The Possibility of Fraud May Exist

 

In March 1999. two years before the SEC shuttered PinnFund and all but $1.5 million of $330 mil­lion was gone, Human set the table for Peregrine and PinnFund’s demise. Incor­porated under Peregrine, the three funding entities— Allied Capital, Grafton, Six Sigma — were private investment trusts, which, because of their relatively few participants, were not audited at first. But once these entities holdings bur­geoned into the many millions, investors clamored for a third party to see whether the money was where it should be and doing what it should be doing— safely funding loans. Pinn­Fund had already been audited by Levitz,  Zacks, and, by 1999, several investors were pushing Hillman to have the cash-fat Peregrine partnerships audited. So Hillman hired Pricewaterhousecoopers, one of the Big Five account­ing firms, alongside Arthur Andersen and Company, which is facing civil penal­ties for allegedly constructing complicated partnerships that kept Enron afloat. Hillman asked for a “minor” audit of the funding enti­ties Allied Capital and Grafton, for 1997 and 1998. Minor, Hillman said, meant “to verify that we recorded investor money” properly and “to substantiate when PinnFund sent us money for monthly distribution”.

 

Pricewaterhouse’s Todd Goldman was the auditor in charge of this account. He told Hillman it shouldn’t take more than three weeks. But, when Goldman looked at what he believed was Levitz, Zacks’ 1997-98 audit report for PinnFund (it is not clear who sent this to him) he discovered a prob­lem. The audit listed a $67 million liability as part of “revolving warehouse facili­ties” Goldman requested clarification from Hillman.

 

 

According to Forbes magazine, “Hillman sent a second set’ of the 1997-98 audit with an added foot­note. The footnote stated that the $67 million was part of a $78 million “credit facility, provided by private sources (Allied Capital Part­ners and Grafton Partners). The unused portion” — $11 million—of the credit facility is held in trust for PinnFund, USA” Goldman wondered where this $11 million was. It was not shown as “cash,” where it should have been.

On June 4,1999, Gold­man sent a memo to Pere­grine’s director of opera­tions, Peter Kodzis. He wrote, “As you know, there seem to be several versions of the PinnFund financial state­ments” Goldman requested that Kodzi  ask Levitz, Zacks to send him its numbers directly; Goldman also wrote, “he will not ask questions about any other aspect of PinnFund’s business”.

His memo, there was no mention of fraud. Gold­man received yet another report, this time from Pinn­Fund directly, with another explanatory footnote in place, clarifying the missing $11 million.

 

 

Still dubious about PinnFund’s books, Gold­man called Levitz, Zacics in mid-June and spoke with Kim Ufford, Levitz, Zacks’ senior manager in San Diego,wbo had helped pro­duce the 1997-98 PinnFund audit. Apparently Goldman told Ufford that PinnFund’s loans were being funded by

the two finding entities, Allied and Crafton Ufford (who along with Stanley Levitz has been contacted repeatedly for this article and has not responded) told Goldman that he didn’t know Peregrine was the funding source for Pinnfund’s loans. Ufford believed PinnFund was using ware­house lines of credit. John Garrita testified that Ufford did know about Peregrine:

“He knew the entities (Allied and Grafton) because he would see the wires com­ing in, so he was aware of who they were” Moreover, in Levitz, Zacks 1997-98 report. the following is stated:

“The Company [PinnFund] has also improved its coor­dination with investors and its underwriting procedure to a accelerate the sale of loans after funding.” This sounds as though Levitz, Zacks understood PinnFund and Peregrine’s structure. What Ufford and the firm did and did not know at the time of the audit is central to Levitz Zacks’ civil liability: Did Levitz, Zacks know there were investors who should have been notified of a potential fraud? Certainly Pricewaterhouse knew.

 

 

In court documents Ufford said that, during their phone call, he and Goldman” established that none of the page were associated with the correct audit record done by Levitz, Zacks or the car-red financial statements.” Goldman had a phony audit.

 

The original audit for calendar year 1998 included a paragraph that stated the a losses raise substan­tial doubt about its ability to continue as a going concern”. The phony audit omitted the paragraph. The original showed a retained deficit of more than $27 million. The phony showed retained earnings of $10 million. A $37 million chasm was too wide for any auditor to ignore.