Posted by Kosta Arvanitis.
In an article written by Sophia Pearson and Elizabeth Amon, they update us on the on-going recovery of funds for Bernie Madoff’s Ponzi Scheme victims. Being the biggest one to date, it has been a grueling process in recovering the billions of dollars lost tied to the scheme. In this specific case, FutureSelect Portfolio Management sued EY in 2010 over faulty audits tied to a Madoff-linked feeder fund, Tremont Group Holdings Inc., and ultimately won a portion of its $112 million loss back. This is just the one of many victims of the scheme; and since Madoff’s incarceration, only 34% of the billions of dollars of losses have been recovered by his thousands of victims. The Washington state court for FutureSelect’s case found that the accounting giant was negligent by signing off on audits of billions in assets that didn’t exist.
It is rare that a negligence case arise against a Big Four accounting firm. This case was brought because under a Washington state securities law, it is more protective of investors than other federal and state statutes (Amon Pearson 4). The main accusation of FutureSelect’s was that EY relied on audit reports done by Madoff’s notorious accounting firm, Friehling & Horowitz. They claim that EY failed to question the firm’s professional reputation; and in doing so, took an enormous risk and lost $112 million in its investment fund. The audit reports were of Rye Funds, managed by Tremont Group Holdings Inc., who was also sued by the company. It appeared as though EY failed to perform adequate procedures in testing the existence of Rye’s assets on their financial statements, which FutureSelect claimed in court documents.
Here are the facts. EY audited Rye Funds, who were managed by Tremont Group. Tremont was the second largest feeder into Madoff’s multibillion dollar fraud. EY also audited Tremont through 2008, and supposedly did not suspect a thing even though Madoff’s assurances showed that Rye outsourced investment decisions, and even record keeping (which should have waved red flags). EY’s spokesperson Amy Call Well, stated that EY technically did not audit a Madoff entity, that they were among many auditors who also chose to use Madoff as their investment adviser. They mistakenly trusted the work done by Madoff’s accountant, saying also that they couldn’t have seen the Ponzi scheme coming. Another important factor is that in 2013, FutureSelect opted to pursue its own case when Tremont and Madoff’s brokerage agreed to a $1 billion settlement that would free up money to repay other victims of the scheme. FutureSelect tried to see if they could be more successful in conducting their own case. The question on all of this is whether EY did everything they could in their power, through adequate audit procedures, to uncover any potential fraud. In which case, there were billions in assets that did not exist that EY failed to detect, which showed EY’s negligent misrepresentation. In the end, FutureSelect’s awards netted $10.15 million, of which EY was found half liable, and FutureSelect half liable of the total $20.3 million in damages.
Kosta is a graduate accounting student with a certification in forensic accounting at the Feliciano School of Business, Montclair State University.