TWO FACES FOR PWC By CHRISTOPHER BYRON
January 3, 2005 -- IT looks like 2005 could develop into a real mess for Pricewaterhouse Coopers.
A crack has opened in what has until now been an unbreachable legal defense behind which the nation's largest accounting firm has built its global practice.
PricewaterhouseCoopers operates out of offices in 768 cities in 139 countries, with the entire business managed out of a global headquarters in midtown Manhattan.
When marketing its services to clients, the firm likes to stress the "family" dimension of its global operations.
But if a PwC client decides, for whatever reason, that it doesn't like the work that one of the firm's global offices does for it and decides to sue, well, in that case, PriceWaterhouseCoopers instantly turns a preexisting other face to the world, and insists upon being treated as "a network of member firms, each of which is a separate and independent legal entity." (From some fine print that began appearing on the PwC Web site in February of 2003.)
So, is PricewaterhouseCoopers really just one big "collective brain," or not?
We may soon find out thanks to a high-stakes professional malpractice case that is boiling up in a South Florida federal court.
For PricewaterhouseCoopers, as well as some 286 investors in the busted Lancer group of hedge funds, it all comes down to whether the accounting giant will be allowed to duck responsibility for a series of worthless annual audits performed for Lancer's flagship "Offshore" fund by PricewaterhouseCoopers' office in the Netherlands Antilles.
The accounting firm's Curacao office is already a defendant in a lawsuit filed last February by a group of private investors in the fund. But in early December, the Lancer Group's court-appointed receiver, which is legally now running the fund, sued the entire PricewaterhouseCoopers global operation as well, arguing that the claimed independence of the Curacao office was just a legal fiction.
The suit by the receiver, led by a former federal prosecutor named Marty Steinberg at the law firm of Hunton & Williams, adds an entirely new dimension to PwC's problems.
UNDER current law, it is nearly impossible for private plaintiffs in suits such as the Lancer matter to force an accounting firm to turn over its books and records — especially when the documents are all tucked safely away in some tax haven hideout like the Netherlands Antilles.
But the situation with the receiver is different. Because the receiver is not shackled by recent pro-business reforms in securities law, it can subpoena any books and records it sees fit — at any time it wants — wherever the documents happen to be physically located.
If those documents show that PwC's headquarters in New York was directly involved with the Curacao office in handling the Lancer audits, the entire firm could wind up exposed to damages.
It is hard to imagine a more startling case of fishy auditing than the work that PwC's Curacao office did (and did not do) for the Lancer Offshore Fund.
The fund's portfolio, given a $1 billion-plus valuation by Lancer Group's founder and investment manager, a Ukrainian immigrant named Michael Lauer, was waved right on through in successive, thumbs-up audits by PwC in 2000 and 2001, and the firm was working on the 2002 audit when the funds were shut down.
Yet as both Lauer and the PwC auditors knew, that $1 billion-plus valuation was a fiction since, by the start of 2002, the Offshore fund's portfolio consisted almost entirely of worthless penny stocks — many issued by companies controlled by figures tied either directly or indirectly to organized crime. Lauer never showed his investors the worthless trash he was buying with their money, keeping them happy by showing them the PricewaterhouseCoopers audits instead.
It was Lauer's way of saying, in effect, "You don't have to take my word for anything. Perhaps you'd rather read what the world's most prestigious auditing firm has to say about us instead."
After a series of articles in The Post drew back the curtain on the swindle, the SEC raided the fund's Park Avenue offices in July of 2003, shut down the business, and the Federal District Court in Miami appointed an SEC receiver to salvage and liquidate what was possible.
HAVING recovered only about $80 mil lion for investors who had pumped more than $954 million into Lancer over the 10-year life of the group, the receiver began looking for deeper pockets than just Lauer's to claim against.
To that end, subpoenas were issued for documents from Lancer's fund administrator, Citco Fund Services, Ltd., a global operation in its own right, with an office in Curacao, as well as more than a dozen other international money centers around the world.
Those documents showed, among other things, that PwC's New York office was directly involved with officials in Curacao in preparing audits of the unmarketable, illiquid trash securities in the Lancer portfolios.
In fact, when The Post published a January 2003 story exposing PwC's deep involvement in the Lancer affair, PwC's New York office immediately e-mailed the Curacao office with a heads-up regarding the developing media interest in the matter.
Armed with this information, the receiver filed suit against the entire PwC operation, claiming professional malpractice by the firm in the preparation of its audits and demanding damages that could easily reach the total amount lost by investors in the Lancer fund investments.
Nor is Michael Lauer likely to be of much help rebutting the receiver's claims that he used the PwC audits as nothing less than marketing tools to promote his funds to fat cat investors around the world.
Already facing SEC charges of securities and market fraud in the management of his funds, Lauer was hit last week with more bad news when the SEC announced that it has asked the court in the SEC action to hold him in contempt for stonewalling four separate court orders seeking detailed answers to how he went about running the fund.
The order follows by several weeks a similar contempt proceeding charging Lauer with violating a court-ordered asset freeze by transferring money from a personal account in his own name to the account of a woman named Heidi Carens, doing business as the Lava Group, which lists Lauer's Greenwich residence as its business address.
Carens is a former official at an Amex-listed penny-stock company called Cross Media Marketing Inc., in which the Lancer Group once held a controlling 55.9 percent block of the shares. The company filed for bankruptcy in June of 2003, and three weeks later, Lancer itself was shut down.
The Group's records show that at the time of its collapse, the Offshore fund alone had loaned roughly $9.5 million to Cross Media Marketing. To date, the receiver has failed to locate or recover any of it.
cbyron@nypost.com |
