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Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

In last Tuesday’s Preliminary Analytics we mentioned the case of Tom Petters, the Minnesota businessman accused of running a multi-billion dollar Ponzi scheme.

The trial is in its first week and already there has been testimony from the star witness — Petters’ former office manager — that included a recording of Petters saying ‘This is one bi his own defense counsel comparing him to a cocker spaniel:

[Defense counsel, John] Hopeman countered that while Petters was an accomplished salesman, he didn’t have the corporate skills necessary to run companies.
“He has the attention span of a cocker spaniel — about 15 seconds,” the defense lawyer told the 10-woman, six-man jury. “He couldn’t read a whole book if his life depended on it.”

Okay, a couple things before we get to the crux.

• Most cocker spaniels we know have attention spans exponentially longer than fifteen seconds. It would be much more believable if defense counsel had said, “He has the attention span of a pomeranian and you can’t leave him home alone or he’s eats the furniture.”

• Petters couldn’t read a whole book if his life depended on it? Are we talking classic literature? Because if we are, then he’s got company. What about children’s books? Do magazines count? He strikes as a guy that could at least make it through the pro football season preview.

Moving on…

Now that the trial is underway we’ll be following the more interesting developments in the case but we’ll be especially interested in the litigation involving the auditors of the hedge funds that cycled funds to Petters’ businesses.
There is pending litigation in Texas that involves both Ernst & Young and McGladrey & Pullen related to the audits the two firms performed for feeder funds for Petters’ businesses.

These feeder funds received purchase orders for high-end electronics from Petters’ businesses that were seemingly made by big-box retailers such as CostCo. The feeder funds then solicited money from investors, including the plaintiffs in the case, in return for promissory notes for Petters’ businesses. The merchandise on the purchase orders secured the notes. Allegedly, there was no merchandise and Petters used the money received to pay off other investors who were looking to get out and so on and so forth.

The feeder funds that are the defendants in this case are Arrowhead Capital Partners II, L.P. of Minnetonka, Minnesota, Palm Beach Finance Partners, L.P. and Palm Beach Finance Partners II, L.P. of Palm Beach Gardens, Florida, and Stewardship Credit Arbitrage Fund, LLC of Greenwich, Connecticut. The general partners and investment managers of these funds are also listed as defendants.

E&Y served as auditors for Stewardship while M&P served as the auditors of Arrowhead. A small Florida firm, Kaufman, Rossin, & Co., P.A. served as the auditors for the two Palm Beach funds. The firms are being sued, naturally, for not detecting the alleged fraud. In this case, however, the firms may have it coming since the fraud was run by someone with the alleged attention span of a canine.

We spoke with Guy Hohmann, who is representing the plaintiffs in this case, and according to Mr. Hohmann, M&P has the most significant exposure in the Petters case as they also served as the auditor for Lancelot Investors Fund and Colossus Capital Fund, L.P. both Oak Brook, Illinois based hedge funds. M&P also faces litigation from the investors of those funds in Illinois.

Lancelot’s Vice President of Finance was Harold Katz, who just pleaded guilty last month to one count of conspiracy to commit wire fraud. Mr. Hohmann was recently informed that before taking the job at Lancelot, Katz was a senior manager at M&P that worked on the Lancelot audit. M&P would not comment. It has been speculated now that Katz — who pleaded guilty September 2nd — is cooperating with authorities in the cases against Petters and Lancelot founder, Gregory Bell.

In another strange twist, Mr. Hohmann told GC that Lewis Freeman — the forensic accountant that is under federal investigation that we told you about last week — was appointed as the Chief Restructuring Officer of the Palm Beach funds. The Palm Beach funds are not currently listed as an active case on the forensic firm’s website.

We reached out to all the firms named in the lawsuit, McGladrey & Pullen declined to comment while calls to E&Y, Kaufman Rossin & Co., and Kenneth A. Welt, the current receiver listed on the Lewis Freeman website, were not returned.

