Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 28 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Thursday, May 24, 2012

Committee Alleges That the Auditor in the Stanford Financial Ponzi Scheme Did More Than Issue False Financial Statements

Posted by Kathy Bazoian Phelps
We have certainly seen many auditor liability cases recently where the auditor, either in reliance on data from the Ponzi insiders or in cahoots with the insiders, issued false financial statements on which the investors relied.  While not quite a dime a dozen, there have been many such cases lately where the results of the audit have created liability.
A new complaint that the Official Committee of Unsecured Creditors in the Stanford Financial Ponzi scheme case filed last week makes those types of allegations. But it goes well beyond that in seeking to hold the auditor, BDO USA and related BDO entities, liable for what may be millions, if not billions, of dollars.
Because Allen Stanford’s Ponzi scheme was largely centered in Antigua, he wanted to weaken that country’s banking laws.  He established a Task Force of nine individuals, three of whom were BDO partners.  The Committee complaint alleges, “A key initiative for the Stanford Task Force — fully known to BDO USA — was to amend Antigua’s Money Laundering (Prevention) Act to ensure that “fraud” and “false accounting” did not fall under the Act’s prescribed list of violations.” 
The complaint further alleges, “BDO USA was charged with some of the most important responsibilities to complete this initiative, including reviewing and advising on Antigua’s banking laws, and making recommendations to Antigua’s regulatory authorities, including procedures for supervising and examining international banks.”

It also alleges, “BDO USA’s service on the Task Force completely undermined its independence from Stanford Financial Group, and as a result, BDO USA blatantly violated Generally Accepted Auditing Standards (“GAAS”) by issuing unqualified audit opinions on its Stanford Clients’ annual financial statements during the years that BDO USA served on the Stanford Task Force.” 

The BDO audit engagement partner also allegedly concealed material information from the audit engagement team, e.g., that the SEC was investigating Stanford Financial for securities fraud.

Therefore, in addition to the “numerous audit failures,” which would support standard negligence claims, the Committee’s complaint also includes claims for relief based on several aiding and abetting theories, as well as conspiracy, and seeks both actual and punitive damages.  The complaint also requests a jury trial. 

We will continue to monitor the progress of this case.  A copy of the Committee’s complaint is attached here.

Negligence, aiding and abetting, conspiracy, and auditor liability issues are discussed in detail in The Ponzi Book: A Legal Resource for Unraveling Schemes.

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