Add Virchow, Krause & Co. to the audit firms getting dragged into the Petters investment mess.
Virchow Krause -- which changed its name Monday to Baker Tilly -- has been sued by Petra Financial Advisors in Hennepin County District Court for alleged failure to adequately examine the business dealings of Metro Gem Inc., a financing and investment company owned by convicted felon Frank Vennes Jr. of Excelsior.
Vennes raised funds for what authorities describe as a $3.5 billion Ponzi scheme allegedly operated by Wayzata businessman Tom Petters. Vennes has not been charged in the case.
Petters, who denies any wrongdoing, has remained in federal custody since his arrest in October on money laundering and fraud charges. He awaits trial in September. Four of his colleagues in the alleged scheme have pleaded guilty to charges ranging from conspiracy to money laundering.
Petra says in its lawsuit that it lost $10 million in the purported scheme and it wants the money back with interest.
Virchow Krause filed a response denying that it conducted improper audits and asserting that Petra failed its own obligation to investigate Metro Gem before investing in it. Petra and its management "failed to exercise ordinary care in performing their duties and allowed for the damages referred to in ... [the] complaint to occur," Virchow Krause said.
Virchow Krause is the second auditing firm being sued for its performance on Petters-related investments. Shortly after the Petters investment operation collapsed last September, the Bloomington firm of McGladrey & Pullen was sued by a Florida family trust for failing to take steps to uncover the alleged fraud.
Often in financial failures, outside interests such as auditors and lawyers become the target of investor lawsuits when there is little to recover from the fallen estate. U.S. District Judge Ann Montgomery placed Vennes' personal and business assets into a receivership last fall.
Virchow Krause is a Wisconsin-based auditing firm with a large office in Minneapolis. In the Petra lawsuit, the California-based firm said it relied on financial statements from audits conducted by Virchow Krause before making a $10 million investment in Metro Gem last July. Petra said it relied on assurances from Metro Gem that its investment was secured by consumer electronic products; they didn't exist.
'Phony purchase orders'
"Petra's loans to Metro Gem and Metro Gem's loans to Petters entities were ultimately 'secured' by nothing other than phony purchase orders, invoices for fictitious transactions and nonexistent merchandise," the lawsuit says, largely repeating the charges and investigative documents implicating Petters in the fraud.
According to the suit, Vennes, who spent five years in prison for money laundering and gun and drug charges, formed Metro Gem in 1996 and was its sole shareholder. Between 2001 and 2007, the suit says, Vennes collected more than $93 million in fees from the Petters operation for funneling money to it.
Petra said Vennes' criminal record should have sent up "red flags" for Virchow Krause. In its answer, Virchow Krause said it "has insufficient information as to whether Frank Vennes was a felon."
"VK had a duty to understand the nature of Metro Gem's business, its business environment and its creditors and clients," Petra's lawsuit says. "VK failed in its duties."
At one point, the suit states, a manager for Petra called Virchow Krause and spoke to the lead auditor for Metro Gem, who assured the manager that Metro Gem's notes to the Petters operation were secured, "so even if something went wrong there was sufficient collateral -- i.e. televisions and other merchandise that were all new in the box -- to collect on the loan."
Vennes has tried repeatedly to win a presidential pardon and got Rep. Michele Bachmann and former Sen. Norm Coleman, both Minnesota Republicans, to write letters on his behalf. Bachmann withdrew her support last fall after the Petters investigation became public. Coleman's spokesman said he had recommended a pardon "based on Mr. Vennes' good works in the community and his emphasis on helping young people." He said if Vennes was involved in the alleged Petters scheme, "then the senator, like many others, has been lied to and has every reason to rescind his letter."
David Phelps • 612-673-7269