Deloitte and others pay $235 million settlement over alleged role in Ponzi scheme

Deloitte allegedly signed off on the books of a $350 million Ponzi scheme.
Deloitte allegedly signed off on the books of a $350 million Ponzi scheme.
Image: Hannah Mckay/Reuters
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After three years in court, accounting giant Deloitte and others agreed last night to pay $234.6 million for allegedly enabling a giant Ponzi scheme run by now-defunct Aequitas Capital Management between 2010 and 2016.

Investors in Oregon-based Aequitas were seeking $350 million from a class action lawsuit, which alleged that the securities scheme couldn’t have happened without accountants like Deloitte and EisnerAmper—also a defendant in the lawsuit—signing off on their books, and lawyers including elite white-shoe firm Sidley Austin doing the paperwork.

The settlement is a warning to service firms that failing to sniff out potential wrongdoing by clients can cause years of expensive court proceedings, followed by a hefty payout.

The 2016 class action complaint details a highly complex scheme using 75 entities, some of which were allegedly created “essentially out of thin air through financial engineering.” They allegedly helped hide the central fraud—that the company had bought up worthless loan receivables for hundreds of millions and was using new investor money to service its payments. Last month, former Aequitas CFO Olaf Janke became the second executive to plead guilty to fraud and money laundering charges related to the scheme, which hit more than 1,500 investors.

Deloitte audited the firm from 2013-2014, while Aequitas was allegedly moving money between myriad cut-outs and misrepresenting—and eventually lying—to investors about its finances. Aequitas used Deloitte’s sign-off to give it “clout” when courting investors, the complaint alleges.

“Former Aequitas insiders have already pled guilty to perpetuating this fraud and hiding it from their investors and their auditors,” a Deloitte spokesperson said in a statement. “We stand behind the quality of our audit work and are participating in this agreement to avoid the ongoing cost, distraction and uncertainty of extended litigation.”

A Sidley spokesperson said the settlement ended “costly and burdensome litigation.” “The plaintiffs did not allege that Sidley or the other six defendants knew about or were involved in the alleged fraudulent scheme perpetrated by Aequitas,” their statement said.

The complaint alleged that company’s debts were “exacerbated by Aequitas’ lavish spending on salaries and other compensation, parties, private planes, renovating existing offices and opening new offices.” As the problems spiraled, the company even opened a New York office in June 2015, renting prime real estate on Park Avenue, the complaint says. The firm’s CEO reportedly collected fine wines and private jets.

The bilked investors’ could end up with up to $312 million once Aequitas’ remaining assets are sold out of receivership, the lawyers for the class action said in a statement. “We are incredibly proud of this recovery and it is pretty remarkable to be able to return this much money to the victims of a Ponzi scheme,” said Steve Berman, a lawyer for the investors.

Deloitte and EisnerAmper didn’t immediately respond to requests for comment. We will update this post if they do.

This story has been updated with a comment from Deloitte.