Hedge fund investors sue Ernst & Young over fraudulent auditing practices

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Five investors who lost millions of dollars following the collapse of a Plano, TX-based hedge fund in 2008 filed a lawsuit against Ernst & Young LLP last week that accuses the Big Four accounting firm of fraud during its time as the fund's auditor. Jason Bramwell reports.

The lawsuit, which was filed August 25 in Houston, claims that New York-based Ernst & Young falsely represented that it fairly audited Parkcentral Capital Management LP. It also claims the auditor failed in its watchdog role to warn investors of the risk of fraud and noncompliance by management.

The suit accuses Ernst & Young of fraud, negligent misrepresentation, securities fraud, and conspiracy.

"Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time", Demetrios Anaipakos, an attorney for the investors, said in a written statement. "[Ernst & Young] was suppose to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral's investors of their impending doom."

According to a Bloomberg report, the lawsuit states that Parkcentral Capital Management marketed its funds by saying its money managers had invested for Texas billionaire and former U.S. presidential candidate Ross Perot and his family. The Parkcentral Global Hub Ltd. fund lost more than $2.6 billion due to a "catastrophic and concentrated risk in a single investment strategy", according to the complaint.

The plaintiffs - Houston financial consultant Gus Comiskey, Brown Investment Management LP, MBB Ventures LLC, SBS Ventures LLC, and the Thomas R. Brown Family Private Foundation - claim they lost a total of $17 million invested in two Parkcentral funds that went into liquidation and seek actual and punitive damages, Bloomberg reported.

In early August, Brown Investment Management won a Delaware Supreme Court ruling that requires Parkcentral Global to disclose its former investors. Those investors could be added to the Houston lawsuit, according to Anaipakos.

Ernst & Young spokesperson Charles Perkins told AccountingWEB on August 31 that he could not comment on the lawsuit.

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