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Platinum Hedge Fund Investors Aren’t Big Fans of CohnReznick

CohnReznick is being sued by 49 investors of an ill-fated Platinum Partners hedge fund who claim the accounting firm is complicit in and benefited from a fraud that doomed Platinum.

Institutional Investor reported:

The group of investors, who collectively sunk $63 million into the Platinum Partners Credit Opportunities Fund, filed a lawsuit against CohnReznick in the Supreme Court of the State of New York on Tuesday [Jan. 7]. According to the complaint, Platinum and its funds “collapsed” in December 2016 after its management team was indicted over allegations that they overvalued investments, concealed liquidity problems, engaged in preferential redemptions, and manipulated a bond vote for a publicly traded security.

“The Platinum funds were a Potemkin façade – outwardly prosperous, but in truth, rotting below the surface from Platinum’s greed and mismanagement,” the complaint said.

A jury last July convicted Platinum Partners founder Mark Nordlicht and Platinum’s former co-chief investment officer, David Levy, of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud. But in an unusual move, U.S. District Judge Brian Cogan overturned the jury’s decision in October, saying there was insufficient evidence of criminal intent to convict Levy and granted Nordlicht a new trial.

While Nordlicht and Levy got mulligans in court, the group of investors believe CohnReznick shouldn’t, saying in the lawsuit that the firm was “white washing the myriad issues that ultimately caused the Platinum funds to collapse.”

According to Institutional Investor:

The firm served as Platinum’s auditor for the 2012, 2013, and 2014 calendar years — “years in which Nordlicht was fabricating asset values,” according to the complaint. During that time period, the investors claimed that CohnReznick attested to the accuracy of Platinum’s financial statements despite a lack of evidence to support the fund’s valuation and apparent knowledge of “substantial” structural problems at the funds.

So, who blew the whistle on Platinum’s improper valuation process, according to the lawsuit? None other than the Little Dipper of accounting firms. Institutional Investor wrote:

The lawsuit cites a separate audit performed by BDO USA, which revealed a “material weakness” in the way that Platinum valued certain assets. The findings were ”so alarming” that BDO allegedly delayed publishing the report, which was for 2013, until early 2015, according to the complaint. The publication of the audit, along with disagreements between BDO and Platinum, resulted in BDO’s termination as Platinum’s auditor, according to the complaint.

“BDO pulled no punches, finding that Platinum’s alleged valuation process lacked organization, documentation, or even ‘discussion of key inputs utilized to value the investment and why such inputs were considered appropriate,’” the complaint stated.

The investors claimed that CohnReznick would have been aware of these issues soon after BDO published its audit, before it issued its own “clean” audit weeks later.

The lawsuit also states CR was making bank from Platinum, even though the firm knew in late 2015 and early 2016 that Platinum was suffering from a “liquidity crunch”:

Wire records show that between June 2015 and August 2016 alone, CohnReznick was paid nearly $2.8 million from various Platinum-affiliated accounts for alleged services rendered – amounts that bear no relation to standard fees charged for traditional hedge fund audit and tax work.

Perhaps most damning, CohnReznick accepted large cash transfers from Platinum entities that the accounting firm knew were illiquid, which calls into question exactly where CohnReznick believed the money was coming from. And, it appears that certain transfers, including an $800,000 wire in October 2015, were simply limited partner subscriptions that were immediately re-routed and paid out to CohnReznick. In short, CohnReznick not only enabled Platinum’s fraud, it directly benefited from it.

The hedge fund investors say CohnReznick should be found guilty of fraud, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty. They are seeking monetary damages in excess $63 million.

CohnReznick, which, incidentally, was named “Best Fund Accounting Firm” at the Private Equity Wire USA Awards in New York City last September, could not be reached for comment.

Investors file suit against Platinum Partners’ auditor [Institutional Investor]