Deloitte & Touche Faces a New Suit Stemming From InverWorld Fallout


By Bob Sechler, Dow Jones Newswires

    AUSTIN, Texas -- Accounting firm Deloitte & Touche LLP is facing a new lawsuit stemming from the fallout surrounding the 1999 collapse of the now-defunct InverWorld investment companies.

The suit, filed Thursday in federal bankruptcy court in San Antonio, accuses Deloitte & Touche -- the former auditor for InverWorld principal I.G. Services Ltd -- of gross negligence and accounting malpractice, among other things. It seeks actual damages of at least $200 million plus unspecified punitive damages.

The total award being sought "is probably going to be in excess of $300 million," said Houston attorney Allan Diamond, who filed the suit Thursday on behalf of Len B. Blackwell, a PricewaterhouseCoopers auditor who serves as the official liquidator and Chapter 11 bankruptcy trustee for I.G. Services. I.G. Services went into Chapter 11 bankruptcy in 1999.

Deborah Harrington, a spokeswoman for Deloitte & Touche, said the firm hadn't seen the complaint yet, but is "confident that our services were performed in accordance with applicable professional standards." Ms. Harrington also said Deloitte & Touche will "vigorously defend" itself in the case.

Deloitte & Touche already faces a $350 million lawsuit stemming from the collapse of the San Antonio-based InverWorld entities. The suit was filed by investors about two years ago. Deloitte & Touche-Cayman Islands also has been sued amid the fallout. About 1,200 InverWorld investors, mostly wealthy clients from Mexico, lost a combined $325 million in the allegedly fraudulent investment scheme.

Two former top executives of InverWorld, Chairman Jose Zollino and President George Fahey, were arrested last April and charged with masterminding a conspiracy to defraud investors by crafting a Ponzi scheme.

Mr. Fahey, InverWorld's No. 2 executive behind Mr. Zollino, pleaded guilty in December to conspiracy to launder money and to investment fraud in a deal to testify against Mr. Zollino, who is expected to go on trial this summer.

The original indictments against the pair allege, among other things, that they recruited new clients to repay earlier investors and to cover expenses despite knowing that their company was insolvent. They also have been accused of putting up fictitious assets to conceal the insolvency. Thursday's lawsuit contends Deloitte & Touche audits negligently failed to reveal the scheme.

Attorney Diamond said Thursday that Deloitte & Touche is being targeted in the suits because it should have raised red flags regarding the financial fraud.

"They so flagrantly missed obvious falsehoods and errors in the financial statements of the company," he said. "They permitted the company to carry out the fraudulent schemes."

Deloitte & Touche's Ms. Harrington pointed out that the U.S. attorney in the case has said that the InverWorld executives intentionally misled their auditors.

Write to Bob Sechler at bob.sechler@dowjones.com
Updated April 4, 2002 5:08 p.m. EST