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Case 6-5
Vertical Pharmaceuticals Inc. et al v. Deloitte & Touche LLP
On December 13, 2012, Vertical Pharmaceuticals Inc. and an affiliated company sued Deloitte & Touche
LLP in New Jersey state court for alleged accountant malpractice, claiming the firm's false accusations of
fraudulent conduct scrapped a public company's plans to acquire Vertical for more than $50 million.
Vertical is a privately owned company that sells niche prescription drugs geared toward women's health and
pain management. Trigen Laboratories (TLI) sells and markets generic drugs. Deloitte was auditing the
2011 financial statements of Vertical and TLI, which are owned by the same three partners, when it
abruptly suspended that review because of supposedly troubling items that two whistleblowers brought to
the firm's attention, according to the complaint, which was filed November 21 in Morris County Superior
Court.
Deloitte insisted that Vertical hire independent counsel and conduct an internal investigation with a forensic
audit, the complaint said. Vertical agreed to those steps, but Deloitte eventually notified Vertical that it was
resigning rather than finishing its work, according to the complaint.
“As a forensic audit later discovered — no money was being pilfered from the company. No partner was
stealing money from another. No improper conduct was taking place,” the complaint said.
The revelation that Deloitte resigned from the 2011 audit and the allegations of potential criminal conduct
and financial improprieties that the auditor passed on to the audit committee left the acquisition for dead,
the complaint said. The public company found another pharmaceutical company to acquire.
The deal would have helped rapidly grow Vertical's business and established a revenue stream for the
company of more than $500 million, the complaint contends. “Deloitte knew the deal would be final once
the 2011 audit was completed. Without Deloitte's interference in concocting a series of false, negligent
statements regarding Vertical's financials, the 2011 Adult would have been issued and the deal completed."
Vertical has asked for $200 million or more in damages on multiple counts, including accounting
malpractice and breach of fiduciary duty. Deloitte also demanded and received $120,000 for all of its
invoiced services before resigning, according to the complaint, which seeks back those funds as well.
Deloitte's allegedly slanted statements involved accusations that Vertical was pilfering company funds
through two LLCs, inappropriately paying company employees through car allowances, committing fraud
by having an owner's father as tax auditor, and paying an owner's wife off the books, according to the
complaint.
The firm also falsely claimed Vertical's books were in terrible shape and that its management was
unreliable, the complaint said. “A subsequent forensic audit initially to assuage Deloitte was ultimately
completed ... which found: None of these items had merit nor did they consider any resolution items
justified to engender Deloitte's resignation; that Deloitte was well aware of the nature prior to its supposed
whistleblower disclosures of the items; and that many of these items were in the process of being resolved
based on advice provided by Deloitte as early as May 2011,” the complaint said.
Questions
1. Do you believe Deloitte & Touche breached its fiduciary duty to Vertical Pharmaceuticals in this
case? Why or why not?
Deloitte had a fiduciary duty to Vertical Pharmaceutical of due care in providing professional services.
Deloitte does not seem to have breached that duty. Out of due care, Deloitte had a duty to follow up on the
information supplied by two whistleblowers. Deloitte insisted on Vertical hiring independent counsel and
conduct a forensic audit, both of which were proper steps given the whistle-blower’s claims. It’s better to
investigate and dismiss erroneous charges than to allow them to fester. The issue of whether Deloitte should
2. Do you believe Deloitte was guilty of malpractice as alleged by Vertical? Use the discussion in this
chapter to answer this question.
Vertical may be thinking that Deloitte was guilty of malpractice since Deloitte resigned from the
engagement and did not complete the audit. Vertical was suing under common law in the state of New
Jersey. Common law liability requires the auditor to perform professional services with due care. It is
possible that Vertical was considering the resignation of Deloitte and failure to render an audit opinion as a
breach of contract or malpractice. After all, that is what the company hired the firm to do. Or, it is possible
3. Do you think it was ethical for Deloitte to resign from the engagement only after being paid for
services rendered without waiting for the results of the investigation and forensic audit that was
conducted at Deloitte’s insistence?
It was ethical for Deloitte to resign from the engagement. Deloitte must have thought that it could not trust
the client’s management. The distrust of a client’s management is a red flag that fraud may exist and can be
a reason to resign from the engagement. Although Deloitte did not complete the engagement, it is possible
