Phar-Mor

Situation

Coopers & Lybrand had been engaged by Phar-Mor, a high-growth drug retailer, to conduct audits over a period of several years. Phar-Mor’s management committed one of the largest frauds in the history of the United States, as it overstated inventory by approximately $1 billion. Phar-Mor thereafter filed for Chapter 11 protection, and eventually reorganized. After the fraud came to light, Coopers & Lybrand was the target of lawsuits brought by over 40 lenders to, and investors in, Phar-Mor.

Engagement

The lawsuits were consolidated in a single action, and Gordian Group was engaged by counsel to Coopers & Lybrand to assist, in respect of nonaccounting issues, in defending the lawsuits.The actual work product we provided on behalf of Coopers & Lybrand is confidential, but we can say that we filed over 40 expert witness reports on behalf of the client, all targeted at the individual lender/investor plaintiffs.Our work included comparisons of how we believed a reasonably prudent investor or lender would have evaluated Phar-Mor’s business plan at the time of each investment or loan transaction (there were a myriad of such transactions) with the actual analyses performed by the plaintiffs prior to each loan or investment, as well as a thorough review of sensitivity analyses and operating and financial statistics of key Phar-Mor competitors and other comparable retailers.

Outcome

Through this thorough and quantifiable approach, we took the offensive on Coopers & Lybrand’s behalf. As a result, counsel to Coopers & Lybrand was able to mount a strong financial argument that the investors and lenders independently failed to meet the reasonably prudent investor/lender standard and hence Coopers & Lybrand was not responsible for investment or loan losses.Following receipt of our comprehensive expert witness statements, all but three of the investor/lender plaintiffs settled with Coopers & Lybrand prior to trial.