MiniScribe Corporation (Litigation)

Situation

Management of MiniScribe Corporation, a $600 million disk drive manufacturer, committed massive financial fraud in the face of a daunting array of operating and financial pressures. Losses to investors in MiniScribe’s collapse amounted to hundreds of millions of dollars, which led to lawsuits against numerous parties, including the Company’s auditors. Because of the egregious nature of the fraud, a Texas jury trial assessed massive punitive damages to the defendants on behalf of a small fraction of the damaged parties. Following this verdict, Gordian Group was engaged by the auditor’s attorneys to assist in the defense. The auditing firm was seeking to minimize its damage exposure arising from past audits of MiniScribe’s financial statements.

Engagement

Gordian Group’s thesis was that MiniScribe’s operating problems would have been fatal even if the auditors had uncovered the fraud in prior periods, and accordingly, any damages pertaining to the auditors should have been <i>de minimis</i>. The challenge was in proving this contention.Using our own technology expertise, we worked in conjunction with counsel and a technology consultant to assess the viability of each product line as of the time of the substantive fraud. Gordian Group then constructed financial models of MiniScribe’s performance-based upon our assumptions regarding sales, profitability, shutdown costs for various products and financing capability.

Outcome

We concluded that MiniScribe would have been rendered insolvent &mdash; with or without the fraud &mdash; and the plaintiffs would have been virtually wiped out anyway. Our opinion was instrumental in the auditors’ successful settlement efforts in the litigation.