Plante Moran is one the largest accounting firms in the U.S. Ranking at number 14, the firm is widely known throughout the Midwest. Its headquarters is in Southfield, Michigan.
When you employ over 2000 people, someone is bound to make a mistake. In an accounting malpractice case called “modern day grave robbery”, Plante Moran was sued for failing to detect a $60 million theft during an audit. That’s quite a mistake and one that could be quite costly for the firm.
The missing $60 million came from families who paid to insure their loved one’s graves would be maintained.
The lawsuit was brought by twenty-eight cemeteries, mostly in Michigan.
According to the cemeteries, the masterminds of the scheme were Clayton Smart and Mark Singer.
Our story begins in 2003 when all the cemeteries were owned by Michigan lawyer Craig Bush. In 2003, Bush was befriended by a financial advisor named Mark Singer. In those days, Singer worked for Deutsche Bank.
Most of the cemeteries had large trust funds each holding millions of dollars. Cemeteries hold money so that the grounds can be maintained. Most cemeteries invest the money and use the interest to pay for maintenance and operations. When someone purchases a plot, part of that money is placed into the trust account to insure permanent care.
Some money held in trust represents prepayments for cemetery plots. When you die, your plot is prepaid so that your family isn’t burden with burial expenses.
Because they held so much money, the cemetery trusts became a natural target for Singer.
Michigan, like most states, regulates these trusts. Government officials and the families of the deceased want to insure the cemeteries will be properly maintained and the grave sites kept well groomed.
Bush wanted out of the cemetery business and began marketing the properties. He found a willing buyer, Clayton Smart. Not so coincidentally, he met Smart about the same time he met Singer. Knowing that the cemeteries held $68 million in their trust accounts, Smart was desperate to acquire the properties.
Bush wanted to sell. Smart wanted to buy. There was just one problem, Smart didn’t have the $31 million that Bush was asking. That is where Singer comes in.
According to court records, Singer and Smart conspired to use the trust monies to fund the purchase price. Later they would then loot the rest.
The cemeteries say that Singer convinced Bush to move the trust accounts to his bank, Deutsche Bank. As required by law, each account was moved separately and not comingled. Once at Deutsche, however, the monies were illegally combined.
The monies were then invested in several hedge funds recommended by Deutsche Bank.
Cemetery trust accounts have many restrictions. As Singer was busy bringing in tens of millions of dollars, his employer, Deutsche Bank, began to get suspicious. Smart and Singer knew they might get caught. Things really got hairy when the bank hired an outside expert to conduct due diligence on Smart.
Federal anti-money laundering laws require banks to perform due diligence on larger clients. Banks have an obligation to keep criminals, drug cartels and money launderers out of the bank.
Knowing that he could get caught at any minute, Singer jumped ship and took a job at Smith Barney. Once there, Singer introduced Smart to Citibank. Citi and Smith Barney are affiliates.
Not knowing of the past due diligence problems and red flags found by Deutsche, Citibank agreed to loan Smart $31.5 million. The collateral? The Deutsche Bank hedge funds holding the cemetery trust account monies.
The perfect crime had been committed. Smart used the segregated cemetery trust funds as collateral to get the loan needed to acquire the properties and the funds they held.
With the financing finally in place, on August 19, 2004, Bush sold the cemeteries to Smart. Michigan’s Cemetery Commissioner approved the transfer.
Clayton Smart acquired 28 cemeteries and $68 million in trust funds and didn’t spend a dime of his own money. Instead, he used the money that had been paid by families to insure the care of their departed loved ones.
Looting the Account
Smart may have acquired ownership of the cemeteries and the cash in the accounts but he couldn’t easily access it. Michigan, like most states, requires cemeteries to keep careful track of trust funds. There are also audit requirements. Simply draining the money from the accounts would quickly land the men in prison.
To access the money, the two had to figure out a way to fool regulators. They had to make it look like the money was there when it was not. Singer helped Smart create phony investment vehicles. On paper, anyone looking would see that the monies were “safely” invested. The investments weren’t real, however.
Smith Barney Becomes Suspicious
It took a while but the cemeteries say that Smith Barney also began to get suspicious. (Remember, Smart now works for the brokerage firm.) In December of 2004, Smith Barney decided to hire outside counsel to review the matter. Unfortunately, it appears that Singer selected the attorney!
