Julia Irvine 11 Jul 2019 06:28pm

Deloitte settles over Aequitas

Deloitte’s US firm is one of four professional firms that have agreed to pay out $234.6m (£187m) in a settlement with investors over collapsed Aequitas Capital Management

The decision to settle followed a three-year legal battle in which the four – auditor Deloitte, fellow accountancy firm EisnerAmper, consultants Duff & Phelps and law firm Sidley Austin – faced a class action lawsuit alleging that their work for Aequitas enabled it to run a Ponzi scheme for six years.

Integrity Bank & Trust of Colorado and TD Ameritrade were also included in the deal. A second law firm, Tonkon Torp, agreed a separate $18.5m settlement in July last year.

Aequitas collapsed in November 2015 and in March 2016, the US Securities & Exchange Commission (SEC) charged the firm and its three top executives with hiding the rapidly deteriorating financial state of its business while raising more than $350m from investors.

The regulator accused them of allegedly tricking around 1,600 investors into believing they were making health care, education, and transportation-related investments when their money was actually being used in an eleventh-hour attempt to save the business. Some money from new investors, it said, was allegedly used to pay earlier investors in “Ponzi-like fashion”.

Despite Aequitas’ dire financial state, the three executives – CEO Robert Jesnik, executive vice president Brian Oliver and CFO and COO Scott Gillis – “continued to draw their lucrative salaries, use a private jet and attend posh dinners and golf outings, all at the expense of investors”, the SEC alleged.

Not only did they use the outings to raise more money, they also took home a total of at least $2.5m during the two years before the firm collapsed.

Deloitte issued unqualified audit reports on Aequitas’ 2013 and 2014 financial statements at a time when the SEC said the firm was already relying on revenue from new investors to keep it afloat.

In their action against the Big Four firm, the investors said that the audited financial statements were given to prospective investors and existing investors deciding whether to invest or re-invest.

“The audited financial statements were a material part of the information made available to investors and the existence of an auditor gave Aequitas clout,” they said. “Indeed, the offering documents for Aequitas securities prominently identified Deloitte as Aequitas’ auditor”.

EisnerAmper acted as Aequitas’ auditor for the 2011 and 2012 financial statements and similarly its name was used prominently on documents given to investors.

Speaking after the settlement was agreed, investors’ lawyer Keith Ketterling of Stoll Berne said that, if necessary, the investors would have taken the case all the way to trial. “This settlement,” he added, “is a pretty extraordinary result that provides investors a substantial recovery without years of additional delay and risk.”

Deloitte has always denied liability but was also aware that the case could rumble on for years. As a spokesperson explained, “Former Aequitas insiders have already pled guilty to perpetuating this fraud and hiding it from their investors and their auditors. 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.”

The settlement is subject to approval by the US District Court in Portland, Oregon.

The size of the contributions made by the different defendants was not disclosed.