Whistleblower says PwC did not retain instant message evidence key to his claim

Mauro Botta's trial exposes the key role of instant messages in cases against the Big 4

A virtual bench trial — judge no jury — is scheduled to start in the Botta v. PricewaterhouseCoopers LLP case on Monday Feb. 22 and go through March 4, 2021.

I’ve written about this case and so have many others in the past.

The “cat’s paw” theory of liability for PwC’s alleged retaliatory firing of Mauro Botta for whistleblowing

PwC whistleblower alleges fraud in audits of Silicon Valley Companies

Whistleblower accuses PwC of failings over private jet trip; Former auditor says ‘outrageous’ incident highlights independence issues

While catching up on the flurry of filings since I last looked in, including a motion for summary judgment from PwC that was denied, I read more about the SEC’s investigation of Mauro Botta’s whistleblower tip. Botta submitted the tip while he was still a PwC employee around November of 2016 and he alleges this sparked his termination in retaliation barely a month later after an investigation by an outside law firm that also interviewed him.

From POGO:

Botta told the SEC that, when it came to their accounting, companies he observed generally had a “low level of competence.” (He explained to the Project On Government Oversight that he was referring to small and mid-sized companies.) But the prime focus of Botta’s whistleblower complaint wasn’t the tech companies. It was something deeper and more far-reaching: the culture of auditing at PwC.

Botta alleged that, to keep corporate managers happy and to avoid losing their business, PwC was pulling its punches—trying not to flag too many problems with companies’ internal controls.

He said he was concerned about “the risk of collusion between auditors and management in this valley . . . with management paying us the fees and auditors picking and choosing what to call an audit issue.”

From the FT:

A PwC whistleblower has accused the Big Four accounting firm of serious independence failings after it allowed its auditors to fly in a private jet owned by a major audit client, US-listed chipmaker Micron. Mauro Botta, a former PwC auditor who is suing the firm in the US for wrongful dismissal, alleged that a photo of the Micron audit team standing in front of the private jet was singled out for praise during a meeting in California in 2016. The incident is one of several alleged audit lapses involving a handful of PwC’s Silicon Valley clients that were highlighted in a document sent by Mr Botta to the US Securities and Exchange Commission as part of a whistleblowing complaint against his former employer in 2016.

The SEC sent a letter to PwC in April 2017 — now available via the case docket— that included an extensive documents/data request and documents preservation request. The SEC’s inquiry was primarily about PwC audit client Cavium, where Botta had served as a Senior Manager under engagement partner Tye Thorsen, although Botta’s tip to the SEC, and subsequent tips to the PCAOB and California Senator Diane Feinstein’s office, had allegations about many other clients he had worked on.

Unless otherwise specified, the time period applicable to these requests is the first date on which PwC performed any work or consultation related to any audit or interim review pertaining to Cavium's financial statements for fiscal year 2013 to the last date on which PwC performed any work or consultation related to the Cavium 2014 year-end audit.

In describing what documents the SEC wanted to review and for PwC to preserve, the regulator defined “document” as such:

3. The term "document" includes, but is not limited to, all records, materials and other tangible forms of expression in your possession or custody, or under your control whether originals, copies, annotated copies, drafts or final versions, and however created, produced, stored or maintained, including, but not limited to, working papers, audit documentation, charts, lists, logs, spreadsheets, financial information or analyses, books, papers, files, notes, memoranda, letters, reports, schedules, charts, lists, transcriptions, correspondence, telegrams, telexes, wire messages, telephone messages, calendars, diaries, budgets, invoices, audio and video recordings, email (including attachments and linked documents), instant messages, text messages, electronic data compilations, computer disks (or hard copy of the data contained on such disks), and other electronic media, microfilm, microfiche, and storage devices.

Instant messages are now the standard way most individuals in organizations communicate with each other on a daily basis, instead of email or voice mail, when the purpose is to get an immediate, no-fuss response to a question or to check-in with colleagues. 

When I was working at MarketWatch the instant message tool was Slack, which a lot of media organizations use. Instant message evidence has tripped up many traders, in insider trading cases and in LIBOR and forex manipulation cases.

From the BBC:

This refers to the setting of Japanese yen interest rates in London.

Senior RBS Yen Trader: its just amazing how libor fixing can make you that much money

Senior RBS Yen Trader: its a cartel now in london[.] they smack all the 1yr irs ..and fix it very high or low

Senior Yen Trader: nice libor[.] our 6m fixing move the entire fixing[.] hahahah

From the FT:

In one example, a broker commented to a UBS trader after a Yen Libor fix on June 10 2009: “mate yur getting bloody good at this libor game …think of me when yur on yur yacht in monaco wont yu” In another conversation with a UBS trader after a Libor Yen fix on August 22 2008, a broker, identified as A1, commented about another broker, A2: “think [broker-A2] is your best broker in terms of value added :-)”. The trader replied: “yeah …i reckon i owe him a lot more”, to which broker-A1 responded: “he’s ok with an annual champagne shipment, a few [drinking sessions] with [his supervisor] and a small bonus every now and then.”

