Moore Stephens UK has been cleared of a
$174 million negligence claim by its former audit client Stone
& Rolls.

Stone & Rolls alleged the firm failed to
detect the fraudulent activities of its owner Zvonko Stojevic
between 1996 and 1998.

The alleged fraud consisted of the
presentation of false documents to the banks, the receipt of funds
by Stone & Rolls and the channelling of those funds to other
parties. His activities finally led to the company being placed in

On 22 December 2006 Stone & Rolls, through
its liquidators, brought a $174 million claim for damages against
its former auditors. Moore Stephens argued the claim should be
struck out on the grounds that Stone & Rolls was the
perpetrator – not the victim – of the fraud. The High Court refused
to do so but in June 2008 the Court of Appeal disagreed and decided
that the claim by Stone & Rolls should be struck out.

The House of Lords has now confirmed that
decision by a 3 to 2 majority.

The action was funded by a third party, IM
Litigation Funding. Jonathan Corman, a specialist in professional
indemnity claims at law firm Browne Jacobson, said the ruling is a
major setback for third party-funded cases.

“[It] will certainly make funders think long
and hard before putting their money on the table,” he said.

Julian Randall from law firm Barlow Lyde &
Gilbert, which represented Moore Stephens, said he has always felt
strongly that the company was pursuing Moore Stephens for losses
caused by its own fraudulent behaviour and that the claim should
therefore fail.

“The ruling confirms that auditors aren’t
simply there to pick up the creditors’ losses when a company
collapses,” he said.

The UK law firm Reynolds Porter Chamberlain
said that although the ruling is a setback for third-party funding,
it does not necessarily set a precedent for other Ponzi cases as
the facts of the case were extremely unusual.

“It is also likely that claimant companies
caught up in similar Ponzi-style frauds will seek to draw
distinctions between Stone & Rolls and their own circumstances,
particularly by pointing to independent ‘innocent’ directors and
shareholders,” the firm said.