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Ritchie Capital demands $100M from McGladrey auditing firm for aiding convicted Ponzi schemer Petters

By Jonathan Bilyk | May 17, 2017

Law money 07

A suburban Chicago capital investment group is demanding a Bloomington, Minn.-based auditing firm and related defendants pay it at least $100 million for the firm’s alleged role in helping to steer hundreds of millions of dollars in investments into a massive multi-billion dollar Ponzi scheme.

On May 12, Wheaton-based Ritchie Capital Management and related entities filed suit in Cook County Circuit Court against auditing firm McGladrey & Pullen, alleging professional malpractice against the firm in relation to its work ostensibly auditing the so-called Lancelot investment funds used to gin up cash for the fraud scheme run by convicted businessman Thomas Petters.

Petters was convicted and sentenced to 50 years in federal prison for masterminding the scheme through his company, Petters Group Worldwide. Overall, the scheme was valued at more than $3.6 billion.

Ritchie’s lawsuit centered on the role played by the Lancelot funds in helping to finance the activities of The Petters Company. Essentially, the Lancelot funds would facilitate the issuance of so-called “special purpose vehicle” “short-term trade notes” designed to support purchase order financing for a corporate entity, known as Thousand Lakes LLC, created to hold funds in a “lockbox” into which warehouse retailers, such as Costco, would ostensibly deposit funds for purchases of consumer electronics.

Ritchie began investing in the Lancelot funds in the mid-2000s. However, in the years following, Thousand Lakes was found to hold no collateral to back the Lancelot SPV notes. Further, a federal investigation determined Costco and Sam’s Club had not actually purchased anything or deposited any funds.

Instead, funds were being funneled directly into Petters’ business, leaving investors with nothing.

Ritchie asserts in their complaint that McGladrey could have and should have easily uncovered the deception. The complaint notes the FBI, for instance, simply took the purported purchase invoices to Costco and Sam’s and compared them against the retailers’ records to verify no consumer electronics purchases had ever been made through Thousand Lakes.

Instead, Ritchie claimed the auditing firm didn’t perform its audits in accordance with established auditing principles, allowing the Lancelot funds to continue to deceive investors.

Ritchie asserts McGladrey’s audits “were intended to induce (Ritchie) into believing the representations made (by Lancelot) were true so that Plaintiffs would not seek to redeem their investment in Lancelot.”

Ritchie further alleges McGladrey “was aware of its role in aiding and abetting Lancelot in the wrongful acts at the time it conducted the audits.”

“McGladrey as part of the conspiracy agreed to perform little or no actual audits of the Lancelot Funds since any audits performed to general accepted accounting principles and generally accepted auditing standards would easily uncover the fraudulent basis of the Lancelot Funds,” Ritchie asserted in its complaint.

Ritchie alleged McGladrey benefited from the alleged scheme by collecting “fees normally associated with complete audits of such funds.”

The lawsuit also alleges counts of breach of contract and violations of Illinois consumer fraud law.

Ritchie is represented in the action by attorneys John E. Sabo, James F. Clayborne and B. Jay Dowling, of the firm of Clayborne, Sabo & Wagner LLP, of Chicago.

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Organizations in this Story

Clayborne, Sabo & Wagner