A New York State Supreme Court judge has dismissed claims
brought against Ernst & Young Cayman Islands (E&Y) by the
liquidators of a defunct hedge fund that “imploded” in 2002.
The liquidators claimed the Big Four firm performed a deficient
audit and was negligent in failing to detect the investment
managers’ fraudulent valuation and alert the directors, thereby
causing the fund’s losses.
The hedge fund, Beacon Hill Master, lost nearly half its net
asset value in the collapse which resulted in a Cayman Islands
court appointing Theo Bullmore and Phillip Stenger as liquidators
In 2002, the US Securities and Exchange Commission (SEC)
commenced an action against the investment managers for securities
fraud. In March 2005, the liquidators launched a motion against the
investment managers, E&Y and the fund’s administrator ATC Fund
Services (Cayman) Limited. All of the defendants settled with
Bullmore and Stenger with the exception of E&Y.
E&Y conducted the fund’s only audit, based upon a
three-month period between 2 January and 31 March 2002. E&Y
issued a “clean audit report”.
In a court document, E&Y contended, among other things, the
“joint official liquidators failed to demonstrate E&Y
proximately caused the losses, because the ill-fated act that
ultimately caused the fund to implode was a poorly-timed bet on the
direction of interest rates by the investment managers, made after
E&Y issued its report”.
Judge Charles Ramos dismissed the proceedings against E&Y on
In his ruling, Ramos noted the undisputed evidentiary record
demonstrated the directors ceded control of the fund to the
investment managers and permitted them to operate the fund with
impunity until they were removed by the SEC. Ramos said that the
directors appeared to have ignored their own responsibilities to
the fund by failing to review the financial statements, despite
attesting to their accuracy in the representation letter.