Suit Against Ponzi|Auditors a No-Go

PASADENA, Calif. (CN) - The Ninth Circuit on Thursday upheld a judgment favoring accountants who audited the financial statements in a $950 million Ponzi scheme.

Robert Mosier, the court-appointed receiver for Private Equity Management Group, or PEMGroup, was appointed after the PEMGroup's directors and managers used its subsidiary companies to defraud investors.

Mosier sued Stonefield Josephson Inc. - who audited the financial statements for six of PEMGroup's fraudulent offerings - seeking $51 million in damages, but a federal judge sided with Stonefield.

In the Ninth Circuit three-judge panel's 26-page opinion upholding the decision, Senior Circuit Judge Stephen Trott said that the court was right to rule that Mosier could not sue on the behalf of the defrauded investors and could therefore only file a lawsuit alleging either professional negligence or aiding and abetting.

Given those legal avenues Mosier needed to make a showing of "reasonable reliance" of the defrauded investors on Stonefield's audits, which the district court correctly concluded Mosier failed to do, Trott said.

"We find it difficult on this record to swallow the idea that PEMGroup showed Stonefield's qualified audits to investors in Taiwan," Trott said.

"Mosier would have us believe that numerous Taiwanese investors lost millions to this fraud, yet he has not produced a single victim willing to step forward to help in a process that could indirectly recoup his or her losses."

Trott added that "it's axiomatic that when stronger evidence of a fact is available, weaker evidence becomes even more so," and "If Conan Doyle had authored this scenario, he could have called it 'The Case of the Missing Link.'"

Mosier's "fatal problem" is that he has "no evidence whatsoever" demonstrating how proffered evidentiary correspondence was used and what weight the investors placed on that correspondence, Trott said.

Furthermore, none of that evidence provides an opinion on the financial statements at issue, Trott said.

"The district court correctly said that 'the record is entirely devoid of any actual, admissible evidence of reliance by anyone,'" he said.

"The sentences that Mosier cherry-picks out of context from the district court's order do not prove otherwise."

Neither side's arguing attorney immediately responded to an email requesting comment on Tuesday morning.

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