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A Massachusetts federal judge has stepped aside from a high-stakes lawsuit accusing accounting powerhouse BDO USA and senior executives of inflating the price of company stock sold to an employee stock ownership plan, a $1.3 billion transaction now under intense scrutiny.

The ESOP BDO judge exit unfolded after U.S. District Judge Richard G. Stearns disclosed a potential conflict tied to his wife’s financial holdings, prompting his recusal from the proposed class action.

Judge Cites Spousal Financial Interest

Judge Stearns entered an electronic recusal order Friday in a case brought by Tristin Taylor, a BDO employee who filed suit in January under the Employee Retirement Income Security Act (ERISA). Taylor alleges that BDO’s privately held shares were significantly overvalued and that the company violated its fiduciary duties by pushing the deal through to benefit top leadership.

In a September amended complaint, proposed class members — all participants in the BDO ESOP — contend that State Street Global Advisors Trust Co. was deliberately left unaware of an internal campaign to fast-track the transaction at an inflated valuation. While State Street is not named as a defendant, the complaint paints it as a key player whose role could loom large if the case proceeds.

Judge Stearns noted that connection proved decisive.

“My wife is a former executive of State Street Bank and as a result holds a substantial number of its shares in her retirement account,” Stearns wrote. “While State Street is not named as a defendant, if Taylor’s amended complaint is permitted to proceed to trial, State Street is a necessary witness.”

Reputational Stakes at Play

In his order, Stearns said federal recusal law requires judges to disqualify themselves in certain circumstances when they or their spouses hold stock in a company tied to a dispute. Even as a nonparty, he said, State Street qualifies as a “material nonparty witness,” and the outcome of the case could ripple into his wife’s financial interests.

The judge added that the allegations place State Street’s reputation squarely on the line, like a referee suddenly becoming part of the scoreboard.

“State Street has a reputational interest in any determination that might suggest that it failed to exercise due diligence in properly evaluating the stock sold by BDO to the ESOP,” Stearns wrote.

Case Reassigned After Recusal

Following the ESOP BDO judge exit, the case was reassigned to U.S. District Judge Denise J. Casper, with U.S. Magistrate Judge Donald L. Cabell designated should the matter be referred.

Representatives for BDO and the proposed class declined to comment Monday.