Accounting firm fined $26m for using confidential client information
Mulcahy and Co and its director were ordered to pay millions for breaching confidentiality and fiduciary obligations owed to clients.
Justice Jim Delany of the Victorian Supreme Court has ordered a Ballarat accounting firm and a related party to pay more than $26 million for relying on confidential information to act on a business opportunity at the expense of its clients.
The accounting firm, Mulcahy and Co, was retained to advise two clients – Timothy Porter and Christopher Conheady - on the purchase of a Melbourne truck manufacturing business, Chris’s Body Builders.
Mulcahy and Co “usurped” the opportunity of those clients to invest in the business by acquiring a controlling interest in the business by forming a separate company, BFMM Investments.
In doing so, the court found the firm and its director, Jamie Mulcahy, had breached the confidentiality obligations owed under its retainer with the clients. It also found the firm had breached its fiduciary duties.
The case makes it clear that trading on confidential client information can prove costly not just for the big four, but smaller firms as well.
The PwC tax leaks scandal has centred scrutiny on the dealings of big four firms with confidential government information.
PwC Australia former partner Peter Collins shared confidential information relating to the government's proposed approach to multinational tax avoidance.
According to the TPB, “internal communications within PwC indicated an awareness among internal PwC recipients, including PwC taxation partners, that the confidential knowledge gained from the consultations with Treasury would be leveraged to market PwC to a new client base.”
Accountants owe fiduciary duties to their clients which prevent them from obtaining unauthorised benefits from the relationship and from being in a potentially conflicted position.
In the Mulcahy case, the costs of breaching fiduciary obligations were made clear.
Mulcahy was one of four directors of BFMM who the court found knowingly assisted the breaches. While Mulcahy was but one of four directors, Justice Delaney ruled the blame fell mostly at his feet.
“It was he who conceived of the opportunity, he brought together the investors, he brought the opportunity to them and to BFMM, and he orchestrated the delivery of that opportunity to the company,” he said.
“BFMM was formed to take advantage of that opportunity and that is the context in which it is properly found BFMM was his alter ego.”
The clients sought damages for breach of contract by the firm and its director tied to the amount it might have earned by investing in the company.
“We are extremely disappointed by the judgment and the decision in this case,” Mulcahy told Accounting Times.
“The people in the community that know us and especially our clients understand that the way we have been portrayed in this case is not the way we operate our business.”
“We also confirm we are in the process of appealing the decision,” he added.
Justice Delaney, in the initial trial decision published in 2021, said BFMM had been formed “for the sole purpose of taking advantage of the opportunity to acquire a controlling interest in the business.”
“There was by Mr Mulcahy … a ‘plain transgression of ordinary standards of honest behaviour. No honest [accountant] would do such a thing without having first obtained the consent of his or her [client]’.”
Mulcahy and his firm were ordered to pay the two clients $9,664,891 with interest, while BFMM was ordered to pay $11,862,693 to one client.
With interest, the total figure is $26,249,391.02 plus incidental costs.
Conheady said he and Porter were “relieved” by the decision of the court, adding “We trusted [Mulcahy] with confidential information and he broke that trust.”
“Ultimately his betrayal meant we missed a significant business opportunity.”
