The audit system in the United States is largely broken. Most auditors are financially dependent on the very people they are required to audit. If you perform a rigorous audit and get a reputation for not giving clients high markets on their financials you will soon find yourself with no clients. Fail to report something, however, and you might get sued by investors or others. Veraja Snelling Company, an Illinois audit firm, is learning the latter lesson.
Several weeks ago, Peregrine Financial Group went under after the CEO attempted to commit suicide and left a note confessing to a massive theft. The fraud was on the verge of being uncovered by regulators when CEO and founder Russell Wasendorf Sr attempted to kill himself by inhaling exhaust fumes. Regulators soon found that $200 million in customer funds went missing. Some customers say that the fraud and theft began back in 1992 and had taken place undetected for 2 decades! Now those investors are suing the audit firm and U.S. Bank too.
Why? Pardon our cynicism but those are about the only people who may have some money (deep pockets) and some responsibility. The latter will have to be determined by a jury. The suit was just filed on Friday.
According to the lawsuit, Veraja Snelling and U.S. Bank were among those that could have “easily detected” the fraud with “minimal investigation.” They say both companies refused to lift a finger to stop or even detect the fraud.
The case against the bank is different than the claims against the auditors. The investors say that U.S. Bank should have been aware that the balance in the company’s customer accounts (less than $10 million) was woefully inadequate for a company that boasted hundreds of millions in customer funds. They also say that the bank was aware that Wasendorf was forging the signature of one of the bank’s own employees.
The case against the bank will not be easy. The bank has a duty to its customers but the investors were not customers of the bank. They were Peregrine’s customers. Whether the bank had actual knowledge of the fraud is questionable and even if they should have become suspicious when the customer accounts fell below $10 million, much of the damage was already done.
The case against the audit firm is a different story. Audit firms are specifically hired by banks and investment firms to examine their financial health. That includes verifying that customer accounts were properly segregated and that the firm’s financial reports were accurate. Obviously, they were not.
According to the complaint,
“Likewise, PFG’s auditors, including Veraja-Snelling Company (‘VSC’) and Jeannie Veraja-Snelling (‘Veraja-Snelling’), were responsible for the effects of the scheme. The auditors were under a duty to verify the accuracy of PFG’s financial statements, including those regarding segregated customer funds. Despite the fact that the statements were completely polluted with misinformation, the auditors took no steps to effectively discharge their duties.”
In 2013, the CFTC barred Veraja-Snelling from working for firms overseen by the agency. In a prepared statement, a CFTC spokesperson said, “There is no place … for below-standard audits or auditors who do not have a sufficient understanding of the futures industry.”
Wasendorf did not die from his suicide attempt and was immediately arrested. He will likely spend his life behind bars.* Hopefully for investors, the audit firm has insurance. Most legitimate audit firms are covered. Whether a small firm has enough coverage to satisfy $200 million in claims is extremely doubtful, however. [*After this post was written, Wasendorf was sentenced to 50 years, effectively a life sentence.]
What are the lessons here? Most people give up when they lose their money to a Ponzi scheme or fraud. Court ordered restitution only works if the bad guys have assets or have a job. In most big Ponzi schemes, the bad guys are headed to prison and will never be able to pay claims. Smart asset recovery lawyers know to look for insurance, auditors, brokers and others who may have facilitated the fraud or turned a blind eye.
If you lost your hard earned money to a fraud or Ponzi scheme, give us a call. We are unique in our approach to fraud losses and can often recover money when others can’t. Any lawyer can get a judgment against a criminal but collecting is another story. That’s why law firms often hire our firm to find hidden assets and other deep pockets.
If you would like more information, contact attorney Brian Mahany at online, or by telephone at 202-800-9791. All inquiries are protected by the attorney – client privilege and kept in confidence. If you are or were a former audit company employee and know of fraud or sloppy auditing, we would like to talk to you too. In addition to representing victims, we also represent whistleblowers who wish to come forward and expose the truth.
Mahany Law – America’s Fraud Lawyers.