Grant Thornton and the Return of Gabriel Azedo

Let it not be said that there is no drama in accounting. In Hong Kong last year, the disappearance of former Grant Thornton managing partner Gabriel Dias-Azedo was a cliff-hanger. A pillar of the community, the influential accountant who built up Grant Thornton’s Hong Kong practice was sued by a relative and two close friends for allegedly defrauding them of millions of dollars.

Some thought him dead, perhaps at the hands of shadowy gambling syndicates with which the racehorse owner is said to have consorted. But last week, Azedo was found alive and hiding out in Spain. He may be repatriated to Hong Kong to face fraud charges, although the two jurisdictions have no extradition treaty.
What’s the next act in this long-running drama? Will Azedo’s trial finally lay to rest the reputational damage that was done to his old firm? Will the lawsuits against Grant Thornton Hong Kong and the global network Grant Thornton International be revived? What will be the impact, if any, on the supposed mass exodus of Grant Thornton Hong Kong partners and staff to rival BDO and the future prospects of new Grant Thornton International member firm Jingdu Tianhua Hong Kong?   
Suing Grant Thornton
After he disappeared in September last year, Azedo was sued by his distant cousin Angela Rita Gardner, who alleged that Azedo, through Grant Thornton Hong Kong and Grant Thornton International, defrauded her of US$9.8 million. Azedo was also taken to court by Arthur Antonio Da Silva and his wife Betty, two of his close friends (and also long-time friends with Gardner), for supposedly absconding with US$2.2 million that they had entrusted to Grant Thornton as part of their estate planning.  
On November 27 that year, the Da Silvas obtained a default judgement against the missing Azedo for US$2,339,922.07. On January 10, 2010, Gardner was awarded another default judgment against the accountant for US$9,756,879.63. Both petitioners then took out enforcement proceedings in Hong Kong and London to track down Azedo’s assets. So far, the assets uncovered include two properties in London, a bank account in Hong Kong, and money that Grant Thornton Hong Kong is said to owe Azedo.
Gardner also took out a “vicarious liability action” against Grant Thornton Hong Kong and Grant Thornton International. According to Gardner, Azedo persuaded her in 1999 to protect her wealth by placing money with Grant Thornton Hong Kong, which would invest it on her behalf. As managing partner of the accounting firm, he promised to “personally oversee and handle her investments with Grant Thornton,” Gardner said in court papers.   
Beginning July 2007, said Gardner, the statement of accounts regarding her investments that Azedo sent her were issued and signed by Grant Thornton Hong Kong. In January 2008, the statements were issued and signed by Grant Thornton International. Azedo had retired as managing partner of the Hong Kong member firm in March 2008 and was a consultant to it until September of that year. He had been appointed to Grant Thornton International’s Global Leadership Board in 2005 and served on it until he disappeared in September 2009.
Gardner argued that she had no reason to believe that Azedo was not acting for the two Grant Thornton organizations. “At all material times, whether in his position as Managing Partner of [Grant Thornton Hong Kong] or member of the Global Leadership Team of [Grant Thornton International],” she said, Azedo “worked from the office premises of [Grant Thornton Hong Kong], retaining the same business contact details including telephone number, facsimile number, and email address, as well as retaining the same personal assistant.”
A Win for GTI
On October 29, 2010, the High Court of the Hong Kong Special Administration Region Court of First Instance ruled against Gardner’s plea to be allowed to serve a writ against Grant Thornton International (GTI). In his judgment, Deputy High Court Judge L. Chan accepted that GTI “does not provide services to clients and has no clients,” being a not-for-profit, non-practising, international umbrella entity of independently owned member accounting firms such as Grant Thornton Hong Kong.
Judge Chan wrote that the investment statements issued under the letterhead of GTI “are obviously false documents created by Mr. Azedo to perpetrate his fraud on the plaintiff. I do not think a fraudster’s unwarranted representation purportedly on behalf of the principal can bind the principal.” The judge concluded: “I therefore do not think the 2nd defendant [GTI] should be liable for Mr Azedo’s fraudulent acts.”
However, the courts have yet to rule on Gardner’s suit against the “1st defendant,” which is Grant Thornton’s former member firm in Hong Kong. This September, GTI expelled Grant Thornton Hong Kong from the GT network, replacing it with the newly created Jingdu Tianhua Hong Kong formed by several partners of the old firm. GTI says everyone from the old firm is welcome to join Jingdu Tianhua, but rival accounting firm BDO Hong Kong has said that Grant Thornton Hong Kong’s more than 500 partners and employees will be transferring to it en masse by the end of the year.
It remains to be seen whether Azedo’s reappearance will have any bearing on the suits still pending against Grant Thornton Hong Kong. In a Garnishee Order obtained by the Da Silvas against Azedo in 2009, the sum of HK$5.5 million was identified as credited into Azedo’s partnership account with Grant Thornton Hong Kong, money that the Da Silvas asked the court to garnish and turn over to them. But Grant Thornton Hong Kong has argued that, in fact, Azedo owes it HK$2.6 million as at January 6, 2010.
According to the firm, its former managing partner was owed some HK$14.9 million upon his retirement in April 2008, including interest. Payment of HK$8.5 million was made in October that year, leaving HK$6.4 million still owed. However, in April 2010, Grant Thornton Hong Kong obtained a judgment in default against Azedo in the amount of HK$9,377,300, representing the judgment debt payable to the firm by its former managing partner. As such, Grant Thornton Hong Kong is a net creditor, not a debtor, of Azedo.
The court has accepted the accounting firm’s contention and denied the Da Silvas’s petition. But it’s a small victory for Grant Thornton Hong Kong, which still faces a difficult legal and financial road as a result of Azedo’s misconduct. In its submission to the court, the firm cited four contingencies behind its inability to close its accounts for 2007/08 and 2008/09:
  • disputes between and a number of former partners, some of which are subject to litigation;
  • disputes between it and another member firm in respect of payments of salaries of persons seconded to Hong Kong and China from overseas;
  • the outcome of further claims by the firm against Azedo in respect of his misconduct as managing partner; and
  • claims by the firm against Azedo for contribution and indemnity should the courts rule against it in the suits brought by Gardner and the Da Silvas.


