnegieagreedto   thenegotiatedfiguretogetitsForm10_KSB_Ԁfiledandtomoveclosertoitsgoaloflistingits :  stockontheAMEX. 0  TheCourtacceptstheexpertopinionofErnestTen_Eyck_ԀthattheSECsquestioningof  thediscountanditsultimatedecisiontodictateafiguresubstantiallylowerthanthatin ,| Carnegiesoriginalfinancialstatementsisnotunusualanddoesnotmeanthattheoriginal " discountdid notcomplywith_GAAP_. x Theadoptionofthefifteenpercent(15%)discountresultedinanincreaseinthegoodwill n ofPTTand_Talidan_ԀwhichleadtoanincreaseinCarnegie'sbalancesheetassets.That  increasedictatedthatinfutureyears,thoseincreasedassetswouldhavetobeamortizedwhich j wouldultimatelyadverselyaffect(fromCarnegiespointofview)therevenuesreported.  `    X  4._Talidan_sImpairment   "   CarnegiesexpertsdidnotexpressanycredibleopinionthatGrantThornton's1997audit \"$ workrelatingtoimpairmentfailedtocomplywith_GAAS_.Moreover,theCourtconcludes,based $R& onthetestimonyofTen_Eyck_,thatCarnegiewasresponsibleforperforminganimpairment % ( analysisinthefirstinstance.In1997,Carnegie'smanagementprovidedwrittenrepresentations N'"* toGrantThorntonthat_Talidan_Ԁwasnotimpaired.Thereisnocredibleevidencethat_Talidan_ (D$, wasimpairedduringthe1997yearorthatGrantThorntonfailedtocomplywith_GAAS_Ԁinits *%.  auditingrelatingtothisissue. @,'0 \  Carnegie'smanagementrepresentedthatCarnegie'sgoodwillassetswerenotimpaired.   StatementofFinancialAccountingStandards_( FAS)_ԀNumber121requiresthatanimpairment V analysisbeconductedincircumstanceswherean eventoccurswhichwouldaffecttheabilityof L acompanytorecoverthevalueofthegoodwill(a triggeringevent).       TheFAS121analysiswasCarnegiesresponsibilityandCarnegiedeterminedthatthe H  goodwillfor_Talidan_Ԁwasrecoverableoverthelifeoftheasset.Thisanalysiswasperformed  >  usingthehighervalueforgoodwillassociatedwith_Talidan_.AlthoughGoldsteincounseled   Carnegiesmanagementregardingitsresponsibilitytodiscloseanytriggeringevent,Carnegie :  didnotdiscloseanysucheventtoGrantThornton. 0    InFebruary1999,Carnegiesmanagementreceivedamemorandumthatinformeditof  developmentsintheBraziliantelephoneindustrythatwouldseriouslyaffect_Talidan_'sfuture ,| income.Thus,byearly1999,Carnegie'smanagementhadknowledgeofmaterialfactsand " seriousproblemswith_Talidan_'sbusiness,butitdidnotdisclosethisinformationtoGrant x ThorntonortotheSECdespitethefactthat,atthistime,itwasundertakingtheprerequisitesto n belistedfortradingontheAMEX.    InMay1999,Goldstein,nowatCarnegie,receivedreportsof_Talidan_'sfirstquarter1999 j revenues.ThoserevenueshaddecreasedtothepointthatGoldsteinexpressedconcernabout `  thepossibleimpairmentof_Talidan_.Atthattime,neitherGoldstein(atCarnegie)norGrant  " ThorntonwasawarethatTalidan'sbusinessactuallyhadbeensuspended.Carnegieeventually \"$ disclosedthispotentialimpairmentof_Talidan_ԀinadraftForm10_QSB_ԀwhichitsenttotheSEC $R& onMay25,1999.TheSECaskedCarnegietoexplainthecircumstancesinvolving_Talidan_'s % ( intangibleassets. N'"* g  OnJune1,1999,_Talidan_'smanagementsentanemailtoCarnegies management (D$, givingadditionaldetailsoftheproblemsintheBraziliantelephoneindustry.GrantThorntonwas *%. informedoftheseissuesforthefirsttimeonoraboutJune4,1999.(Communicationsbetween @,'0 CarnegieandGrantThorntonessentiallyceasedonoraboutMay7,1999whenCarnegiehired -6)2 alawfirmtorepresentitinmattersrelatedtoGrantThorntonsperformance.)    Afterthetradinghalt,Carnegiesoughttoreopentheissueofthevaluation.Inpart, V Carnegiedidsobecauseofconcernswithapossibleimpairmentoftheamountsrecordedfor L _Talidan_'sgoodwill.OnJune9,1999,Carnegieobtainedanewappraisalofthestockusedto   acquirePTTand_Talidan_,whichvaluedthestockusinganapproximatefiftyfivepercent(55%) H  discount.  >    InitsJuly2,1999responsetoquestionsraisedbytheSECintheMay27,1999,   commentletter,Carnegiedisclosedthat_Talidan_Ԁhadsufferedimpairmentlossesofover :  $5,000,000inthethirdquarterof1998andthatitsDecember31,1998financialstatements 0  wouldberestatedtoaccountfortheselosses.Carnegiealsodisclosedthatpaymentsfromthe  Braziliannationaltelephonecompanyhadbeensuspendedand,asaresult,_Talidan_Ԁhad ,| suspendeditsbusiness.  "    OnJuly12,1999,CarnegiereportedthattheSECacceptedathirtythreepercent(33%) x discounttovaluethestockissuedtoacquirePTTand_Talidan_.Usingthatthirtythreepercent n (33%)discount,inaJuly28,1999,lettertotheSEC,Carnegiereportedanimpairmentlossof  $5,700,000for_Talidan_Ԁandstatedthatitexpectedtosell_Talidan_.Thereafter,on j August3,1999,CarnegieprovidedfurtherinformationtotheSECstaffabouttheimpairmentof `  _Talidan_ԀandtheSECraisedmorequestions.  " r  OnAugust18,1999,_Talidan_'smanagementinformedGoldsteinoftheinformationthey \"$ hadgiventoCarnegiesmanagementinFebruary1999andGoldsteininformedGrantThornton $R& forthefirsttime. % (   TherewasnocredibleevidencethatGrantThorntonviolated_GAAS_Ԁwithregardtothe N'"* impairmentissue.GrantThorntonhadnobasisforconductingaFAS121analysisinthe (D$, absenceofknowledgeofatriggeringevent.Carnegiesmanagementhadsuchknowledge,but, *%. forwhateverreason,electedtokeepthatinformationfromitsauditorsanditsCFO(Goldstein) @,'0 untilGoldstein(whileatCarnegie)stumbleduponnewsof_Talidan_spossibleimpairment. -6)2 |  CarnegiefailedtoprovebyapreponderanceoftheevidencethatGrantThornton's  auditingof_Talidan_'sgoodwillcausedanyharmordamagetoCarnegie.EvenifCarnegiehad V provencausation,theonlyevidenceofeconomicdamageitpresentedattrialrelatedtothe L tradinghaltonApril30,1999.Asdeterminedabove,CarnegiedidnotinformtheSECofthe   possibletriggeringeventrelatedto_Talidan_ԀuntilMay25,1999.Accordingly,thisissuecouldnot H  haveformedthebasisforanyconversationbetweentheSECandtheAMEXthatresultedinthe  >  tradinghalt.    Q& %%L& 0  B.GrantThorntonsConductWasNottheProximateCauseofCarnegiesAlleged :  Damage  ] (#(# /L& %X X!X%Q& /Q& %%L&   Toestablishtheelementofproximatecause,aplaintiffmustintroduceevidence  establishingtwoelements:(_i_)causeinfact;and(ii)legallycognizablecause(or"legalcause"). Y SeeBoardofCounty_Commrs_Ԁv.BellAtlanticMaryland,346Md.160,184(1997);Petersonv. O Underwood,258Md.9,1617(1970);Wankelv.A&BContractors,Inc.,127Md.App.128,158  (1999).#L& %%Q& # K +L& %X X!X%L& +  Causeinfactfocusesuponwhetherthedefendant'sconductactuallywasacauseofthe A plaintiff'sallegeddamages.Peterson,238Md.at1617.Tosatisfythiselement,aplaintiffmust  establishacausalconnectionbetweenthedamagesclaimedandthedefendant'sconductand = showthat"itismoreprobablethannotthatdefendant'sactcausedhisinjury."Id.at17.Ifthere 3! isnodirectevidenceofcausation,causationmaybeestablishedbycircumstantialevidenceif !# theevidenceissufficienttoshow"areasonablelikelihoodorprobabilityratherthana /#% possibility."Id.;seealsoMed.Mut._Liab_._Socy_Ԁv._V.B._ԀDixon&_Assocs_.,339Md.41,5457 $% ' (1995). {&!)   Indeterminingwhetheracauseinfactexists,oneoftwotestsisemployed,a"butfor" !(q#+ testora"substantialfactor"test.SeeWankel,127Md.App.at158.The"butfor"testapplies )%- "whentheinjurywouldnothaveoccurredintheabsenceofthedefendant'snegligentact.Id. m+&/ (citationomitted).The substantialfactortestwascreatedtoaddresssituationsw