CPA firm Moss Adams sued for $150 million over Meridian founder's Ponzi scheme
The trustee for the bankrupt Meridian Mortgage funds has sued Seattle-based accounting firm Moss Adams for $150 million, claiming negligent audits allowed Meridian founder Frederick Darren Berg to pull off what prosecutors called the biggest Ponzi scheme in Pacific Northwest history.
Seattle Times deputy business editor
The trustee for the bankrupt Meridian Mortgage funds has sued Seattle-based accounting firm Moss Adams for $150 million, claiming negligent audits failed to detect the biggest Ponzi scheme in Pacific Northwest history.
The lawsuit, filed Wednesday in King County Superior Court, faults the nation's 11th-largest CPA firm for issuing "clean" audit reports for six of the Meridian funds at various times between 2001 and 2007.
A dozen Meridian funds collapsed in summer 2010, and last August Meridian founder Frederick Darren Berg pleaded guilty to fraud and admitted diverting "approximately $100 million" to personal uses and to perpetuate the Ponzi scheme.
"It is impossible to have a fraud that is this pervasive and not have significant audit failures," said Los Angeles attorney Michael Avenatti, who filed the suit on behalf of bankruptcy trustee Mark Calvert.
Had Moss Adams given Meridian the proper scrutiny, "this Ponzi scheme would have come to a screeching halt years earlier than it did," Avenatti said.
A Moss Adams spokeswoman did not respond to requests for comment. At least 750 individuals and others lost more than $150 million in Meridian's real-estate funds, according to the lawsuit. (Berg's plea agreement put the total raised at $280 million.)
The suit alleges that if not for "Moss Adams' gross negligence and turning a 'blind eye' to Berg's fraud, investors would have lost but a small fraction of this amount."
The audits conducted by Moss Adams assured investors the financial statements Berg produced for his Meridian funds were accurate, says the suit. But once Meridian fell into bankruptcy, it was discovered that Berg had misappropriated about $45 million to create and run a luxury-bus company, an additional $11 million to buy and remodel a Mercer Island mansion, and millions more for condos, yachts and private jets.
The suit, which also names Berg as a defendant, alleges the CPA firm failed to meet professional standards in conducting its audits. It also claims Moss Adams "intentionally or recklessly" ignored warning signs at Meridian and wasn't a truly independent auditor because Berg was paying it substantial fees for personal-tax and business-consulting services.
Among other things, said Calvert, "They were discussing taking the bus company public."
When Berg was indicted, prosecutors said that in 2007 he'd fooled independent auditors by renting dozens of private mailboxes in the names of fictitious borrowers whose names were on the loans he created to hide his fraud. The auditor sent loan-confirmation documents to those mailboxes and Berg personally completed and returned the paperwork, they charged.
Prosecutors also said Berg used "fake loan files, fake loan servicing files, fake bank-account statements and fabricated accounting workbooks to mislead the independent auditors as to the true health and makeup of the mortgage investment funds."
The indictment didn't identify the audit firm or say whether Berg had used such subterfuges during previous audits.
In October Calvert obtained a court order requiring Moss Adams to turn over documents and correspondence dealing with Berg's personal tax returns. He declined to comment on what those papers may show.
Excluding the lawsuit, Meridian investors are now estimated to recover approximately 10 percent of their initial money, Calvert said.
Rami Grunbaum: 206-464-8541 or firstname.lastname@example.org
On Twitter: @rgrunbaum