No surprises, attorney Peter Jensen signed off on the transactions. (Jensen and his law firm were sued for their alleged role in the fraud as was Deutsche Bank and Smith Barney.)
Plante Moran and Allegations of Accounting Malpractice
In the spring of 2005, Smart’s cemeteries were due for an audit. Those audits are required by the Michigan Cemetery Regulation Act and are common in most states.
Who was hired to do the audit? Plante Moran. The audits were completed yet none of the frauds were discovered.
The cemeteries say that Plante Moran botched the audit and did almost nothing. Despite charging for 1300 hours of work, the accountants simply took Singer’s phony statements at face value. “While the truth behind the spreadsheets should have been discovered when Plane Moran performed the 2004 review, it was not. In an astonishing breach of duty, Plante Moran failed to perform even the minimal due diligence required to uncover the worthless investments on the Cemeteries’ books… They made no attempt to ascertain whether the tens of millions of dollars stated on the spreadsheets was supported by actual assets.”
Plante Moran’s Alleged Liability
The complaint filed by the cemeteries is 102 pages. Covering 31 counts and multiple defendants, Plante Moran was not spared. The law firm, bank, brokerage firm and many individuals were sued. The cemeteries accused Plante & Moran of accounting malpractice and negligence.
As licensed accountants, Plante & Moran had a duty to exercise the knowledge, skill, ability and care ordinarily possessed and exercised by accountants. They also had a duty to act in the best interests of the cemeteries. Although Singer may have owned the cemeteries, each entity was separate and distinct from its owner. According to the complaint, Plante Moran’s real clients were the cemeteries, not Clayton Smart.
Those cemeteries claim that the accountants let them down. Their complaint says the firm used inexperienced accountants and never looked beyond the phony statements provided by Singer and Smart.
Plante & Moran Wins First Round
Shortly after the cemeteries filed their lawsuit, Plante & Moran filed a motion to dismiss.
Plante Moran argued that the cemeteries’ lawsuit should be dismissed for several reasons. They said: (1) the wrongful-conduct rule barred plaintiffs’ claims, (2) plaintiffs could not establish causation given that Smart’s theft occurred before the audit and that there was no evidence that anyone relied on Plante’s report, and (3) plaintiffs could not maintain an action because they were not Plante Moran’s client or non-clients identified in writing.
The court didn’t spend much time on Plante’s arguments or the cemeteries’ rebuttal. Instead the trial judge focused on the engagement agreement. The court ruled that certain of the phony investments were not specified in the engagement letter and were therefore outside the scope of Plante & Moran’s audit.
Although deciding the motion to dismiss on something that was never fully argued, a trial judge in Ingham County, Michigan dismissed the case. For purely technical reasons, the cemeteries’ lawsuit was tossed. (We will examine each of the legal issues below.)
Plante’s victory didn’t last long. On September 17, 2015, a three judge panel of the Michigan Court of Appeals reversed the dismissal. The case against Plante Moran could once again proceed. Plante Moran’s lawyers would try to take their case next to the Supreme Court but were again rebuffed.
Accounting Malpractice & Engagement Letters
Just like lawyers have representation or retainer agreements, accountants have engagement letters. The purpose of these agreements is to memorialize exactly what work the accountant is to perform.
To prove an accounting malpractice claim, one must demonstrate the existence of an accountant client relationship. That relationship is usually evidenced by the engagement letter.
In this case, the Court of Appeals said “[The engagement letter showed the audit was to include tests of the cemetery investment records and other procedures necessary to enable to express an opinion] as to whether management’s assertions regarding compliance contained in the 2004 Cemetery Report are fairly stated, in all material respects based on conformity with” the enumerated public acts listed in the agreement.
The engagement letter referred to the legal requirements of Michigan’s cemetery laws. Many of those laws relate to the trust funds, how the trusts are funded, and how they are invested.
Since the cemeteries claimed that Plante Moran didn’t “test” the records supporting the investments, the dismissal of the cemeteries claims was reversed.
Although the trial judge never ruled on the other arguments of Plante Moran for dismissal, the appeals court did. All the accounting firm’s argument went up in smoke.
Wrongful Conduct Rule
The wrongful conduct rule says that “no man shall take advantage of his own wrong.” That means the cemeteries can’t bring an action or lawsuit if their own wrongdoing caused the loss.
