Impact of the Economic Crisis on Traditional Professionals

2009 Professional Risk 2009 Professional Risk Symposium: EPL, E&OSymposium: EPL, E&O

and Fiduciaryand Fiduciary

San Diego, CA ~ April 29 & 30, 2009

Impact of the Impact of the Economic Crisis on Traditional Economic Crisis on Traditional

ProfessionalsProfessionals

THE IMPACT OF THE ECONOMIC THE IMPACT OF THE ECONOMIC CRISIS ON "TRADITIONAL" CRISIS ON "TRADITIONAL"

PROFESSIONALSPROFESSIONALS

MODERATOR:

John E. Ianotti, Esq, Vice President, Financial Institutions,

Everest Reinsurance Company

PANELISTS:

Brian E. Cropp, Assistant Vice President,

Victor O’Schinnerer

Jeffrey Day, CPCU, Assistant Vice President,

CNA

H. Steven Vogel, Esq., Of Counsel,

Wilson Elser Moskowitz Edelman & Dicker LLP

• Underwriters’ Perspective Professional Services Firms Accounting Firms Real Estate Professionals

• Claim Defense Perspective What the economic crunch has changed

Professionals’ ExposureProfessionals’ ExposureChanges Driven by the Changes Driven by the

EconomyEconomy

• Challenged financial condition of the professional firm

• Acceptance of work for firm’s survival Lax screening for conflict of interest Lax consideration of firm’s core expertise Lax consideration of locale of work and

firm’s knowledge of that locale Lax risk management


EconomyEconomy (cont’d) (cont’d)

• Staff reductions driving down the quality of their work

• Projects where banks have pulled funding Professional firms and contractors have

filed liens Banks are suing lien holders to claim right

to property



When Professional firms file for bankruptcy: Projects/clients left in the lurch Owners bringing legal action -

Professional Liability Insurance Limits of Liability become an asset of the bankruptcy estate



• Financial condition of clients

• Insolvency/bankruptcy of a client Large damage backdrops Potential for liability to owners,

shareholders and other constituents The longer the relationship had been, the

larger the potential exposure


Economy Economy (cont’d)(cont’d)

• Professional Services: trustee in bankruptcy

• Lucrative but highly contentious

• Target for class action litigation

Professional Liability Underwriting Impact

• Need to analyze the professional firm’s financials

• Monitor press on major publicly held clients

• Need ever greater integration of business intelligence sources Less underwriting intelligence

means higher risk level

Impact of the Economic Impact of the Economic Crisis on AccountantsCrisis on Accountants

• Sub-prime

• Credit crisis, recession and Ponzi schemes

• Going concerns

• Business bankruptcy

• Tax enforcement & collection activity


• Timing Impact to CPA firms delayed due to

“trickle down” effect Full impact won’t start to be felt until

after tax season


Effect on Areas of Practice Consulting work likely to decline

• Exceptions: Bankruptcy, Business Valuation, Litigation Support

Many small businesses will fail• Loss of bookkeeping, compilation & tax

services Tax and audit work remain core services

• However, clients looking to “trade down” to review


• Increased competition: “reverse” cascade effect…..here comes the Big 4!

• Lost billings will pressure firms on: Expense management Client acceptance and continuance

Impact of economic downturn on APL

• How will small firms react? “My book of business”

• Owners protective of their clients• More likely to allow delinquencies to mount• More likely to act as client advocate and

attempt to assist with financing• More likely to SUE FOR FEES when they hit

“crisis” mode• Delay in retirement


• Retirements, mergers and acquisitions What retirement? “Work until you drop” Many mid-sized firms will seek to be

acquired, but few will be Likely “shakeout” among small regional

firms• Some will shrink; a few may even break up• Some will be acquired by larger regional firms


Summary-• Increased frequency

Subpoena assistance, potentials, and actuals going up

• Increased severity Business bankruptcies and ponzi schemes

• Increased competition; flat or declining billings Competition increases “dabbling”, pressure on client

acceptance/continuance, and work quality issues

• Increased insurance price sensitivity Requests for lower limits, higher deductibles Some small firms have gone bare

Impact of the Economic Impact of the Economic Crisis on Real Estate Crisis on Real Estate


Real Estate Professional Liability

Appraisers Professional Liability

Mortgage Broker Professional Liability




Stagnant Housing Foreclosures Bank-Owned Properties




Rating basis• Number of Agents/Brokers• Gross Commission Income



Real Estate Professional Liability Rating basis

• Number of Agents/Brokers Many employees are leaving to find

greener pastures Commissions and number of sales

are decreasing



Real Estate Professional Liability• Rating basis

Commission Sales• Turn in marketplace causing premiums

to decrease• Writing new business with prior acts will

pick up exposures from prior years



Appraiser Professional Liability

Rating basis• Fees/number of appraisals

Exposures-• Appraisers pressured to “hit the price” to

help sales go through



Appraiser Professional Liability

Severity of claims Some companies are getting out of

the market Others are limiting coverage



Broker Price Opinions (BPOs)

