The Cleveland-based CPA firm Skoda Minotti is facing a lawsuit from a group of depositors who lost their money after the collapse of a credit union that the firm had been auditing.
The case involves Taupa Lithuanian Credit Union in Cleveland, whose former CEO, Alex Spirikaitis, was sentenced last December to 130 months in prison for the fraud scheme.
Spirikaitis and co-conspirators allegedly stole $15 million from the credit union. The former CEO allegedly used some of the money to build a $1.6 million home, pay for luxury seats at Cleveland Browns games, and purchase nine vehicles, according to the Credit Union Times.
The National Credit Union Administration and the Ohio Department of Commerce closed down the credit union in July 2013 and the NCUA covered the losses of the depositors who had up to $250,000 in funds on deposit. However, several depositors with losses over the NCUA threshold are suing Skoda Minotti for the amount of their loss alleging malpractice.
The lawsuit alleges that Skoda Minotti missed glaring red flags and certified the credit union’s financial statements as truthful when tens of millions of dollars in reported deposits were in fact in the hundreds of thousands.
Skoda audited Taupa’s financial statements from 2007 to 2012 and issued an unqualified opinion for each of the six years. In the sixth and final “clean audit” report, Skoda verified there was $16 million currently on deposit in Taupa share accounts. However, several months later, in July 2013, regulators found Taupa to be insolvent, having less than $600,000 actually on deposit as a result of the embezzlement by Taupa employees.
John Chapman, a Cleveland-based attorney with a national securities and fraud practice who is representing six of the depositors, initially compared the case to Enron and WorldCom, claiming the auditors rubber-stamped the financials with effectively no due diligence. “Auditors are the watchdogs, but what happens when the watchdog is asleep?” he said in a statement. “The Taupa Credit Union disaster and these depositor losses are the result.”
Brent Silverman, a partner at Kaufman & Company who is representing Skoda Minotti, took exception to the comparison. “To the extent the plaintiffs seek to compare this case to Enron, that is completely improper and misplaced, and I can only interpret that they’re making such a comparison to trump up and sensationalize their claims,” he said, when reached on Thursday. “The issue in this case is whether Skoda Minotti properly audited Taupa’s financial statements, We believe that when Skoda has an opportunity to give its side of the story in a court of law, it will be cleared of any wrongdoing.”
In an interview Thursday, Chapman backed away from the Enron and WorldCom comparison.
“Clearly it doesn’t rise to that level in terms of the magnitude and the thousands of lives that are affected,” he said. “Enron and WorldCom were seismic catastrophes. In the aftermath there was evidence that one of the enabling factors that allowed the bad guys to get away with cooking the books for as long as they did were sometimes conflicted and sometimes inadequate outside auditing practices. Our case against Skoda is similar only in that we allege that Skoda failed to bring the degree of diligence and rigid systematic review to bear when it was reviewing the financials of this Ohio-based credit union. It is what you might call a mini version of a national catastrophe. Its effect is localized to Cleveland and actually to the Lithuanian community in Cleveland.”
Chapman noted that the depositors he is representing had reviewed the audited financials before putting their funds in the credit union. “They received the degree of assurance they needed before they made that very important decision to deposit entirely in most cases substantially all their entire net worth in Taupa,” he said.
He acknowledged that the embezzlement scheme preceded Skoda Minotti’s involvement in auditing the credit union, but said Skoda still should have caught the fraud during the the six to seven years that it was auditing Taupa.
“There was a very pronounced failure of the process of confirming funds on deposit, such that only months before the fraud was discovered, Skoda signed off on a representation in the financial records that there were somewhere north of $15 million in the creditor accounts and the member accounts,” he said. “In fact the number was a tiny fraction of that. That was simply a failure to confirm probably the single most important piece of information about the fiscal health of this credit union, which is the funds on deposit, substantially all of the assets. Essentially they relied on management to furnish them with the information about funds on deposit.”
Chapman pointed out that Corporate One Federal Credit Union, a clearing broker for Taupa in Columbus, Ohio, could have provided Skoda with information about the actual funds available. “They could have simply confirmed the information with a phone call or via the Internet or by any number of different means, but they chose to accept management’s representations,” he said. “That was a fatal flaw that allowed management to continue doing what it was doing for years.”
The scandal was ultimately uncovered by the CEO of Corporate One, who called the NCUA in July 11 2013 to raise a red flag about activity in Taupa’s line of credit, repeated overdrafts and the exceeding of credit limits.
“The very next day, on July 12, state and federal regulators confronted the CEO [of Taupa], and the same day essentially discovered all of the fraud and placed the guy under arrest,” said Chapman. “It required information volunteered by a third party to finally bring this situation to the attention of regulators. In July 2013, Taupa’s cash on deposit with Corporate One was $300,000. Management was claiming there was almost $20 million, so it was a vast, vast overstatement.”
Taupa’s former CEO, Alex Spirikaitis, now serving a prison term, and there are others who were aiding and abetting his illegal activities who have been charged and are at various different stages of the criminal justice system, according to Chapman, who anticipates that others involved in the scheme will ultimately serve time in prison.
His clients are bringing civil claims against Skoda Minotti alleging auditing malpractice and asking for compensation for the funds that weren’t insured by the NCUA.
“The thrust of it is that our folks want to be compensated for their loss of funds under deposit, fund that should have been on deposit with Taupa to the extent that those losses have not been reimbursed by the regulators,” said Chapman.
Chapman said it has had some preliminary conversations with Skoda’s attorneys. “We’re at the very beginning of the process, he said. “There are many things that we don’t know yet. We have not reviewed Skoda Minotti’s work papers, so there’s a lot of work ahead of us. What we have primarily are some source documents from the credit union itself, and the material loss review that was prepared by the NCUA, which basically discusses the conditions that enabled this fraud to go on as long as it did undetected.”
Skoda’s attorney, Brent Silverman, acknowledged that the case is at an early stage. “The case is at its early inception and we are exploring all of our options, including seeking immediate dismissal,” he said.
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