The appeals court properly reasoned that the Smart would be precluded from filing a lawsuit for the cemeteries losses since he was a principal wrongdoer. As mentioned earlier, however, the cemeteries are separate entities from Smart.
Normally the acts of an individual are imputed to the organization. That means a company can’t claim it is a victim of wrongdoing if a company official committed the wrongdoing. The appeals court said that the wrongful conduct rule didn’t apply, however, as the cemeteries didn’t benefit from the thefts. In the words of the court, “Smart’s actions involved the blatant looting of cemetery trust funds for his own personal gain with no intent to benefit the cemeteries…”
Causation is another legal concept in professional malpractice cases. Did the defendant’s actions cause the losses suffered by the victims. In this case, did Plante & Moran’s actions cause the losses suffered by the cemetery trust funds?
Plante Moran made two arguments on causation. First, they said that there was no proof that anyone read and relied on the audit report. Second, the thefts by Smart and Singer occurred before the audit was performed.
Accounting malpractice cases frequently involve accountants who are accused of not uncovering wrongdoing. Here, the cemeteries say that the audit didn’t find the phony investments or detect that monies were being looted from the accounts.
Most courts say that the people bringing the lawsuit must prove that relied on the audit report. One court expressed the concept this way:
“The reason for this is simple: if no one relied on the reports so as to ‘be lulled by the audits in failing to detect’ the financial perils faced by the company, then the harm would have occurred even without the accountant’s audit and the accountant cannot be considered a cause of the resulting in harm.”
According to Plante Moran, since Smart owned the cemeteries and Smart was the one looting the trust funds, the cemeteries are precluded from relying on the audit report. Once again, the court pointed out that in this case, the cemeteries’ interests were different from Smart’s. They were adverse, in fact. Smart’s actions hurt, not helped, the cemeteries.
The arguments centering on the timing of the losses are more complex. If the all money was gone by the time Plante Moran did the audit, then nothing they did or discovered could have prevented the losses from occurring.
The court, however, said that Plante Moran oversimplified the facts. The cemeteries say that although much of the losses did happen before the audit, had the accountants done their job properly, $27 million of thefts could have been prevented or monies recovered.
Were the Cemeteries Plante Moran’s Clients?
Michigan has an accounting malpractice statute that dictates who has standing to bring a lawsuit. Because the law was changed between 2004 – 2005 when the wrongdoing occurred and now, those arguments are not addressed in this post.
The Scheme Finally Collapses
Singer and Smart’s greed was ultimately too much. Despite the clean audit report in 2005, authorities in Michigan and Tennessee began investigating the cemeteries. As the money ran out, the properties were placed in receivership. By then it was too late. As much as $60 million – or more – was missing.
Criminal prosecutions were begun. Michigan recovered some money from Bush although that settlement is sealed and is not public.
Clayton Smart was convicted for his role in the thefts. In 2011, Smart was sentenced up to twenty years in prison. He was 71 years old at the time of his sentence. For him, it is a likely death sentence.
And Plante & Moran? Last December the Supreme Court ordered the case to go trial. The thefts took place over a decade ago. Hopefully the cemeteries and the families of those interred in those cemeteries will find justice.
Suing an accounting firm is not easy. This post touches on several of the defenses and procedural roadblocks in an accounting malpractice case. Often the stakes are quite high and the accountants’ reputations are on the line. For the victims, the stakes can also be huge such as a large IRS bill or the loss of one’s business.
If you have a similar tale involving Plante & Moran or other accounting firm, we want to speak with you. We understand these cases and can help you achieve justice.
Common accounting malpractice scenarios include bad tax advice, improper tax return preparation, poor quality audits, failure to detect fraud and promoting abusive tax shelters (419 plans, welfare benefit plans and captive insurance schemes).
For more information on any of the topics, contact the author of this post, attorney Brian Mahany at or by telephone at 414-704-6731 (direct). The time period to bring claims against accountants varies widely state to state. If you think you have a potential claim, don’t delay in calling.
All inquiries are confidential and without obligation or cost. Even if you don’t have a case but just want to help or have information, we would love to listen.
MahanyLaw – The Accounting Malpractice Lawyers
(About us: We consider cases nationwide with provable losses of $1 million or more.)