A cheaper way for banks to get the value of a home instead of using a certified appraiser

Legislation in many states are requiring BPOs be performed by certified appraisers



Broker Price Opinions (BPOs) could be the cause of decreasing home values. Incentive to undervalue short sales, foreclosures Inherent conflicts of interest:

• (Want to) sell property fast• Want additional BPO and property listings from bank• Many sales to investors, at depressed prices, become

the comparables for appraisers

Washington Post, March 28, 2009



Mortgage Broker Professional Liability

• Rating basis Revenue/number of mortgages



Mortgage Broker Professional Liability• Sub Prime mortgage earlier this decade

created some claims No Money Down No Documentation for Loans Mortgagees were under-qualified for mortgages

they were offered Buyers not able to afford house for loan size

offered by mortgage broker

Impact of the Impact of the Economic Crisis on Traditional Economic Crisis on Traditional


Especially

• Ponzi Schemes Impact on Accountants and Lawyers

• Subprime Issues Impacting Accountants and Lawyers

• Auditors or professional advisors of any Madoff investor stand a good chance of becoming a defendant.

• Auditors for the numerous feeder funds that invested all or a portion of their investors’ monies with Madoff

Are likely to face lawsuits from their fund clients and their clients’ investors

WHO IS AT RISK?

Madoff’s auditor-

• Friehling & Horowitz Three person operation:

• One active CPA• One secretary• Third person living in Florida

WHO IS AT RISK?

WHO IS AT RISK?

• CPAs and lawyers that served as trustees, and personal representatives of estates and foundations that invested with Madoff

• Any lawyer or CPA who accepted finders fees from Madoff, for soliciting new investors, will have difficulty convincing a jury that their objectivity in giving advice was not compromised

POTENTIAL PLAINTIFFS

• Entities that invested directly with Madoff will seek to recoup their losses (educational and charitable organizations and pension plans)

POTENTIAL PLAINTIFFS

• Individual investors will likely take aim at their accountants who offered investment advice (even if- or especially if- not retained to do so), alleging failure to adequately investigate the Madoff investments

WARNING SIGNS

• Recent lawsuits allege that feeder fund auditors failed to notice red flags: Madoff’s investment strategy was incapable of

delivering the returns he reported

Option contracts in which Madoff was supposedly invested were not reflected in the trading of the option exchanges

Investors had no electronic access to their accounts at Madoff

Madoff did not have an independent custodian hold its investment securities

Madoff operated under a veil of secrecy and did not allow outside audits by significant investors

Madoff went to 100% cash every December 31, irrespective of market conditions

WARNING SIGNS(cont’d)

HEADWAY INVESTMENT CORP V. AMERICAN EXPRESS BANK

Miami Circuit Court –

Filed April 6, 2009

Headway sues: American Express Bank Fairfield Greenwich PriceWaterhouse Coopers Citco


• American Express recommended two Madoff funds

• $10 million invested

• Funds managed by Fairfield Greenwich – not disclosed to Headway

• The lawsuit includes allegations of: Negligence Breach of fiduciary duty Unjust enrichment

• PriceWaterhouse Coopers audited the feeder funds


GOLDBERG V. NATIONAL CPA FIRM

• Filed in Miami Circuit Court on March 30, 2009

• Plaintiffs lost approximately $100 million in Madoff investments

• Plaintiffs sue trustees, personal representatives and investment advisors

GOLDBERG V. NATIONAL CPA FIRM

• Plaintiff allegations include: Demand for an Accounting of all

funds held by the respective trusts Breach of fiduciary duty against the

trustees Removal of trustees/personal

representatives

NEW CENTURY FINANCIAL CORP V. KPMG

INTERNATIONAL AND LLP

• Filed April 1, 2009 – among the first attempts to blame auditors for the sub-prime mortgage crisis

• Suit demands $ 1Billion in compensatory and consequential damages

NEW CENTURY FINANCIAL CORP V. KPMG

INTERNATIONAL AND LLP

• KPMG performed financial statement audits of New Century

• Complaint alleges that KPMG was grossly negligent in performing the audits

• KPMG is “public watchdog”

Questions?Questions?

• Please let us know who should address your question.

Thanks!

• We appreciate your attendance!

Impact of the Economic Crisis on Traditional Professionals

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