When Mauro Botta worked at PwC, the firm used the internal chat message software SameTime, the same legacy IBM software I used when I worked for the firm in 2005-2006.

In an informal survey of audit and consulting sources at all four of the Big Four firms, I learned that PwC transitioned from SameTime beginning in 2016 and now uses Microsoft Teams and Google Chat. EY and KPMG use Microsoft Teams and Deloitte has been using Microsoft’s Skype for Business but is said to be moving towards Microsoft Teams, also.

Botta’s attorneys requested in the discovery process that PwC turn over SameTime messages they assumed the SEC had already received and that had been preserved. Botta’s attorneys had referred to the messages in their filing to oppose PwC’s request for summary judgment – a quick end to the case if the judge agreed that Botta had none. That’s because Botta had communicated with Tye Thorsen, the Cavium engagement partner, via SameTime about the issues Botta reported first to PwC’s Ethics Office and then its National Office, before filing the whistleblower tip to the SEC.

PwC sought summary judgment based on its argument that the individual who made the decision to terminate Botta, Mark Simon, did so for other reasons and had no knowledge of Botta’s SEC complaint.

In the objection to PwC’s motion for summary judgment, Botta’s attorneys wrote:

Botta’s attorneys say they did not receive the SameTime message evidence from PwC and asked the judge to “draw a negative inference against PwC for not complying with mandatory requirements and not allowing Plaintiff access to record that should have been preserved, not only for this litigation but as is required by law.”

Botta’s attorneys cite federal law, enacted as part of the Sarbanes-Oxley Act that requires certain records to be retained for at least seven years. Of course, when preservation orders are imposed by litigation or government regulators, that adds an extra legal obligation. Since the records the SEC requested related to the Cavium 2013 and 2014 audits, the SEC requests and Botta’s attorney’s request would certainly have been made within seven years of the records being created.

On June 27, 2019, Judge Richard Seeborg in the Northern District of California denied PwC’s motion for summary judgement in the Botta case. In his decision to deny PwC’s motion for summary judgment and send the case to trial, the judge wrote:

The relatively strong circumstantial evidence available to PwC that the SEC complaint may have been submitted by Botta weighs against concluding as a matter of law that the decision maker acted solely on other, legitimate, grounds.

Even if Botta may have been fired for good cause, the judge wrote, Simon’s stated reasons for the firing are “intertwined with the alleged protected activity of reporting improprieties to the SEC.”

Recent tried cases against PwC for auditor negligence such as the “settled before end of trial” TBW Trustee v. PwC and MF Global Trustee v. PwC and the full bench trial with damages hearing of the FDIC v PwC claim for the failure of Colonial Bank don’t appear to have presented any evidence that included PwC’s SameTime instant messages. New class action cases against PwC for accounting malpractice at Mattel, for example, are not yet at the stage to know if instant messages are important evidence.

PwC is also the auditor of more companies such as Tesla, Under Armour, Kraft Heinz, and Disney where the SEC is investigating, or has investigated, alleged securities fraud and accounting fraud and where whistleblowers and short sellers have also raised these issues.

PwC spokeswoman Megan DiSciullo sent me this statement on the Botta case.

The claims presented are completely false and have no merit. PwC terminated Mr. Botta for violating both firm policy and professional standards after he confirmed twice that he fabricated an internal control and falsified audit documentation on a PwC audit client engagement. The SEC fully investigated Mr. Botta’s purported whistleblower allegations and declined to bring any enforcement action against the firm. We remain confident that PwC will prevail at trial.

DiSciullo and PwC did not answer my questions about whether the firm is retaining its instant message records according to the Sarbanes-Oxley and federal law, whether the firm provided them to the SEC for its investigation, and whether Botta’s attorneys were correct in telling the judge that the firm did not comply with their discovery request for the SameTime messages.

Alex Cabeceiras of the Derek Smith Law Group, an attorney for Mauro Botta, did not respond to a an email or phone request for comment about PwC’s alleged non-compliance with his discovery request and his request for the judge to draw a negative inference form that non-compliance.

A spokesman from the SEC declined comment on the SEC’s investigation of the Botta whistleblower tip.

Here's the info on trial access starting Feb. 22 from the court. A pre-trial hearing will be held today at 2 pm PST.

Trial Access: All counsel, members of the public, and media may access the webinar information at https://www.cand.uscourts.gov/agt

General Order 58. Persons granted access to court proceedings held by telephone or videoconference are reminded that photographing, recording, and rebroadcasting of court proceedings, including screenshots or other visual copying of a hearing, is absolutely

© Francine McKenna, The Digging Company LLC, 2020