Wednesday, February 24, 2016
Ninth Circuit Says Accountants Not Liable for Failure to Detect Client’s Role in Ponzi Scheme
By a MetNews Staff Writer
An accounting firm that audited some of the financial statements of companies involved in what a judge found to be a “massive Ponzi scheme” is not liable to defrauded investors, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The court said Stonefield Josephson, Inc. cannot be held liable for professional negligence or for aiding and abetting the conversion of investors’ funds because there is no substantial evidence the investors’ relied on the audits.
Robert Mosier, court-appointed receiver for the companies of Orange County-based Private Equity Management Group, or PEMGroup, sued Stonefield, claiming the company misrepresented PEMGroup’s financial condition and thereby induced new investors to put their money in the companies. The receiver sought $51 million in damages, just part of the total $950 million lost by investors in the scheme, according to the Securities and Exchange Commission.
PEMGroup was organized by Danny Pang, a native of Taiwan who obtained most of his funding from Taiwanese investors. The SEC and others said PEMGroup claimed to invest in life insurance settlements and time shares, but that the money was actually used to finance Pang’s lifestyle and lavish expenses, including a Disney cruise for all of his employees.
The SEC seized the companies in April 2009, and Pang was charged criminally with evading currency-reporting laws. He died in September of that year while under house arrest awaiting trial.
He was 42 years old. The coroner subsequently said he committed suicide by consuming large dosages of opioids.
In his suit against Stonefield, Mosier said the accountants should have warned investors, in the 10 audit reports it prepared for a PEMGroup subsidiary between 2003 and 2007, that management had not accurately reported the value of the company’s assets in accordance with Generally Accepted Accounting Principles.
The reports did, however, express reservations about some of the company’s practices, including selling assets to an affiliated entity that shared the same advisor, and failing to present proof, apart from its internal evaluation, that those assets were sold at fair market value.
U.S. District Judge Philip Gutierrez granted the accountants’ motion for summary judgment on causation grounds, and the Court of Appeals affirmed in an opinion by Senior Judge Stephen S. Trott.
The receiver failed to present proof of reasonable reliance, Trott said, noting that the district judge excluded all of his proffered evidence of reliance as hearsay and that he did not challenge that ruling on appeal.
“We find it difficult on this record to swallow the idea that PEMGroup showed Stonefield’s qualified audits to investors in Taiwan,” Trott wrote. “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. Were the audits translated into their language? Do they read English? In his deposition, Mosier testified that he had a meeting with defrauded investors to discuss what ‘induced them to come’ to PEMGroup. Mosier said—and this was excluded hearsay—that the investors said, ‘We all relied on the audit reports.’ Did Mosier ask the investors for any paperwork corroborating their assertion? At least one of them might have had paperwork and files to scaffold their alleged statements and Mosier’s assertions. Did he ask them for it? It’s axiomatic that when stronger evidence of a fact is available, weaker evidence becomes even more so. If Conan Doyle had authored this scenario, he could have called it ‘The Case of the Missing Link.’”
Randall A. Smith of Brown Rudnick LLP in Irvine argued the case for the plaintiff and Stephen J. Tully of Garrett & Tully, P.C. of Westlake Village for the defendant.
The case is Mosier v. Stonefield Josephson, Inc., 13-56453.
Copyright 2016, Metropolitan News Company