E&Y Sued over Audits of Failed Hedge Fund

A group of investors has filed a securities fraud lawsuit against Ernst & Young for its audits of a failed Texas hedge fund connected with H. Ross Perot.

The investor group claims to have lost more than $17 million after the collapse of the Parkcentral Global hedge fund. The now-defunct hedge fund was operated by affiliates of Perot, a billionaire and former presidential candidate who founded Electronic Data Systems and Perot Systems. The Plano, Texas-based hedge fund closed its doors in November 2008, losing more than $2.6 billion.

The lawsuit, filed Wednesday on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, by attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos, claims that New York-based Ernst & Young falsely represented that the company fairly audited Parkcentral Global, and that the auditor failed in its “watchdog” role to warn relying investors of the risk of fraud and noncompliance by management.  The suit accuses Ernst & Young of fraud, negligent misrepresentation, securities fraud and conspiracy.

A Ernst & Young spokesman declined to comment on the lawsuit.

“Our clients were told that an investment in Parkcentral was designed to preserve capital,” said attorney Demetrios Anaipakos, who will argue the case with Amir H. Alavi on behalf of the plaintiffs. “Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom.”

This month, Brown Investment Management, one of the plaintiffs in the suit against Ernst & Young, won a Delaware Supreme Court ruling that requires Parkcentral Global to disclose its former investors. Those investors could be added to the new Houston lawsuit.

The investments of the Brown foundation, Brown Investment Management and the two other family-related ventures totaled $16 million and were lost within 90 days despite a “worst-case loss” estimate of 5 percent. Financial consultant Comiskey, like his fellow investors, lost 100 percent of his investment when Parkcentral Global went under.

The lawsuit is separate from a class-action suit filed in the U.S. District Court for the Northern District of Texas against Parkcentral Global.