EY's US outfit liable for huge fine over Madoff Ponzi audit

EY’s US arm has been slapped with a massive fine by a US court which found it liable for half of a $20m (£13m) damages in a case that centred on losses tied to the infamous Bernie Madoff Ponzi scheme.

The case was brought by FutureSelect Portfolio Management Inc., and concerned the Big Four firm’s auditing of a feeder fund used by convicted fraudster Madoff’s – currently elaborate Ponzi scheme which robbed investors of millions, Bloomberg reports.

FutureSelect sued EY in 2010 over faulty audits of a Madoff-linked feeder fund, and is now entitled to a slice of the $112m it lost in its investment in the fund, jurors ruled in Seattle state court.

The jury ruled that EY was liable for half of the $20.3m damages it awarded.

The case was brought under a Washington state securities law known to be more favourable to investors than similar state and federal statutes.

EY had audited Rye Funds, which was managed by Tremont Group Holdings Inc. The firm audited Rye from 2000 to 2003 and performed surprise audits of Tremont during that time frame and until 2008, FutureSelect said in court documents.

It subsequently sued EY along with Tremont and its parent Oppenheimer Acquisition Corp., which later concluded a confidential settlement.

FutureSelect accused EY of failing to perform adequate audit procedures to verify assets on Rye’s financial statements. It actually relied on assurances made by Madoff to whom Rye had outsourced everything from investment decisions to record keeping, the court heard.

EY was accused of relying on audit reports conducted by Madoff’s own accounting firm Friehling & Horowitz, and of failing to inquire about its professional reputation, Steven Thomas, FutureSelect’s attorney, said.

EY lawyer James Bennett told the WSJ that the auditor had in fact conducted itself in a professional way and that Madoff’s fraud went undetected by regulators, banks, sophisticated investors and multiple auditors for several decades. He said the onus was on investors such as FutureSelect to research its own investments, adding that they could have concluded that the returns Madoff’s firm offered “were too good to be true.”

Tremont was the second-largest feeder into Madoff’s multibillion-dollar fraud after Fairfield Greenwich Group.

David Friehling, Madoff’s accountant for over two decades, pleaded guilty to fraud in 2009 and was sentenced to two years’ probation after cooperating with prosecutors.