According to the complaint, the amount lost by the plaintiffs was $24 million dollars, however, according to a October 6, 2008 Bloomberg article, the two Palm Beach Funds were responsible for approximately $1.1 billion of the alleged $3 billion the scheme while the Lancelot funds held approximately $1.0 billion with Petters. Mr. Hohmann’s understanding was that the Palm Beach funds had provided approximately $1.0 and that Lancelot held approximately $1.6 billion. Because of the complex web of companies in this case, the final dollar amounts may not ever be known.

So regardless of the fact that the case in Texas is in its early stages, future lawsuits from other investors could arise, and all three firms could continue to face significant litigation.

We’ll continue to keep you updated on any developments in the cases involving these accounting firms and will be following any noteworthy developments involving the Petters trial.

The case is SSR v. Arrowhead et al., District Court of Dallas County.

New McGladrey Directors to Check Out Natalie Gulbis?

gulbis3.jpgMaybe! RSM McGladrey/McGladrey & Pullen announced new directors in their Charlotte office today which is obviously exciting for them. We also think it’s nice that the press release still has both names of the firm together.
That gets us to wondering if M&P is heeding our advice? Regardless of that whole situation, it’s nice to see them come together for the sake of the new directors. Sort of like when bitterly divorced parents show up at their son or daughter’s graduation. Very touching.
Along with these promotions, the national finals for the McGladrey Team Championship start on Sunday at Pinehurst and you-know-who is going to be there.
Obviously we’re very curious as to whether these new directors will be in attendance to get a look at Natalie’s swing. Two McGladrey directors are actually playing in the tournament, so unless NG has a clause in her contract that says she doesn’t have to golf with accountants, there’s an outside shot one of those lucky ducks might end up in her group.
So if you’re in the area, it might be worth checking out since A) Obvious answer; and B) the silent auction has some cool stuff if you’re willing to drop some coin. Oh, and it benefits the Special Olympics, so that’s good too.
This is it! [RSM McGladrey Golf Blog]

RSM/McGladrey & Pullen: ‘Breaking Up is Like Pushing Over a Coke Machine’

natalie-gulbis-.jpgAt least that’s one expert’s opinion. Allan Koltin, CEO of PDI Global, Inc., based in Chicago, thinks RSM McGladrey and McGladrey & Pullen will eventually be getting back together.

“I think what you’re seeing now is just the flexing of some muscles,” [said Koltin.] “What (RSM’s termination notice) does is reinforce what [RSM Parent, H&R] Block said before, which is that, if need be, they will go to the mat with them on this one.”

That’s a fine assessment but we all know what this is really about. The Gulbis factor. RSM/Block can go on and on about ‘administrative services’ and whatever hell else they think that’s in M&P’s ‘best interest’ but we understand the unmentionable factor here.
Sooner, rather than later, M&P had better come to their senses in this whole mess and realize that being associated with Natalie Gulbis is by far the best thing any accounting firm has been able to pull off since…yeah, pretty much anything.
McGladrey, RSM move to reconciliation [KCBJ (Subscription Required)]

McGladrey & Pullen Might Want to Think This Whole Divorce Thing Over

gulbis3.jpgThe accounting firm soap opera between McGladrey & Pullen and RSM McGladrey continues as RSM has filed notice terminating the two firms’ agreement and, under no circumstances, will they allow M&P to come crawling back to them without RSM’s involvement.
This was all included in a filing with the SEC, made by H&R Block, who is obviously the pimp in this whole love triangle.
Personally, M&P should probably consider going back to RSM’s sorry ass just to take advantage of the Natalie Gulbis exposure.
Judging by the firm’s response to our earlier mistake, they won’t be listening to us. Poor thing is caught in middle of this whole mess. Natalie, if you ever need to talk, don’t hesitate.
RSM McGladrey wants say in any reconciliation with McGladrey & Pullen [KCBJ]

McGladrey & Pullen Needs to Quit Being Nice to Us

natalie_gulbis3.jpgOn the one hand we feel bad about missing McGladrey & Pullen being on BW’s list of Best Places to Launch a Career. They land at #66 but the picture at right wasn’t used and frankly, our attention span is short.

