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PwC fails to dismiss £25m negligence claim over Guernsey ‘Ponzi scheme’

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PwC fails to dismiss £25m negligence claim over Guernsey ‘Ponzi scheme’

PwC

PwC fails to dismiss £25m negligence claim over Guernsey ‘Ponzi scheme’

Auditor accused of failing to uncover fraud at fund that collapsed, owing investors £40m

A judge at the Guernsey Royal Court has dismissed an attempt by PwC to quash legal proceedings © Dreamstime.com

A £25m lawsuit against PwC for alleged negligence in its audits of a Guernsey “Ponzi scheme” will go ahead after the Big Four accountant failed to have the claim thrown out of court.

A judge in the Guernsey Royal Court has dismissed an attempt by PwC to quash the legal proceedings. PwC is accused of failing to discover a fraud at the Providence Investment Fund, which collapsed owing its investors millions of pounds.

Administrators to the fund who work at Deloitte, another large accounting firm, claim PwC breached its duties as an auditor by signing off on its accounts despite the fraud in which almost all shareholders’ money was stolen. PwC on Monday said the claim was “misconceived” and that it would “continue to robustly defend” it.

Providence was put into administration in 2016 owing investors ⁠in the fund — who had been promised returns of up to 14 per cent ⁠⁠ — more than £40m.

Court documents filed by lawyers for the administrators allege the business was run as a “fraudulent Ponzi scheme”.

We are pleased the court has confirmed our client’s claim should proceed and should not be struck out over limited technical arguments

Mathew Newman, lawyer at Ogier

Providence claimed to invest in Brazilian factoring, a type of debt financing. Instead, 97 per cent of investors’ money was used to finance the wider Providence group, according to the court papers. The documents said investors’ cash was also lent to companies in Brazil that were controlled by Antonio Buzaneli, founder of the Providence group.

Mr Buzaneli, a Florida businessman, was last year sentenced to 20 years in prison in the US as part of a plea agreement after he was accused of orchestrating an investment fraud at the group company, Providence Holdings International.

PwC audited Providence’s 2013 and 2014 accounts, producing “clean” audit reports on the financial statements for both years in April 2016, the court filings said. The administrators claimed this amounted to “negligence, breach of duty and breach of contract” in its role as auditor to the fund.

However, PwC applied to the courts to quash the claim on the grounds the administrators had not identified any director of the fund who relied on the audit reports and who would have acted differently if the fraud had been identified. PwC also claimed the fund suffered no losses as a result of its work.

The judge said the test of whether an auditor was liable for losses stemming from a fraud at a company whose books it checked would be a first for the Guernsey courts. They dismissed PwC’s application. PwC said it would appeal against the decision.

Mathew Newman, a lawyer at Ogier who is representing the administrators, said: “We are pleased that the court has confirmed our client’s claim should proceed and should not be struck out over limited technical arguments. We now look forward to vigorously pursuing this matter to trial in the interests of investors who have lost millions.”

The lawsuit is one of a number of legal cases being brought against Britain’s largest audit firms by the administrators of failed businesses.

KPMG is facing a £250m lawsuit over allegations of negligence in its audits of Carillion by the UK government agency tasked with unwinding the collapsed outsourcer. Administrators to Patisserie Valerie are also exploring a possible legal claim against Grant Thornton, the cake chain’s auditor, after it collapsed following an apparent fraud. Both firms have previously declined to comment on the potential legal claims against them.

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