Grant Thornton practices in Ireland and the Cayman Islands have been sued by the receiver to a failed US investment advisory firm, who claims they enabled a multimillion-dollar fraud by not drawing proper attention to significant concerns they had from audit work.
The receiver to Florida-based TCA Fund Management and credit funds it ran, including the TCA Global Credit Master Fund, named Grant Thornton Ireland audit partner John Glennon in legal documents filed with US district court for the southern district of Florida this month.
Grant Thornton Ireland said in a statement on Tuesday evening, however, that it “categorically denies all claims of wrongdoing alleged in tis work on TCA Global audits” and that it would “vigorously defend the claims in this case”. It declined to comment further.
Jonathan E Perlman, the receiver over a number of TCA entities, said in his filing that the Grant Thornton defendants – Grant Thornton Cayman Islands and Grant Thornton Ireland – “turned a blind eye” to “significant inconsistencies and proper controls” at the TCA Global Master Fund, which left independent directors in the dark. The accountancy firms served as auditors to the master fund in 2017 and 2018.
The scandal at TCA Fund Management broke in January 2020 when NBC News reported that the firm inflated its TCA Global Credit Master Fund’s assets and returns from 2017. The report cited three employees who had filed a whistleblower complaint with US watchdog, the Securities and Exchange Commission (SEC).
The TCA master fund business was to make high-interest loans to micro- and small-sized companies. The SEC found that many borrowers had insufficient cash to meet their own running costs, used loan proceeds to repay other debts and ended up in default on facilities from the master fund.
The fund had failed to book losses on defaulted loans and recorded investment banking fee revenues it had not received and never will, resulting in significant inflation in its net asset value (NAV), according to SEC findings later backed up by the receiver’s investigation.
“A misstated NAV misrepresents the financial health and potential solvency of an investment fund. Certain insiders at [TCA Fund Management] artificially inflated the NAV, which Grant Thornton defendants’ actions allowed to continue,” Mr Perlman said in the document, adding that resulted in the master fund overpaying the fund manager.
He said the NAV was “grossly overstated” as master fund assets turned out to be worth some $400 million less than the value reflected in the fund’s audited financial statements.
The final audit report for the master fund for 2017 hid from directors serious control issues that would eventually lead to the receiverships and SEC’s intervention, “even though these issues were known by the Grant Thornton defendants when they issued their audit report, Mr Perlman claims. He said that report should have carried an “adverse” opinion from the auditors, which would have raised red flags for readers of the report, rather than the much less serious “qualified” opinion issued.
In April 2019, the auditors indicated they planned to issue an adverse opinion on the 2018 financial statements, as they did not fairly represent the fund’s financial condition, the filing said. The receiver claims that a TCA Fund Management employee, Matthew Wrigley, “used his leverage” with Grant Thornton clients “as leverage to convince” them to change their mind.
Shortly after, the auditors “provided a roadmap to obtain another qualified opinion for 2018″, which equated to the offering of a “blind eye” to significant accounting inconsistencies and improper controls, the receiver alleged. The financial statement ended up carrying a qualified opinion.
The receiver is looking for a judgment against the auditors and awarding of damages in amounts to be determined during a jury trial. The lawsuit was first reported by the Irish Independent.
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