PwC dismisses claims of negligence in not detecting ponzi scheme with Providence

A VIGOROUS defence of Guernsey-based auditors was heard yesterday, in connection to a £14m. claim involving a Ponzi scheme that collapsed owing investors millions.

PwC (26577434)
PwC (26577434)

PricewaterhouseCoopers wanted to dismiss the allegations of negligence, breach of duty and breach of contract that had been put forward by the administrators of Providence Investment Funds.

That company was put into administration in 2016, owing investors, who had been promised very high returns, more than £37m.

Audit work had previously been carried out by PwC’s Channel Islands office, and the Ponzi scheme was not detected.

Advocate Ian Swan, for PwC, told the Royal Court that there were ‘no reasonable grounds’ for bringing the case and the application should be striked out because ‘you can’t blow the whistle on a foul, unless you see the foul.’

The Deputy Bailiff Richard McMahon heard from both the defendant and the plaintiff, and is now considering judgement.

Providence Investment Funds had been run by Floridian Antonio Buzaneli, who had set up offices and affiliates in locations around the world, including Guernsey, Hong Kong, Singapore and Panama. The investors had been told that their money would be used to finance Brazilian factoring, which is a type of debt financing.

Instead, papers filed with the court alleged that the business was run as a Ponzi scheme, an illegal scam which paid profits to early investors with funds from recent investors.

In a Ponzi set-up the early investors are unaware that other investors are the true source of the profits, and it is said that such schemes always fail in the long run. The US Securities and Exchange Commission began investigating Providence in 2016, and two years later Buzaneli pleaded guilty to conspiracy to commit mail fraud and he was jailed for 20 years by a US court.

The administrators of Providence, Deloitte, claimed that PricewaterhouseCoopers had failed in its duty when it worked as auditors for Providence because it should have realised that a fraud was taking place, and should have reported it to the Guernsey Financial Services Commission, or to a senior person at Providence.

PwC had given Providence clean bill of health audit reports for 2013, 2014 and three months in 2012.

In the Royal Court both the plaintiff and the defendant agreed to the common ground that a fraud had not been detected.

At the heart of the highly complex case was whether PwC should have detected a fraud.

In court there were seven people representing PwC, and on the Deloitte bench there was a team of six.

Both sides had big lever arch files containing huge stacks of papers.

Advocate Swan, representing PwC, said it was ‘entirely reasonable’ to ask for a strike out of the application, and he outlined similar cases in the UK which had been dismissed, although the Deputy Bailiff Richard McMahon queried whether they were relevant to Guernsey’s laws.

Advocate Mathew Newman, for the administrators, argued that it was not a suitable case for a strike out, and he said it was ‘more suitable to be determined at trial’.

The Deputy Bailiff will now review the evidence, and his judgement on whether the case should be quashed is expected in a few weeks.

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