MANHATTAN (CN) - Deloitte & Touche aided and abetted a $553 million Ponzi scheme by issuing clean audit reports on it, the Iowa Public Employees Retirement System claims in Federal Court.
The civil case stems from criminal prosecutions against Paul Greenwood, 61, and Stephen Walsh, 64, who are accused of defrauding investors in their commodities and investment house, WG Trading Investors.
Greenwood allegedly took $293 million through promissory notes, and Walsh $261 million.
The SEC and Commodity Futures Trading Commission also suedthe men in 2009, claiming that they spent the money on, among other things, high-priced collectible teddy bears.
Greenwood and Walsh also owned WG Trading Company, a registered broker-dealer; Westridge Capital Management, a registered investment adviser; and WGIA LLC.
Greenwood pleaded guilty. The charges against Walsh are pending.
In its 28-page complaint filed last week, the Iowa Public Employees' Retirement System claims that Deloitte & Touche should have warned its clients about the scheme, but ignored warning signs of the fraud.
"Plaintiff suffered millions of dollars of losses as a result a fraudulent investment
scheme that had the elements of a classic Ponzi scheme," the complaint states. "At all relevant times, defendant served as the auditor of a company controlled by the operators of the fraudulent scheme, and it aided and abetted the scheme by issuing unqualified and/or 'clean' audit reports on which plaintiff justifiably relied in purchasing securities issued as part of the scheme. Defendant acted in willful blindness of the scheme, and its auditing practices were so deficient that the audits amounted to no audit at all, or an egregious refusal to see the obvious, or investigate the doubtful, and the professional judgments which it made were such that no reasonable auditor would have made the same decisions if confronted with the same facts."
Between early 2007 and late 2008, the Iowa pension invested roughly $496 million in the managers' companies, according to the complaint.
The National Futures Association suspended Greenwald and Walsh from trading on Feb. 13, 2009, because they refused to cooperate with an audit, according to the complaint. The Futures Association referred the case to the SEC, whose investigators said they "immediately" discovered the fraud with "red flags" dating as far back as 2005, according to the pension fund's complaint.
"According to the SEC examiner in 2009, the 'fraud was not that hard to uncover,'" the complaint states. "The SEC examination team recognized, as Deloitte should have, that a proper examination of WGTC could not be performed without examining certain records that showed that WGTI (the unregistered/unaudited entity) was being used as a 'pass-through' between WCM and WGTC and between WGTC and the investors."
According to the complaint, Deloitte & Touche's annual audit reports from 2005 to 2007 reported nothing unusual.
The pension fund says the audits stated: "In our opinion, such financial statements present fairly, in all material respects, the financial position of [WGTC] at December 31, 2005 [2006 and 2007, respectively], and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America."
The pension fund seeks compensatory and punitive damages for participation in breach of fiduciary duty and violation of Section 10(b) of the Exchange Act.
It is represented by Thomas I. Sheridan III of Hanly Conroy Bierstein Sheridan Fisher & Hayes.
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