Liquidators for the Cayman Islands-based hedge fund Argyle Funds SPC are suing several branches of the auditing firm BDO Ltd., including the one in the Cayman Islands, for allegedly failing to spot fraud by two of the fund’s credit advisers, costing Argyle millions of dollars and causing it to enter liquidation as a result.
Either gross negligence or intentional misconduct on the part of BDO’s Cayman, Trinidad and Tobago and U.S. offices allowed the New York-based credit adviser New Solutions Financial and the Canada-based ECB Funding LLC and RMP Capital Corp. to defraud Argyle out of some US$86 million, according to an amended claim form filed by Argyle on July 10 in the New York State Supreme Court.
“[BDO] acted with utter disregard for their duties to Argyle and with such extreme recklessness that their conduct rises to the level of gross negligence and/or intentional and fraudulent misconduct,” Argyle’s claim states. “Thus, Argyle seeks compensatory damages against BDO in an amount to be determined at trial.”
Argyle stated that it is seeking at least US$280 million from the BDO offices, as well as at least US$139 million from the U.S-based firm Schwartz & Co., which is allegedly a subcontractor of BDO.
Argyle’s claim form details the frauds allegedly perpetrated by the New York- and Canada-based credit advisers, which were hired by Argyle to build investment portfolios.
According to the claim form, the Canada-based credit adviser represented to Argyle that it had grown the fund’s US$54 million investment to some US$200 million between 2006 and 2011.
However, the credit adviser instead used Argyle’s money “to extend large loans to already bankrupt companies, such as Death Row Records record label and a defunct dried fruit company – entities that are deemed high risk, as the likelihood of ever recovering that investment, let alone making a profit from it, is incredibly low,” the claim form states.
Likewise, Argyle stated that it invested some US$31 million with the New York-based credit adviser from around 2010 to 2012, but in February 2016 the adviser informed Argyle that only about 10 percent of that investment remained.
When the Canada-based credit adviser was discovered to be a scam around 2012, Argyle sued it in the Canadian courts and won a judgment against it. However, as of this month, Argyle has yet to collect an outstanding claim of about US$40 million from the defunct advisor, according to the fund’s claim form. Additionally, fraud on the part of the New York credit adviser was not discovered until last year.
Argyle could have avoided being defrauded if BDO did not “rubber stamp” audit reports on the credit advisors, the fund claims.
Court hearings have yet to be scheduled for this matter. BDO’s Cayman office did not immediately respond to a request for comment on the matter before this issue’s press deadline.