Byline: Jeff Siegel

NEW YORK — Stockholders of The Leslie Fay Cos. have asked bankruptcy court for permission to sue BDO Seidman, the auditing firm for the apparel manufacturer when massive fraudulent accounting entries were inflating the firm’s results.
The motion was filed by the official committee of equity security holders in the Chapter 11 proceedings of Leslie Fay. A hearing on it has been set for Tuesday.
Although individual shareholders have filed class action suits naming Seidman, along with Leslie Fay, as defendants in connection with the accounting scandal, these actions are outside the purview of the bankruptcy court.
In seeking permission for this new action, the equity committee said any claims against BDO “may be the equity holders’ only source of recovery in this Chapter 11 case” because Leslie Fay “may be insolvent.” The committee further pointed out that the two-year statute of limitations on filing such a suit will expire on April 5.
The committee said it believes BDO may well have been negligent in its role as Leslie Fay’s accountants prior to 1993 and could be liable for significant damages.
Leslie Fay filed for Chapter 11 in April 1993, after the accounting fraud came to light. Federal investigators have estimated the company misstated earnings by $119 million over three years ending in 1992.
Donald Kenia, Leslie Fay’s controller at the time of the accounting scandal, pled guilty in October 1994 to two federal felony counts of filing false information with the Securities and Exchange Commission and awaits sentencing. Kenia is the only person from the company to be nailed for the scandal so far.
The equity committee cited two separate reports, one by an independent audit committee and the other by court-appointed examiner Charles A. Stillman, in which BDO’s conduct during Leslie Fay’s accounting scandal was called into question.
The audit committee report has never been made public, but the equity committee says the report describes “numerous questions” regarding BDO’s role as Leslie Fay’s former auditors. BDO resigned as Leslie Fay’s accountant on May 6, 1993.
The equity committee stated that Leslie Fay’s unsecured creditors committee also has an interest in preserving any claims against BDO, and this motion “represents a consensus between the two committees.” The equity committee said it is also consulting with Leslie Fay on the issue of claims against BDO, and Leslie Fay has no quarrel with the motion.
According to the bankruptcy court filing, Leslie Fay has said it would be “inappropriate” for it to control the pursuit of claims against BDO because some of its top officials are or could be defendants in pending or future litigation from the accounting scandal.
If its motion is granted, the committee — comprising two institutional holders, American National Bank & Trust of Chicago and Dimensional Fund Advisors Inc., and a private shareholder, Salvatore Salibello — said it will either negotiate an extension of the statute of limitations agreement with BDO or file a complaint for damages prior to April 5.
Responding to the motion, a BDO spokeswoman said only that the company finds it “curious” that the suit was being filed considering “nobody’s ever asked to see any of our work papers” in regards to Leslie Fay.
But in January, a federal court judge in Manhattan dismissed a motion by BDO to be removed from a class action suit filed by Leslie Fay’s shareholders.