Accounting Firm Sued In Ponzi Scheme Case

Guest Post by Brian Mahany

Here is a new twist. A hedge fund sues an accounting firm for its failure to uncover a Ponzi scheme operated by one of the hedge fund’s traders. That might sound farfetched, but its not. New York accounting firm Rothstein Kass was sued by two hedge fund managers in San Francisco Superior Court after the fund lost millions of dollars to one of its traders who was allegedly running a Ponzi scheme.

The plaintiffs in the case, two hedge fund managers from Nevada based Paron Capital, claim that Rothstein Kass was hired to verify the trading results from one of their traders. They claim the accountants were specifically hired to perform due diligence and insure the trader was not a fraudster. The accountants, however, say they did nothing wrong and were never asked to verify the trader’s alleged 20% rate of return.

It’s too early to tell what actually happened or who is right but on October 19th, a California judge denied the accounting firm’s motion to dismiss the lawsuit. This means the case will be set for trial. Paron Capital is seeking $50 million in damages.

This case is unusual for several reasons. First, Paron Capital seemingly did everything required of it yet was still the victim of fraud. Many companies do no due diligence whatsoever. Here, however, Paron says it hired a reputable accounting firm to look for fraud.

Hiring a legitimate auditing or CPA firm before making major investments makes great sense. Fraudster and Ponzi scheme artists are criminals; they usually don’t have enough money to pay back all their victims. Auditing firms typically have errors and omissions insurance, however.

Successful fraud and asset recovery lawyers always look for deep pockets in any case. The fraudster is often not the one with assets. If the allegations in this case are true, the trader is likely to face prison. According to an article in Accounting Today, the trader has already been charged with fraud by the Commodity Futures Trading Commission.

The second interesting aspect of the case is that Paron’s complaint alleges that Rothstein Kass facilitated the fraud. In most accounting malpractice cases, the accountants were simply asleep at the wheel or performed substandard work. Here, the hedge fund claims that the fraudster / rogue trader was personal friends with one of the Rothstein partners and that Rothstein Kass actually knew of fraud yet never said anything.

Cases like this are certainly unusual. Many smart people are victimized every day by fraud. That a hedge fund with hire a reputable CPA firm to verify trades and trading history is impressive. That the accounting firm would then “switch sides” and help the fraudster while also being paid by the victims is very rare. Let’s hope Rothstein Kass has good insurance.

If you are the victim of a Ponzi scheme, investment fraud or securities violation, call us. The fraud lawyers at Mahany & Ertl have helped many people recover their hard earned money. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at brian@mahanyertl.com.

Mahany & Ertl, America’s Fraud Lawyers – offices in Detroit, Michigan; Portland, Maine and Milwaukee, Wisconsin.

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