On August 3, 2018, Judge David B. Atkins for the Circuit Court of Cook County, Illinois, granted final approval of a $27.5 million settlement, concluding a nearly decade-old putative investor class action against McGladrey & Pullen LLP, an accounting firm, for its alleged fraud and negligence arising out of one of the largest Ponzi schemes in U.S. history.
The conclusion of this case is significant for not only surmounting numerous legal hurdles and the value of the final settlement, but also the rarity of such a case in which the auditor was allegedly involved in its client’s fraud and a fraud of such magnitude as Tom Petters’ Ponzi scheme.
Before there was Bernie Madoff, there was Tom Petters.
Petters, the CEO of Petters Group Worldwide, operated one of the largest – and most brazen – Ponzi schemes on record. McGladrey and Altschuler played central roles in Petters’ $3.65 billion Ponzi scheme. Petters implemented his Ponzi scheme in part through feeder funds, some of which were known as the Lancelot Funds. Through these feeder funds, Petters would solicit investments for the purpose of purchase order financing, i.e., funding the purchase and resale of bulk consumer electronics and appliances to retail entities like Sam’s Club and Costco. These transactions were coordinated through the Lancelot Funds, which would subsequently repay the investors’ money with earned interest. McGladrey and Altschuler were the Lancelot Funds’ auditors: they repeatedly certified the Lancelot Funds’ financial statements and stated that the Lancelot Funds’ financial statements were compliant with U.S. generally accepted accounting standards, giving significant comfort to investors.
In September 2007, the FBI and other regulators uncovered the Petters Ponzi scheme. In December 2009, Petters was convicted of 20 counts of wire fraud, mail fraud, money laundering, and conspiracy, and he is currently serving a 50 year prison term. While the FBI, U.S. Department of Justice, and the SEC pursued Petters, they did not pursue the defendant accounting firms.
On March 30, 2010, Cohen Milstein filed a class action lawsuit on behalf of investors against McGladrey and Altschuler in Illinois state court for failing to follow generally accepted accounting standards and guidelines and issuing materially false and misleading audit reports that were relied upon by the Lancelot Funds’ investors. The lawsuit, however, was stayed by the federal bankruptcy court overseeing the Lancelot Funds’ bankruptcy proceeding, at the request of the Lancelot Funds’ bankruptcy trustee. The lawsuit remained stayed for five years until a federal district court in Illinois dismissed the trustee’s lawsuit against McGladrey and Altschuler under the doctrine of in pari delicto, determining that the trustee could not pursue a case against the accounting firms for fraud when the Lancelot Funds’ themselves had also engaged in related acts of fraud. The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s ruling. Shortly thereafter, Cohen Milstein’s action on behalf of investors against McGladrey and Altschuler was reinstated.
On March 4, 2016, the defendants filed motions to dismiss, arguing, among other things, that the Lancelot Funds investors’ claims belonged only to the trustee, and that neither McGladrey nor Altschuler could be held accountable for their misrepresentations to investors. Cohen Milstein successfully defeated the defendants’ arguments, and on January 10, 2017, Judge Atkins denied the defendants’ motions to dismiss in their entirety. Thereafter, Cohen Milstein successfully defeated the defendants’ motions for reconsideration and the defendants’ petition to the Illinois Appellate Court for interlocutory appeal.
The case name is: Tradex Global Master Fund SPC Ltd. et al. v. Lancelot Investment Management, LLC, et al., Case No. 10-CH-13264, Circuit Court of Cook County, Illinois