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EY has been accused of helping a United Arab Emirates oil storage company carry out a fraud against investors in a US special purpose acquisition company, the latest lawsuit against the accounting firm over an audit of a fraudulent company.
In a lawsuit filed last week in the Southern District of New York, a group of Brooge Energy shareholders accused EY of playing a “critical role in a years-long scheme” to help the Fujairah-based company defraud investors in a Spac transaction from 2019.
The oil storage operator listed its shares on Nasdaq that year through a merger with Spac, giving it a market value of more than $1 billion, making it an early beneficiary of a renewed wave of investor enthusiasm for companies publicly listing their shares using of a method. with lighter control.
But despite the backing of powerful Middle Eastern investors, including Sheikh Mohammed bin Khalifa bin Zayed Al Nahyan, the son of the previous UAE president, Brooge’s shares have since collapsed by 99 percent after US authorities uncovered a long-running fraudulent scheme. plan came to light. company.
Brooge shareholders’ lawsuit – which targets EY Middle East, the firm’s UAE managing partner Anthony O’Sullivan and several other EY member firms – accuses the accounting firm of not only failing to show clear evidence of fraud discover, but also to play a “key role” in a “round-tripping scheme” to mask falsified income.
The US lawsuit comes after administrators of bankrupt UAE hospital NMC Health filed a $2.7 billion legal claim against EY for allegedly failing to take basic steps that could have helped identify fraudulent transactions. EY is also facing lawsuits from shareholders of Wirecard, the German payments company that went bankrupt after the FT revealed it was a longstanding fraud.
“This is an astonishing story of brazen, prolonged, blatant fraud by one of only four UAE companies listed on the Nasdaq or the NYSE,” said Neil Richardson, one of the investors who filed the lawsuit, told the Financial Times, adding that it was critical that investors get healthy so that “quality companies” from the region “can gain access to US capital markets in the future.”
EY said it had “emphatically” rejected the claim filed against it.
“Responsibility for this fraud lies with Brooge Energy’s key shareholders and senior officers and claims against EY for damages are without merit. We cannot comment further pending legal proceedings,” EY said.
The U.S. Securities and Exchange Commission announced fraud charges against Brooge a year ago, alleging that the company had used “false invoices” for years to boost revenues by as much as 80 percent. Brooge agreed to settle the SEC’s charges alleging the company violated several federal securities laws.
EY issued an unqualified audit opinion on Brooge’s 2017 and 2018 accounts, during which time the company claimed it had contracts with two commodity trading firms. The lawsuit describes these contracts as a “sham” and claims that EY “never received a single payment from either client” during the period that EY controlled the Brooge company.
EY is said to have “failed to verify the authenticity” of invoices relating to these contracts. In one case, EY requested bank statements to confirm whether millions of dollars had been received from one of the trading firms, during which time the company had deposited checks from an affiliate to cover up the missing revenue.
EY is said to have either “not requested to see copies of the checks to confirm the identity of the payer” or “accepted any explanation from Brooge” about the discrepancy.
The investors also allege that EY then assisted Brooge with a plan to transfer (or “renovate”) the trading firm’s contracts to its affiliate, Al Brooge International Advisory (BIA), which the SEC said last year ‘had no meaningful business’. activities apart from participating in the misstatement of earnings” at the US-listed company.
“This novation structure was fraudulent because it allowed EY Defendants to explain away BIA’s ‘revenues’,” the lawsuit alleges.
The lawsuit also notes that EY signed Brooge’s 2019 accounts even after O’Sullivan and another EY executive attended an audit committee and reported that the auditor had “identified a fraud risk.”
The FT revealed in January that a director of consultancy Alvarez & Marsal – who had been appointed director of Brooge to help with its restructuring – had been detained in the emirate of Fujairah while carrying out his work. He was later released and resigned as director. A&M declined to comment.
The plaintiffs in the lawsuit against EY also allege that a UAE citizen named Husam Al Ameri “exercised de facto control over” Brooge, noting that he had previously sanctioned by Dubai’s financial regulators for “performing monetization fraud.”
Brooge and Al Ameri did not respond to requests for comment.