Mosier v. Stonefield Josephson, Inc.

Decision Date23 February 2016
Docket NumberNo. 13–56453.,13–56453.
Parties Robert P. MOSIER, as Receiver for Private Equity Management Group Inc. and Private Equity Management Group, LLC and their subsidiaries and affiliates, Plaintiff–Appellant, v. STONEFIELD JOSEPHSON, INC., CPAs, a California corporation, Defendant–Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Randall A. Smith (argued), Ronald Rus, Sara A. Milroy, and Laurel R. Zaeske, Brown Rudnick LLP, Irvine, CA, for PlaintiffAppellant.

Stephen J. Tully (argued), and Efren A. Compeán, Garrett & Tully, P.C., Westlake Village, CA, for DefendantAppellee.

Michael C. Kelley, Bradley H. Ellis, Mark E. Haddad, and Collin P. Wedel, Sidley Austin LLP, Los Angeles, CA, for Amici Curiae California Society of Certified Public Accountants and American Institute of Certified Public Accountants.

Before: HARRY PREGERSON and STEPHEN S. TROTT, Circuit Judges, and WILLIAM H. STAFFORD,* Senior District Judge.

OPINION

TROTT

, Senior Circuit Judge.

Appellant Robert Mosier is the court appointed receiver for Private Equity Management Group, Inc. and its interrelated subsidiaries and affiliates (collectively, "PEMGroup"). Mosier was appointed after the former directors and managers of PEMGroup used the companies to defraud investors of approximately $950 million in what the district court called a "massive Ponzi scheme."

Mosier sued Appellee Stonefield Josephson, Inc., the CPAs who audited the financial statements for six of PEMGroup's fraudulent offerings. Mosier contends that Stonefield's reports and related conduct materially misrepresented PEMGroup's financial condition, allowing PEMGroup's management to prolong the life of their scheme and to loot and to dissipate assets from PEMGroup. According to Mosier, if Stonefield had performed its audits competently or simply resigned after it caught wind of management's fraud, PEMGroup could not have attracted new investors. Mosier seeks $51 million from Stonefield in compensation for damages the firm allegedly caused to PEMGroup.

Mosier's first amended complaint stated three causes of action: 1) professional negligence, 2) aiding and abetting the wrongful conversion of PEMGroup's assets, and 3) unjust enrichment. On summary judgment challenging all three claims, the district court dismissed the first two, holding that Mosier had not raised a genuine issue as to the existence of an essential aspect of his case: proof of causation. Specifically, the district court held that to show causation, Mosier ultimately would have to demonstrate that either PEMGroup or its investors relied on Stonefield's audits, but that Mosier had utterly failed to satisfy this legal requirement. Moreover, the court concluded that any reliance on the audits by the investors would have been unreasonable. As to claim three for unjust enrichment, the court also granted summary judgment. Although Stonefield challenged this cause of action in its motion, Mosier did not respond to or defend it in his response.

We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291

, and we affirm.

IBACKGROUND

Danny Pang founded PEMGroup. Together with PEMGroup's directors and management, Pang established Genesis Voyager Equity Corporation ("GVEC") and its related entities GVEC II and GVEC IV as subsidiaries of PEMGroup. These entities, known as "special purpose vehicles," eventually became parts of an integrated swindle.

GVEC made debt and equity offerings in life insurance policies and commercial real estate mortgages. These offerings allegedly raised $951 million. In its offering memoranda, GVEC told investors to expect a return on their investments of between approximately six to seven percent. However, eventually the "returns" GVEC paid did not come from its investments. GVEC fraudulently paid its investors with money from new investors and by selling GVEC's assets to GVEC II and GVEC IV at over-inflated prices. In addition to paying old investors with new investor money, management used the ill-gotten money from unsuspecting investors to prop up GVEC by paying GVEC's overhead and retiring older offerings. Management also looted money from PEMGroup for their own personal benefit.

