Unnamed Defendants in Mortgage Meltdown: Accountants for Banks and Investment Bankers

Some time ago we mentioned on these pages that the auditors who certified the financial statements (KPMG, here) would come under intense scutiny simply because they MUST have known, by simple common sense, that the economics of mortgage lending had been turned on its head. The worse the loan quality the more they made leaving hapless investors, who put up the money, and hapless borrowers, who put up their homes, in unworkable investment schemes devised to decieve, manipulate and steal. Here, laid bare, along with the IndyMac story, shows the outright complicity of the big accounting firms in the major frauds to jolt our economy in the past few years. regulators, virtually owned by the banks, of course played the game. As former, current or future employees of the banks they knew who was writing their paychecks, directly or indirectly.


December 22, 2008

In Madoff’s Wake, Scrutiny of Accounting Firms



As more details unfurl in the Bernard L. Madoff fraud case, so do the lawsuits. And the big accounting firms, which oversaw many of the feeder funds that funneled billions of dollars into what prosecutors describe as the largest Ponzi scheme ever perpetrated, are likely to be among the defendants.

Though Bernard L. Madoff Investment Securities itself was audited by small firms, questions are arising over how major firms like PricewaterhouseCoopers and KPMG overlooked several red flags related to the operations over a number of years. The big accounting firms are likely to face queries about why they gave their seal of accounting to the astoundingly steady positive returns booked by a fund manager whose investment strategy was nearly completely opaque.

One investor in a feeder fund, New York Law School, has already sued BDO Seidman, the auditor of one of its money managers, arguing that the firm failed to notice warning signs related to the $50 billion scandal.

The district attorney for Rockland County, N.Y., Thomas P. Zugibe, has also begun inquiries into Friehling & Horowitz, the three-person accounting firm that provided services to Mr. Madoff’s firm. Many have asked how a company as small as Friehling — a three-employee firm based in New City, N.Y., that occupies a 13-foot-by-18-foot storefront space in an office plaza — could have handled an operation as large as Bernard L. Madoff Investment Securities. Friehling & Horowitz is also the subject of a preliminary ethics investigation by the American Institute of Certified Public Accountants started after the scandal broke.

Another small accounting firm, Sosnik Bell, handled paperwork for investors in Mr. Madoff’s firm, according to Clusterstock, a financial news blog. Sosnik Bell, based in Fort Lee, N.J., processed forms for these investors, and then forwarded its work to the investors’ own accountants. Executives from Sosnik Bell could not be reached for comment.

A more lucrative place for victims of the fraud, however, are at the giant accounting firms that audited the investment managers who directed money into Mr. Madoff’s firm.

In several other fraud cases, accounting firms, which are responsible for scrutinizing the financial underpinnings of companies, have become targets for investor lawsuits. Ernst & Young paid $300 million to settle a lawsuit filed by Cendant related to fraud at one of the conglomerate’s subsidiaries. It had earlier paid $335 million to settle a lawsuit filed by Cendant shareholders.

Also last year, Pricewaterhouse agreed to pay $225 million to settle auditing malpractice claims tied to the Tyco scandal, which saw the convictions of top executives for grand larceny, conspiracy and securities fraud. Pricewaterhouse’s payment amounted to about 7 percent of total amount paid in Tyco lawsuits.

But the Madoff case presents an unusual situation, said Scott M. Berman, a partner at the law firm Friedman Kaplan Seiler & Adelman who represents investors in several feeder funds. Previous cases focused on the auditors of the firm at the center of the scandal, not the auditors of investment managers one rung removed.

“I expect that this is an issue that has not been litigated before,” Mr. Berman said.

With many of the feeder funds’ managers having taken losses from their own personal exposure to Mr. Madoff’s firm, the accounting firms may be a likely target for investors seeking to recoup at least some of their money.

PricewaterhouseCoopers was the main auditor for Sentry, the largest fund run by Fairfield Greenwich Group, the $14.1 billion investment manager that has lost the most money so far in the Madoff scandal. The accounting firm was tasked with minding Sentry, which had about $7.5 billion invested in Mr. Madoff’s firm.

“The company has not yet settled on a legal strategy,” said a Fairfield spokesman, Thomas Mulligan.

A spokesman for PricewaterhouseCoopers, Mike Davies, said, “No claim has been asserted against the PWC member firm in relation to Madoff, and we know of no valid basis for any claim.”

The lawsuit by New York Law School, filed in federal court in Manhattan last week, names J. Ezra Merkin, the money manager who placed $3 million of the school’s money into Mr. Madoff’s firm. But it also sues BDO Seidman, the American arm of BDO International and the auditor for one of Mr. Merkin’s funds, Ascot Partners.

In its lawsuit, New York Law School said that BDO Seidman had “utterly failed” in its auditing of Ascot Partners. The lawsuit says that BDO Seidman failed to flag Ascot’s reliance on a single money manager, Mr. Madoff, as well as Mr. Madoff’s reliance on Friehling & Horowitz.

BDO Seidman has said that it never audited Mr. Madoff’s firm, just Mr. Merkin’s, and that its audits of Ascot Partners “conformed to all professional standards.”

