The liquidators of a Cayman-based offshore feeder fund and a related intermediary pass-through fund that invested into the now-defunct Platinum Partners Value Arbitrage Fund LP (PPVA) are suing the fund’s auditors BDO in Cayman.

In a writ filed in the Cayman Islands Grand Court on 1 Sept., Platinum Partners Value Arbitrage Fund (International) Limited and Platinum Partners Value Arbitrage Intermediate Fund Ltd., both in liquidation, seek damages from BDO USA for alleged negligence and breach of contractual duties.

The plaintiffs claim the auditors failed to act in accordance with applicable audit and accounting standards and issued reports about the financial statements which “significantly misstated the financial condition” of the plaintiffs.

“As a result, the plaintiffs have suffered loss and damage,” the writ states.

PPVA, the master fund the funds invested in, is not a party in the proceedings.

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The funds are asking for the return of management fees, director fees, consulting fees, certain operational expenses, audit fees and costs from BDO USA.

“In the alternative,” the plaintiffs seek a declaration that BDO Cayman is solely responsible for the work delegated to and undertaken by BDO USA.

According to the court filing, BDO Cayman was hired to carry out the audits and produce the audit reports and financial results for the funds from 2010 to 2013. However, BDO USA performed the audit work, assisted in the conduct of the engagement and contributed directly or indirectly to the issuance of the audit reports. BDO’s Cayman operations then signed off on the audit reports.

While the 2010 audit report was qualified in relation to the fair value of two specific investments, comprising 7.7% of the fund’s net asset value, the audit reports from 2011 to 2013 were unqualified, the writ noted.

BDO Cayman was first structured as a partnership and from 2011 as a limited company. Both entities appear as defendants in the court document.

Platinum collapse

Platinum Partners collapsed in 2016 amid allegations of fraud as federal charges were filed against the hedge fund’s top executives.

A December 2016 indictment alleged Mark Nordlicht, one of Platinum’s founder partners and its chief investment officer, and four other defendants defrauded investors by overvaluing illiquid assets held by its flagship Platinum Partners Value Arbitrage Fund LP, particularly those in troubled energy-related investments.

In July 2019, after a nine-week trial, Nordlicht and David Levy, another senior executive and portfolio manager, were convicted of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud for their roles in defrauding the bondholders of Black Elk Energy (Black Elk), an oil company that was one of Platinum’s largest assets.

However, Nordlicht and his co-defendants were cleared of charges that they defrauded investors in Platinum’s hedge funds. This included the accusation that they lied to investors about the health and liquidity of the Platinum Partners Value Arbitrage fund.

In Sept. 2019, a federal district judge overturned the jury conviction on the remaining charges, acquitted Levy and granted a new trial for Nordlicht.

Other Platinum auditors also sued

BDO’s audit work for Platinum was also mentioned in a US trial earlier this year.

In January 2020, investors in another fund managed by Platinum – the Platinum Partners Credit Opportunities Master Fund, L.P. (PPCO) – sued auditors CohnReznick in the Supreme Court of the State of New York. The investors accuse CohnReznick of fraud, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty.

The lawsuit cites audits performed by BDO USA for Platinum Partners Value Arbitrage Fund LP, which revealed a “material weakness” in the way that Platinum valued certain assets. According to the plaintiffs, BDO’s 2013 audit report of PPVA was delayed by almost a year because of significant problems with Platinum’s Level 3 asset valuation process.

Level 3 assets are the most illiquid and hardest to value. Their values are often estimated using mathematical models and subjective assumptions.

“While CohnReznick legitimized Platinum’s Level 3 valuation process [for PPCO] with its Audit Reports, PPVA’s auditor, BDO, tore the valuation process to shreds,” the complaint said.

The investors claimed that CohnReznick would have been aware of these issues after BDO published its audit but instead issued a “clean” audit later. CohnReznick’s attempt to have the case dismissed was rejected by the court in July.

The complaint stated that “BDO pulled no punches” and alleged the disagreements over asset valuations led to BDO’s termination as Platinum’s auditor.

*EDITOR’S NOTE: This article was amended to clarify that Mark Nordlicht and his co-defendants were acquitted on all charges relating to Platinum investors.

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