In 2003, GVEC hired Stonefield to audit the financial statements for six of its offerings. Stonefield issued ten audit reports for fiscal years 2003 through 2007. Mosier alleged that these reports fell below Generally Accepted Auditing Standards ("GAAS") in a variety of ways. However, Stonefield's cardinal sin in Mosier's eyes was Stonefield's alleged failure sufficiently to warn investors that GVEC's management had not accurately reported the value of its assets in accordance with Generally Accepted Accounting Principles ("GAAP"). Mosier estimates that GVEC misstated the value of eighty to ninety percent of the assets in the financial statements.

Beginning with its March 2004 report, a wary Stonefield issued "qualified" opinions about their client's operations. "A qualified opinion states that, except for the effects of the matter(s) to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with generally accepted accounting principles."1

Extending through the end of Stonefield's relationship with PEMGroup, each of Stonefield's audit reports expressed significant reservations about its client's improper method of assigning value to its assets and the unknown effects of those questionable practices on its financial statements. For example, Stonefield's "Independent Auditors' Report" dated March 4, 2005 says,

[T]he Company has valued certain investments ("Growth Special Assets") at a method similar to an amortized cost basis, which basis values the investment at historical cost. Any potential unrealized gain resulting from these Growth Special Assets is then amortized on a straight-line basis over their estimated life. In our opinion, accounting principles generally accepted in the United States of America require that all investments be presented at fair value, and all corresponding changes in fair value between balance sheet dates be recorded to the statement of operations. The Company has elected to not disclose the exact nature of all of the special assets for confidentiality purposes, which is also a departure from accounting principles generally accepted in the United States of America. The effects on the financial statements of the preceding practice is not reasonably determinable.

In a summary note to Stonefield's report, the misgivings continued:

The Company is recognizing unrealized gain resulting from the Growth Special Assets ... on a straight-line basis method over the estimated life of the Growth Special Assets, which method is not in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). US GAAP requires that all investments be presented at fair value, and all corresponding changes in fair value between balance sheet dates be recorded to the statement of operations. The effects on the financial statements of this non U.S. GAAP practice are not reasonably determinable.

In a letter dated April 18, 2008 addressed to "Board of Directors and Inventors Genesis Voyager Equity Corporation," Stonefield warned that GVEC's

[r]ecording of the sale of Special Assets were not in accordance with accounting principles generally accepted in the United States of America. The Special Assets of the Portfolio were sold to an affiliated entity that shares the same advisor as [GVEC]. Furthermore the valuation for the sale price of the Special Assets could not be concluded to be Fair Market Value independently of management's internal valuation.

In Mosier's opinion, however, Stonefield's series of qualified reports did not go far enough. Given the extent to which GVEC admittedly misstated asset values, Mosier alleges that Stonefield should have issued either an adverse opinion or refused to issue any opinion at all and simultaneously to unload GVEC as a client. "An adverse opinion states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity in conformity with generally accepted accounting principles." AU § 508.10, supra.

Stonefield's involvement with GVEC and PEMGroup went beyond issuing qualified audit reports. Stonefield attended a meeting with at least one investor, although the record does not reveal what Stonefield said during the meeting. Also, Stonefield authored "comfort letters," which stated that its qualified audit reports were prepared in accordance with GAAS and fairly described the "quality or reliability of the [relevant] financial statements." Two of Stonefield's auditors served as a character reference for Danny Pang and another of PEMGroup's managers. Finally, Stonefield prepared for GVEC's board of directors and investors net asset valuations and limited reports concerning two of the sales between GVEC and its affiliates.

Stonefield never had an entirely comfortable relationship with GVEC. Early on, Stonefield learned that its predecessor had resigned as GVEC's CPA after GVEC misrepresented the predecessor's involvement with GVEC's initial funding period. Furthermore, the manner in which PEMGroup structured GVEC and its offerings—e.g., soliciting only Chinese investors, basing its operations in the British Virgin Islands, and promising seemingly unsustainable rates of return—raised Stonefield's concerns. As time went on, Stonefield began seriously to question GVEC's operations, management's integrity and competence, and whether Stonefield should resign. Ultimately, Stonefield did resign, but not until April 29, 2009, after it learned that the SEC had filed a complaint against Pang and PEMGroup, and that the FBI had arrested Pang.

IIDISCUSSION
1. On whose behalf may Mosier sue Stonefield?

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