Mr. Berman, however, said the firm had a duty to dig deeper. “I don’t think that they can simply, blindly accept what Madoff did without doing their own auditing work,” he said.

3 Responses

  1. my heart goes out to all those who are going through this and face losing there houses i was one of them.IF YOUR LOKKING FOR UNDERSTANDING OR COMPPASSION OR ON AN AFFORDABLE LOAN PAYMET OR EVEN THE TRUTH FROM WELLS FORGE GOOD LUCK .MY DAUGHTER AND I LOST MY HOUSE IN AUGUST 2011.I BOUGHT MY HOUSE IN2001.WAS HURT ON MY JOB OF 10 YRS IN 2007 AND THEY FIRED ME I WAS A LIAIBILITY MY DAUGHTER AND I HAVE BEEN HOMLESS EVER SINCEI AM PERMENENTLY DISABLED AND MY DAUGHTER HAS A CHRONIC ILLNESS SHE HAS WAGNERS DIDEASE LOST HER HEARING AND MOST OF HER EYESIGHT WAS AT A TIME IN REMMISSION AFTER ALL THE STRESS HER ILLNES CAME BACK SHE IS VERY SICK AND HAS A 6YR OLD. wells fargo gave us 24hrs to be out the sheriff came to my door not to mention all the time they had some poor so serve me with papers its humiliating .We could not take anything with us not even our animals i lost everything i worked so hard for now my credit is shot .IFILLED OUT AN INDEPENDENT REVIEW AND LET ME TELL YOU I DID NOT WANT TO SIGH IT I DO NOT TRUST ANYBODY ANYMORE.so i can relate i called wells fargo.april5 i got a specialist that said he should be my only piont of contact.HE HAD A LOAN MODIFICATION IN THER FOR2009 THAT LOWERED MY PAYMENTS AND INTEREST RATE THAT I HAVE NEVER SEEN AND HAVE OUR NAMES TYPED IN WITH NO SIGNATURE FROM THEM HE HAS ALL SORTS OF LEGAL LOOKIN THINGS IN THERE THAT SAYS I AGREED TO ALL SORTS OF THINGS.YUP STILL AT IT .I KNOW I HAVE A GOOD CASE I AM LIKE SO MANY BUT WE HAVE NO MONEY ANYONE HAVE ANY SUGGESTTIONS AS TO ATTORNEYS AS TO WHAT I CAN DO IF ANYTHING .they sold tht house illegally i think i still legally own it they auctioned it off illegally amoung many other things.what i would like is some restitution or if that is possible i need a lawyer and cant afford on what do i do .vicki fro minneasota wickamo@aol.com love and prayers to all and thank you neil for giving us hope.

  2. Can you provide more information on this, or do you have some resources you can share where i can read more about such issues?

  3. This is not exactly a FUN mortgage lender “lets attack” subject. It’s none the less IMPORTANT.
    •Nationwide Loan Services, as part of our audit an examination services will always review the SEC 10 K filings for any loan in question. “There’s Gold in them Noodles”. ..Said a joking M Soliman, examiner. “For example, we had a claim against a lender that was as vulgar and corrupt as the rest we see. It appears the lenders are unwilling to “repurchase” delinquent loans under the provisions of the Trust Master Servicing Agreement as stipulated in the bi- lateral contracts amongst parties.
    •What they are alleged to do is finance the loan and initiate foreclosure while keeping the loan current with the Trustee – to again avoid repurchase. Legal or illegal – only the Grand Jury will know for sure. But in the SEC filings we see include the attestation auditor reports that make public violations amongst parties available to the public. And there we find Sun Trust who is acknowledged in the auditors letter (to pass through investors) by Well Fargo (Trust Department administrator ) having on multiple occasions been cited for servicer breach and misconduct for failing to REPORT servicing delinquency and servicer reporting requirements for “triggering” delinquency.

    The borrowers have no idea why they were set to go to sale in January 2008 and got a Notice of sale delivered in January 2009. The terror of living with this hanging over your head has torn the borrower (family to pieces) and now we see the brutality of the trustees (not really a trustee – more later) going in for the kills. [Our ranking system rates servicer wrongful acts between a scale range of (M) =moron through (F) = fool and this one gets a (W) for Wacko.

    Where doe s the Trustee lawyers fit into this. Revisit the Enron investigation and inability for licensed professionals to insulate themselves from a federal investigation. If correct the attestation report is sugar coated and provides little to the layman who cannot pick up the seriousness of the matter. If true the borrower in foreclosure and down 12 months or more maybe current. If seeking a demand for payoff from the Trustee will find the loan to be current. . .or will the demand come back to the servicers and show delinquent 12 months.

    Either way, beware of modification offers calling for you to bring in 6 -12 months of payments in order to get a modification to fund. You’re likely reimbursing the servicer with no chance of a loan modification.

    NLS admin@borrowerhotline.com/ http://www.borrowerhotline.com (we support livinglies and encourage the practice of donating wherever possible to keep this needed resource alive)


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