Costa Brava wins Telos case

The litigation strategy seems to have worked for activist investor Costa Brava Partnership III LP. Late Monday, the Boston-based hedge fund won a civil suit it launched in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense.
According to a Costa Brava release, a seven-member jury returned a verdict Monday in the Circuit Court for Fairfax County, Virginia, in favor of Costa Brava’s claim that the Norfolk-based public accounting firm “aided and abetted a breach of fiduciary duty by Goodman’s client, Telos Corporation.”
"Costa Brava is pleased that there now has been a public finding by an impartial jury that Goodman aided and abetted a breach of fiduciary duty by Telos and its directors,” said Costa Brava managing partner Seth Hamot in a statement.
The activist hedge fund alleged in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centered on Telos’ 2004 annual filing audited by Goodman.
It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol