Accounting firm cites FBI inquiry in civil case plea. (Up Front).

Three accountants in the L.A. office of Moss Adams LLP have temporarily avoided a civil fraud trial by claiming they and the firm are under investigation by the FBI for bank fraud, according to court documents.

West Covina-based Universal Bank filed suit in December 2001, alleging Moss Adams and the three accountants misrepresented the financial health of former client Lanico Inc. when it obtained a $3.3 million line of credit from Universal in 1999. Moss Adams is the eighth largest accounting firm operating in Los Angeles.

Days before the scheduled June 16 start of the trial, Moss Adams partners Mark Rabkin and Jeffrey Richardson, along with accountant Anthony Sanchez, claimed they had learned the FBI was investigating the firm for bank fraud, according to court papers.

Officials in the FBI's L.A. office would not confirm or deny whether it is investigating Moss Adams or its individual accountants.

James Miller, a partner at Musick Peeler & Garrett LLP representing Moss Adams and the three individuals, declined to comment about the case. None of the three accountants returned calls seeking comment.

In a prepared statement, Miller said, "Moss Adams has and will continue to vigorously defend this matter, and believes that its work was appropriate and conforms to all professional standards."

Last-minute maneuver

In citing the FBI investigation, the three Moss Adams accountants exercised their right against self-incrimination under the Fifth Amendment, and thus avoided testifying at the trial.

A petition filed on behalf of the firm said, "To say that the FBI is 'monitoring' this civil litigation would be a gross understatement. It would be patently unfair to require any of the Moss Adams defendants to proceed to trial with the very real threat of prosecution facing (them)."

The petition succeeded in temporarily staying the civil case, but on June 11, L.A. Superior Court Judge Elizabeth Grimes issued a ruling saying the Moss Adams accountants could not halt the trial because they did not have sufficient evidence proving they were under investigation.

Moss Adams has appealed that ruling to the 2nd Appellate District.

If a three-judge appellate panel rules in the firm's favor, it would halt the civil trial until any FBI investigation concludes.

Universal's attorney, Jeff Huron of Huron Law Group LLP, called the 11th-hour Fifth Amendment motions "a Hail Mary at the end of the game" because the Moss Adams accountants had already given taped depositions. "Once the boats leave the harbor, there's not much you can do to bring them back," he said.

As long as the civil case is in abeyance, any liability Moss Adams faces in Universal's fraud and negligent misrepresentation suit is also held in the balance.

Moss Adams, in its petition to the 2nd Appellate District, said it believes it may be under an FBI investigation after Universal refused on May 28 to turn over Lanico materials that Moss Adams wanted to use as evidence during the trial. Universal claimed it had submitted the materials to the FBI, said Moss Adams in its petition.

No implication

While most executives plead the Fifth Amendment early on in the case, they may be inclined to do so closer to trial if they want to buy time to find out more about an investigation, said Jan Handzlik, a partner at Kirkland & Ellis LLP who is not involved in the case.

"Asserting the Fifth doesn't mean a person has done something wrong," Handzlik said "It simply means he or she may become involved in an investigation and is seeking to protect his rights."

Huron confirmed that in the past few months the FBI had ordered Universal to turn over various materials relating to Lanico, whose records were given to Universal after it filed for Chapter 7 bankruptcy in January 2001.

Among the materials retrieved by the FBI were old invoices and a tape recorded conversation between a Universal representative and Lanico's former president, Jamie Yuan, in which Yuan says Moss Adams helped him fraudulently obtain the Universal line of credit, Huron said.

Yuan's attorney, Paul Beck, a partner at Ben-Zvi & Beck LLP, declined to comment.

According to court documents filed by Universal, the invoices requested by the FBI are in addition to those that sparked a sales-and-tax audit in 1998 by the California State Board of Equalization. The board assessed taxes and penalties of about $650,000 against Lanico in 2000, the papers said.

The audit failed to show up on Lanico's 1998 and 1999 financial reports, which were drafted by Moss Adams, according to Universal's complaint. Universal said had it known about the audit's findings, the bank would not have agreed to lend Lanico $3.3 million.

But Universal stopped short of calling the FBI's recent requests an investigation.

Moss Adams' accountants have not been indicted or sent a letter indicating an investigation by the FBI, said Universal in its petition.

"Moss Adams was merely speculating that it was the target of a criminal investigation and did so in an effort to delay the trial of this case," said Universal in its petition.