Moving On
Will Azedo’s reappearance force GTI back into the dispute? “While the situation is highly regrettable for the individuals concerned, this is now a matter for them and for the Hong Kong courts,” GTI said in a statement, pointing out that the courts have dismissed Gardner’s suit against it. However, it is not clear whether GTI will have any liability should the court find that its former member firm bears some responsibility for Azedo’s fraudulent activities, given that Grant Thornton Hong Kong was still a GTI member firm during Azedo’s time as managing partner.
Beyond the legal arena, there is the issue of reputational damage. How was it possible for Azedo to apparently perpetrate fraud against Gardner and the Da Silvas for a decade without anyone at the Hong Kong member firm or GTI knowing about it, or worse, knowing about it and not saying anything? Were the oversight and risk systems so dysfunctional that the fraud went undetected for such a long time?
GTI says its decision to replace its old member firm with Jingdu Tianhua Hong Kong has nothing to do with the Azedo case. “That is totally irrelevant to this decision,” says Alex MacBeath, the member of Grant Thornton International’s global leadership board with responsibility for strategy in Asia Pacific. Unlike the old firm, which operated independently under Azedo’s leadership, Jingdu Tianhua will be integrated strategically with the member firm in China and will have a similar governance structure.
Jingdu Tianhua is “a totally new legal entity,” says MacBeath, one that is “totally separate and apart from the old firm” – meaning, among other things, that it has no liability in the Azedo cases (although individual partners from the old firm who join the new one will be liable in their personal capacity.) The new entity represents a chance for Grant Thornton in Hong Kong to start over. Hopefully, it has learned lessons from the Azedo fiasco and will be more vigilant to the possibility that a managing partner can commit fraud and get away with it for years.
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.

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