The Bloomington, Minn.-based accounting firm of McGladrey & Pullen, along with the partner in charge of now-defunct Sentinel Management Group Inc.’s audit, were sued for $550 million by a Chapter 11 trustee for Sentinel. The trustee charged that accountancy “itself participated in the wrongdoing committed by a Sentinel insider,” who wasn’t named.
The trustee for Northbrook, Ill.-based money manager Sentinel — which itself had been accused of fraud — filed the suit in U.S. Bankruptcy Court in Chicago. In addition to McGladrey & Pullen, the suit named G. Victor Johnson, who had been the partner in charge, according to a Bloomberg News report.
A representative for the accountancy and Johnson didn’t return a call from CFO.com seeking comment.
Last August, Sentinel froze client withdrawals from its $1.5-billion short-term investment fund, and company officials claimed in a letter to clients that because of subprime mortgage crisis and resulting credit crunch “fear has overtaken reason,” according to an Associated Press report at the time. Sentinel reportedly told clients that it could not meet their requests to withdraw cash.
The following week, the Securities and Exchange Commission filed an emergency action against Sentinel seeking to halt any improper commingling, misappropriating, and leveraging of client securities without client consent. The SEC’s complaint alleged that for at least several months Sentinel’s advisory clients suffered undisclosed losses and risks of losses as a result of several unauthorized practices. The commission said Sentinel placed at least $460 million of client securities belonging in segregated customer accounts in Sentinel’s house proprietary account.
According to the AP, the trustee, Frederick Grede, accused the firm, which audited Sentinel’s 2006 financial statements, of certifying false financial statements and creating some of the accounting entries that led to Sentinel’s financial misstatements. According to Bloomberg, Grede said McGladrey & Pullen “ignored blatant violations of federal law” and “failed to satisfy the most basic standards of the accounting and auditing profession.”
The trustee said the firm “assisted in the creation of a fictitious management agreement” used to siphon $1 million out of Sentinel when it knew no management services were being provided, according to the wire service. Rather than giving Sentinel an unqualified opinion for 2006, the trustee said that the firm should have disclosed violations of law, according to Bloomberg.
“M&P’s failure to either ensure that Sentinel’s financial statements accurately reflected the facts or refuse to certify materially misstated financial statements, as well as its failure to report these violations in its audit report and to authorities, reflects a deliberate disregard of M&P’s obligations as an auditor,” Grede reportedly said.