Accounting firm sued over bankruptcy of LV firm

David Strow

Wednesday, Aug. 4, 1999 | 11:44 a.m.

The trustee of defunct Las Vegas company Mednet sued the accounting firm McGladrey & Pullen, alleging that poor accounting advice led to the company's 1997 bankruptcy.

In a state court suit, trustee Nancy Knupfer accused the CPA firm of accounting malpractice and intentional breach of fiduciary duty.

Mednet, the operating name of MPC Corp., provided prescription mail order and benefits management. It was publicly traded on the Nasdaq exchange. Until April 1997 M&P was the company's auditor.

In February 1996 Mednet entered into an agreement to extend the expiration date of 1 million warrants held by an investor. In exchange, Mednet was to receive a cash payment of $600,000 by year's end.

Knupfer said M&P advised Mednet to account for this payment as operating income, instead of equity. This treatment allowed Mednet to report a $454,000 profit in the first quarter of 1996.

By year's end, the fee hadn't been paid. Knupfer alleges that at this time, M&P auditors admitted that the fee should have been accounted for as equity, not income. In January 1997, M&P threatened to resign, saying that Mednet had misrepresented the nature of the payment to its auditors, the suit said. M&P soon after withdrew its resignation after Mednet informed it that M&P auditors had access to the necessary documents prior to the filing of the first-quarter financial report, the lawsuit states.

On March 19, 1997, Mednet filed a statement with the Securities and Exchange Commission, stating that it was taking a $13 million charge and restating quarterly earnings to make up for the improper accounting of the warrant fee.

One month later, M&P informed Mednet that it was resigning as auditor. In its letter to Mednet, M&P said it believed "illegal acts" occurred with respect to the reporting of the warrant fee, the lawsuit alleges. Mednet reported the resignation on April 21, stating that M&P came to the conclusion that it was "no longer able to rely on management's representations." As a result, Mednet was unable to file its annual report or restated earnings on time with the SEC, leading to the company's delisting from the Nasdaq.

This resignation caused an investor to terminate his agreement to invest $10 million in the company, Knupfer's lawsuit said, leading to the company's bankruptcy in July 1997.

The lawsuit claims M&P resigned to cover up its alleged mistake in advising Mednet to report the $600,000 fee as income, rather than equity.

The defendant could not be reached for comment.