Aircraft parts firm wins case over malpractice in expert testimony.

A small aircraft parts company in Paramount has won what its attorneys claim is a precedent-setting case involving accounting-firm malpractice.

The case, according to the attorneys, establishes accounting-firm liability for work done in preparing for trial litigation, including expert testimony. In addition, it sets precedent regarding the grounds on which a business can sue an expert witness it had hired for its own purposes, the attorneys said.

Earlier this month, after a trial that lasted six weeks, a Los Angeles County Superior Court jury found the national accounting firm of Ernst & Young and two of its accountants guilty of fraud and malpractice. The verdict came in a suit filed by Mattco Forge Inc., an aircraft-parts maker with annual sales of less than $5 million.

Ernst & Young, a private partnership, is expected to appeal the decision but as of last week the same county jury was scheduled to reconvene on April 11 to consider monetary damages. The session could last several weeks.

Attorneys for Mattco said they will seek at least $39 million to cover business losses and punitive damages.

The case goes back almost 10 years and involves work done for Mattco by Arthur Young & Co., a national accounting firm that merged with Ernst & Whinney to form Ernst & Young in 1989. When Ernst & Young absorbed Arthur Young, it assumed the company's liabilities, including ongoing litigation.

Eugene Erbstoesser, Ernst & Young's in-house counsel in Los Angeles, declined to discuss the case. "It's our policy not to comment on matters where there is still litigation," he said.

Mateo (Matthew) Minguez, the 56-year-old founder, owner and president of Mattco, said he felt vindicated by the decision and that so far he has spent about $2 million in legal fees pursuing the case.

"I understand that this is a humongous victory. But what I'm really happy about is that my name and my company's name has been cleared and now we can get back to people making aircraft parts," he said.

According to court documents and Mattco's Santa Monica attorneys -- J. Joseph Connolly and John Moscarino of the firm of O'Neill, Lysaght & Sun -- the parts company was founded by Minguez in 1969. He was born in Argentina but is a naturalized American citizen.

Between 1979 and 1983 Mattco was a subcontractor to General Electric Co. In May 1983, GE severed its relationship with Mattco and, subsequently, Mattco sued GE in U.S. District Court in Los Angeles for $20 million for business losses and punitive damages.

In preparation for the lawsuit, Mattco hired Arthur Young to determine the monetary losses from the severed relationship and to offer expert testimony.

In 1988, Mattco dropped its lawsuit against GE after the court concluded that "based on the abundant uncontroverted evidence, (Mattco and Minguez) in an attempt to fraudulently increase the damages they seek to claim in this action, altered and fabricated estimate sheets used to calculate those damages. ...

"The court further finds that (Mattco) knowingly produced those false estimate sheets to (General Electric) and thereby perpetrated a fraud upon (GE), this court and the judicial process."

After it dropped the GE lawsuit, Mattco then sued Arthur Young, its successor Ernst & Young, Richard Lamping and Thomas Blumer in Los Angeles County Superior Court in July 1989 for fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract. Ernst & Young denied the charges and sued Mattco for essentially the same claims but that counterclaim was later dismissed.

The Superior Court action brought by Mattco against the accounting firm claimed Arthur Young "misrepresented" itself and its accountants as trained professionals in assessing damages and offering expert testimony. The suit also claimed that accountants assigned to the Mattco case were not qualified to do the work.

The central point in the Mattco argument, however, involved procedures used by Arthur Young accountants in gathering data to establish losses to Mattco from the severed GE agreement, said Mattco attorneys.

According to court documents and the Mattco attorneys, Arthur Young instructed Minguez to "recreate" job estimates for lost work from the severed GE contract. These estimates were then passed on to the federal court and to GE as legitimate working papers that were compiled while Mattco was bidding on GE contracts.

According to Mattco and its attorneys, Arthur Young then tried to "cover up" the fact that the working papers from prior years were actually recreated documents made after the start of the Mattco vs. GE action.

"This is a complete victory for Mattco," said Moscarino, one of the company's attorneys. "The jury found that Arthur Young committed intentional fraud against Mattco, then committed malpractice, then tried to cover up its conduct after the fact."