SEATTLE (CN) - A bankruptcy trustee claims a mortgage investment fund operator defrauded 750 investors in a $150 million Ponzi scheme and an accounting firm turned a "blind eye" to it.
Frederick Darren Berg pleaded guilty in August to federal charges of defrauding Meridian Mortgage fund investors. He is awaiting sentencing.
Berg, who started the Meridian Mortgage funds in 2001, lavished investors' money on himself, buying a waterfront mansion, yachts, real estate, private jets and a luxury bus company, according to the complaint in King County Court.
Moss Adams LLP, the accounting firm, regularly issued unjustifiable "clean" audit reports for the funds, which allowed Berg to continue soliciting investments, according to the complaint.
"In order to successfully carry out the fraudulent scheme, Berg regularly retained Moss Adams to perform, among other financial services, audits of the investment company and investment funds. At the conclusion of each of these alleged 'audits,' Moss Adams issued a 'clean' audit opinion/report. Berg used these 'clean' audit reports, with Moss Adams' knowledge and consent, to solicit additional investment from members of the public," the complaint states.
"Had Moss Adams properly performed even the most basic of their duties and responsibilities, as opposed to turning a 'blind eye' to Berg's conduct, they would have had no choice but to disclose the massive fraud being perpetrated by their large client Berg. However, to the extent Moss Adams performed audit and accountancy work, it was performed so negligently, and so lacking in due care, that it allowed Berg's fraudulent scheme to grow, undetected, for over 9 years. Indeed, instead of uncovering the fraud, Moss Adams issued, year after year, false, unqualified and unjustifiable 'clean' audit reports which Moss Adams knew Berg would use to solicit additional investment in his Funds, and which Moss Adams knew or should have known investors were relying on in deciding to invest money in the funds. Absent Moss Adams' representations that the investment company and investment funds' operations were financially legitimate, investors would not have made and/or maintained their investments and would not have lost over $150,000,000."
Investors forced the funds to file for bankruptcy in 2010 after Meridian failed to make monthly interest payments. Then the fraud was uncovered, according to plaintiffs trustee Mark Calvert.
Investors say Berg engaged in "systematic and continuous fraud" since he founded Meridian by misappropriating funds for his extravagant living.
"By way of example, without limitation, Berg misappropriated from the Meridian Funds approximately $45 million for the creation and operation of a luxury bus company named MTR Western and several subsidiaries; $11 million for the purchase and remodeling of a waterfront mansion on Mercer Island, Washington; $1.5 million for the purchase of a condominium in Seattle, Washington; $1.2 million for the purchase of a condominium in San Francisco, California; $3 million for the purchase of two yachts; and $8 million for the purchase and/or lease of two private jets.
"To support his lifestyle and continue his misappropriation scheme unabated, Berg engaged in a classic 'Ponzi' scheme whereby he used investment money from new investors to cover interest payments and redemptions due existing investors," according to the complaint.
Moss Adams collected "substantial fees" for the audits, which failed to follow Generally Accepted Auditing Standards and the company's own internal policies, Calvert says.
"On information and belief and by way of example, Moss Adams's reviews during, and audits for, the years 2001 through 2007 did not conform with GAAS and Moss Adams's own internal guidance, practices, policies and procedures in that, at a minimum and without limitation, Moss Adams failed to exercise due professional care in the planning, staffing and performance of its examinations and the preparation of its reports, did not supply the requisite critical review, skepticism and judgment relating to the work done, failed to remain independent as required under GAAS, and failed to maintain proper independence in mental attitude," the complaint states.
"This systemic failure by Moss Adams on a firm-wide basis was a substantial factor in causing damage to Investors."
The list of plaintiffs covers 7½ single-spaced pages in the 52-page complaint.
Calvert seeks disgorgement and treble damages for professional negligence, misrepresentation, fraud and consumer law violations.
The investors are represented by John Gagliardi with Luvera, Barnett, Brindley, Beninger & Cunningham.
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