• Being Diligent

The WG Story (2 of 3): Iowa v. Deloitte


On March 22, 2012, the Iowa Public Employees’ Retirement System, the largest victim of the WG Trading fraud scheme, sued Deloitte as it believes it was misled by Deloitte's audit on WG Trading Company, a broker-dealer entity. In reality, Deloitte should have done a better job, but the investor’s accusation is probably unfounded since the auditor was not in a position to review the financial conditions of unregulated fund vehicles, where most of the unlawful transactions were recorded. In my opinion, it was the same investor who could have saved itself by conducting an additional check.

Case Profile:

On March 22, 2012, Iowa Public Employees’ Retirement System (“Iowa PERS”), a victim of the WG Trading Ponzi scheme, sued Deloitte & Touche (“Deloitte”) as it believes it was misled by the financial statements of WG Trading Company, Limited Partnership (“WGTC”), its broker-dealer arm. Deloitte conducted audits over 8 years since 2001. Iowa PERS invested $427 million in the scheme since April 4, 2007 and became the largest investor of WG Trading by far before Paul Greenwood and Stephen Walsh were arrested in 2009. Iowa PERS lost as much as $38 million.

According to the court document, the NFA reviewed the financial records for WGTC and found that $531.5 million was in accounts receivable (other than Receivable from broker-dealers), which never appeared in an annual report filed by WGTC. The NFA’s finding is supported by the financial statements of WGTC, which are still available on the SEC’s EDGAR system.

According to WGTC’s financial statements As of Dec 31, 2007, its balance sheet was as following. There is no sign of “account receivable” from related parties.

Exhibit 1: WGTC 2007 Balance Sheet

The scheme of WG Trading was somewhat more complicated than a regular hedge fund structure and this probably created a “loophole” where Greenwood and Walsh fooled investors’ eyes. Most of the misappropriation of assets occurred at WGTI, an unregulated entity, which was probably never audited in the past. As an auditor of WGTC, Deloitte was only responsible for WGTC and didn’t have any authority to review WGTI’s financial conditions, except for an account receivable from WGTI (which only appeared on unpublished 2008 financial statements). Although Deloitte failed to identify over $500 million “hidden” accounts receivable, its ability to reveal this fraud scheme was probably limited.

Exhibit 2: Scheme of WG Trading

Source: the author, created based on publicly available information

What investors should have done instead was to request an annual audit on WGTI, which made nearly $800 million unlawful loans to Walsh and Greenwold or related entities. If an auditor reviews the financial statements, it wouldn’t be very difficult for them to point out the unusually large loans to the funds’ management.

In the court document, Iowa PERS said it relied solely on the financial statements of WGTC, not WGTI, for its investment in the scheme, and therefore, Deloitte is liable for the losses. However, why did it think ok not to review WGTC’s financial statements? It is unusual not to review the financial statements of an entity to which it had direct financial exposure (Iowa PERS invested in WGTI through purchasing promissory notes). The bottom line is that it is not enough to review a financial statement. A potential investor has to take a more holistic approach to understand the entire scheme in which it is going to participate.


Iowa Public Employees’ Retirement System v. Deloitte & Touche LLP, United States District Court Southern District of New York (2012)

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