We’re also a little disappointed that the M&Pers out there didn’t jump our shit about missing it altogether. Perfect opportunity for you call us out for being a Big 4 whore or something to that effect. Probably due to the Minnesota Nice or maybe you’re all clinically depressed because your firms are getting divorced. WTFK.

Regardless, your opportunity is gone because this is the GC “our bad” statement for leaving you out of the previous posts.
However, when we probed M&P’s profile we discovered that the five year retention rate was 18%. And M&P sponsors Natalie Gulbis for crissakes. We shouldn’t have to explain how valuable she would be in the recruiting and retention processes. We just convinced ourselves that we don’t feel bad at all.

Get it together M&P.

McGladrey & Pullen Sued for Helping Bad Guys

fraud.jpgMark this suit in the “Accountants are Crooked” column as opposed to the “Accountants are Stupid” column.
McGladrey & Pullen, its predecessor auditor, and the partner on the audit engagement, G. Victor Johnson, are being sued by the Sentinel Management Group Trustee for being a knowing participant in the fraud put on by Sentinel who collapsed in 2007.
More, after the jump

M&P is accused of “knowingly and substantially assisted and participated in the fraud by [Sentinel], and as a result, committed and are liable for fraud themselves.”
Many suits against accounting firms accuse negligence related to technical mistakes that were made so we’re impressed see a lawyer say “To hell with it, these guys are crooks, I’m taking them down like Arthur Andersen.”
On a more personal level, between this suit and the messy divorce with RSM McGladrey, we’re expecting to M&P to have the CPA firm equivalent of a nervous breakdown any day now. Feel free to speculate as to what that might actually be.
Collapsed Financial Company’s Trustee Claims Accountants Knew About Fraud [Chicago Bar-Tender]

H&R Block is Not Letting McGladrey & Pullen Leave Until They Talk About This

argument.jpgSo the H&R Block/McGladrey & Pullen soap opera break-up has gotten more annoying. At first, it simply looked like a firm falling out of love with its parent company because M&P didn’t want to be stuck with a loser their whole life.
Natch, H&R Block wasn’t going to just let M&P walk away from the best thing that ever happened to the firm. M&P was not going to have that conversation and said that they were still walking out.
The Block feels so strongly that M&P is making a mistake, that it was announced late last Friday, probably in order to not make a scene, that H&RB sued M&P to prevent the termination of their administrative service agreement. Essentially saying, “WE ARE GOING TO TALK ABOUT THIS!
M&P is not impressed with this desperate attempt to be won back:

“We are disappointed that H&R Block has chosen to pursue litigation,” said McGladrey & Pullen managing partner Dave Scudder. “We are committed to respecting our legal obligations and are confident we are doing so. Thus we are confident this lawsuit has no merit. Under the terms of our shared services agreement, we have every right to terminate that arrangement. We have chosen to do so because it is the best business decision for McGladrey & Pullen LLP in order to serve our clients in the increasingly complex business and regulatory environment.”

M&P is over being held back by HR&B and wants to get out there on their own. Besides, all The Block does is sit around and prepare tax returns for people who can’t read the instructions on the tax forms. You’ve got no motivation, Block. Oh sure, you got into the online tax return prep business but now what? M&P just wants time to be alone, so please respect that.
Block Files Suit Against McGladrey & Pullen [WebCPA via CPA Trendlines]

H&R Block Still Loves McGladrey & Pullen

begging.jpgEarlier in the week we told you about McGladrey & Pullen falling out of love with H&R Block. Well, H&RB is not going to just let M&P walk away. The Company cares too much about this relationship:
“We believe the path proposed by certain of M&P’s leaders is fraught with significant business and financial risks and is not in the best interest of M&P partners, employees or clients,” Block CEO Russ Smyth in a release Wednesday. “Whether the full M&P partnership is willing to assume these immense risks remains to be seen.”
Nevermind the fact that H&R Block is the used car salesman of tax preparers. Nevermind that H&RB is probably responsible for the failed appointments of several Obama cabinet members. This about love lost (and probably sex lost).
H&R Block questions McGladrey & Pullen decision [Kansas City Business Journal]