Forty-nine investors in Platinum Partners’ now-defunct hedge fund are suing the firm’s auditor for allegedly engaging in fraud, among other charges.
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. 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.
So where does CohnReznick come in? 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.
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.
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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. What’s more, the suit alleges that CohnReznick was “richly rewarded for white washing the myriad issues that ultimately caused the Platinum funds to collapse.” According to the complaint, CohnReznick was paid nearly $2.8 million by Platinum between June 2015 and August 2016 alone.
In total, the investors have accused CohnReznick of fraud, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty, per the suit. They are seeking monetary damages of over $63 million to compensate them for the money they lost, as well as punitive damages and legal fees, the complaint said.
A spokesperson for CohnReznick did not return a phone call seeking comment on Friday.
This lawsuit comes roughly a half a year after Platinum Partners co-founder, Mark Nordlicht, and its chief investment officer, David Levy, were found guilty on conspiracy and securities fraud charges by a federal court in the Eastern District of New York, as Institutional Investor previously reported.
The two were found guilty of diverting assets from Platinum’s investment in oil exploration company, Black Elk Offshore Operations, to other Platinum funds before filing for bankruptcy. Those convictions, however, were overturned by the court following a post-trial briefing. The United States’ Attorney’s Office has appealed that decision, according to the lawsuit filed against CohnReznick.