Deloitte & Touche Wins Dismissal of Suit Over Ponzi Scheme

Deloitte & Touche LLP won dismissal of a lawsuit filed by an Iowa pension fund over the auditing of WG Trading Co., a company that U.S. prosecutors said was used as a Ponzi scheme by two of its former managers.

U.S. District Judge Paul Oetken in Manhattan today granted a request by Deloitte & Touche, one of the so-called Big Four accounting firms, to throw out the claims by the Iowa Public Employees’ Retirement System. The pension fund said in a complaint filed last year that it suffered millions of dollars in losses as a result of a Ponzi scheme operated by former WG Trading managers Paul Greenwood and Steven Walsh.

The pension fund, which said it invested almost $500 million in entities controlled and used by both men, sought about $39 million of an investment and fees made in WG Trading.

Oetken said in his ruling that the pension fund hadn’t adequately alleged claims that Deloitte & Touche exhibited “conscious indifference” and disregarded “red flags” that would have alerted it to the scheme conducted by the two men.

He also ruled that Deloitte & Touche couldn’t be held accountable for representations in statements of unaudited, non-client entities and dismissed claims that the auditor had aided and abetted the fraud.

‘Willfully Blind’

“The facts as alleged in the complaint fail to support an inference that D&T was reckless, let alone willfully blind with respect to the fraud afoot at Westridge,” Oetken said in his order. “While D&T may indeed have been negligent, the allegations don’t establish that it was a conscious wrongdoer.”

The plaintiffs had alleged that Deloitte & Touche served as the auditor of a company controlled by Greenwood and Walsh and “aided and abetted” it by issuing “unqualified and/or ‘clean’” audit reports that the pension fund relied on while purchasing securities that were issued as part of the scheme.

Jeffrey Thompson, a deputy attorney general in Iowa and a lawyer for the pension fund, said his office was reviewing the decision and didn’t have an immediate comment.

Greenwood and Walsh were indicted in July 2009 on charges that they conspired to defraud investors of $554 million. The U.S. said the scheme stretched from 1996 until the men were arrested in February 2009. Greenwood pleaded guilty to six charges, including conspiracy and securities fraud. Walsh has pleaded not guilty.

‘Piggy Bank’

The government alleged that Greenwood and Walsh used the company as their own “personal piggy bank” to buy homes, cars, horses and collectible Steiff teddy bears.

The U.S. Securities and Exchange Commission also sued the men, and described WG Trading Investors as an unregistered investment vehicle.

The two were minority owners of the New York Islanders professional hockey team in the 1990s, the U.S. said. In 1984, Greenwood bought Old Salem Farm, a 54-acre riding school and horse farm, from actor Paul Newman and his wife, Joanne Woodward. Greenwood later sold the farm.

Deloitte & Touche, based in New York, is a unit of Deloitte LLP, the U.S. arm of U.K.-based Deloitte Touche Tohmatsu Ltd., according to its website. Chris Faile, a spokesman for the company, didn’t return an voice-mail message left at his office seeking comment about the ruling.

The case is Iowa Public Employees’ Retirement System v. Deloitte & Touche LLP, 12-cv-2136, U.S. District Court, Southern District of New York (Manhattan).

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