Add Deloitte To The List of "Vulnerables"

Week before last, I wrapped up a poll on “Next Firm to Collapse.”  You can see the results here.  Deloitte has as many suits as anybody else, as was reported recently to ACAP, but I hadn’t included them in the poll.  There are others with more imminent issues.

But the Bear Stearns debacle has, I’m sure, been keeping Deloitte management up at night. The suits over the original hedge fund collapses keep getting amended and stronger as more information comes out on the Bear Stearns side, especially with regard to the hedge fund managers.
I love that the lawyers are getting good at being very specific about what the firms could have done wrong.  They’re reading and learning and getting to the meat of what the Big 4 does and should be doing and why they should often be held much more accountable for these spectacular failures of judgement and management by their clients.  

Bloomberg reports today:

Bear Stearns Faces Revised Suit Over Collapse of Hedge Funds

Bear Stearns Cos., two of its former managers, and auditor Deloitte & Touche are accused in an amended lawsuit seeking $1.5 billion in damages of engaging in fraud before the collapse of two hedge funds.

Two investors and the liquidators of two Cayman Islands funds filed an amended complaint that broadened the scope of an April 4 suit seeking $1 billion in damages. The defendants include Ralph Cioffi, 52, and Matthew Tannin, 46, who were indicted June 19 and accused of misleading investors about the hedge funds, which invested in subprime mortgages. The amended complaint, filed June 30, adds elements of the indictment, including e-mails in which Cioffi and Tannin discuss the declining financial position of the funds before they imploded in July 2007. The collapse of the funds helped trigger the credit market crisis last year and led to the acquisition of Bear Stearns in May by New York-based JPMorgan & Chase Co.

“The funds were doomed to fail, because the Bear Stearns defendants conceived, managed, and deceptively marketed them knowing that they would be viable so long as — but only so long as — the U.S. housing market continued to experience an unprecedented rise,” according to the amended complaint filed n federal court in Manhattan…

A spokeswoman for Deloitte, Deborah Harrington, said in an e-mailed statement that the amended complaint “is totally without merit” and the firm will defend it “vigorously.”

Deloitte certified a flawed model used by Bear Stearns to value assets in the funds’ portfolio and issued clean audit opinions about the funds, according to the complaint.

Deloitte “played a direct role” in the Bear Stearns scheme by “defrauding investors and aiding and abetting the Bear Stearns defendants in the financial and reporting improprieties related to the funds,” according to the complaint.

Bear Stearns was one of Deloitte’s “largest and most significant clients,” paying more than $20 million in fees last year, including $1 million to audit the collapsed hedge funds, according to the complaint…

10 replies
  1. Anonymous
    Anonymous says:

    Didn’t Deloitte pick up the majority of the collapsed Arthur Andersen practice? Losing one’s capital 2X is surely a bad sign …

  2. Anonymous
    Anonymous says:

    Francine, does this tie in to your “And they have been laying off all along … ” blog? How does the timing of this suit marry up to the timing of the Deloitte layoffs?

  3. Francine McKenna
    Francine McKenna says:

    Deloitte and KPMG (and to a lesser extent indirectly the other two and a few other consulting firms,) picked up Andersen folks. It depended on geography, where each partner made their own deal for their clients, staff, and “franchise.” I do feel bad for the Andersen folks who have had to live through uncertainty again with any of the firms. I remember some individual Andersen partners here in Chicago who went to EY. When EY was suspended from taking on new audit clients for six months due to their independence violations a few years back, these partners were visibly stressed, worrying that they would have to move again. Some did. To a next tier firm. Frying pan into the fire…

  4. Francine McKenna
    Francine McKenna says:

    To be honest, I don’t think the suit has anything directly to do with the layoffs, except to add another reason for pessimism to the firm’s psyche. The layoffs have been happening all along for the last year in some places. The original suit related to BS was filed in April. Deloitte is, as one other commenter mentioned on another post, building a new multimillion dollar facility in Texas for training and internal activities. But they’re feeling worried about the future revenue stream as much as anyone else. I have heard from many that they have communicated to staff that they had a bad year in order to set expectations for low bonuses, minimal raises, and fewer promotions. The reduction in SOx expenditures coupled with the overall depression about the economy and corporate spending has made the firms retreat to their “cautious closets.”

  5. Anonymous
    Anonymous says:

    Regardless of the outcome of this law suit, it is a fact that Deloitte can no longer count on its annual BS fees of +/- $20 million, and this has a direct impact on future revenue stream and staffing needs. Curious why EY is not on the list …

  6. Francine McKenna
    Francine McKenna says:

    EY and Deloitte were not included in the vote because there’s room for only four answers and I wanted to highlight imminent issues. BDO and GT are facing serious threats, there is large litigation threatening a weakened KPMG and PwC is facing multiple litigations (plus I always pick on PwC more, LOL) But as you know, both Deloitte and EY have litigation and potential litigation pending and any one of them could be the first to go, depending on how cases wind through the courts. If they keep settling them, it’s instead like a series of little and big cuts, bleeding them dry slowly, inhibiting them from making longer range plans and from doing big things with confidence. Sure, they will still build big buildings and training facilities, monuments to hubris, but they will also nickel and dime staff and tell them they have to be let go or they have to wait for a promotion or they have to wait for bigger raises or bonus until the “economic case” can be made.

  7. Anonymous
    Anonymous says:

    Fran, once again your insight is spot on. I’m at [Big 4 firm]. Indeed, this year was a “bad year” and there are fewer promotions to be had because of the “poor economic conditions” … and salary increase/bonus expectations are being set as low as possible for the same weak reasons.

    In related news, I understand that the partner units came in above budget values. So at least our partners had a good year.

  8. Rob
    Rob says:

    If anyone from Deloitte is looking for a new position or they know someone that was downsized, show them this post and they contact me – I have a client that is looking for MANAGER OF TECHNICAL ACCOUNTING & RESEARCH (NY/NJ)


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