A LOCAL accounting firm may be held liable for losses suffered by people who collectively invested R55 million in what has now been exposed as a pyramid scheme run by disgraced Durban attorney Colin Cowan.
|||A local accounting firm may be held liable for losses suffered by people who collectively invested R55 million in what has now been exposed as a pyramid scheme run by disgraced Durban attorney Colin Cowan.
Cowan, an executive consultant at law firm Garlicke and Bousfield, committed suicide in late 2010, admitting to his fraud in a note he penned before shooting himself at his Morningside home.
His death exposed the firm to claims totalling R55m from some of the “investors” in what Cowan promoted as a bridging finance scheme.
The law firm filed third party claims against accountants PKF (Durban) Incorporated, saying its liability should also be tested in court because it operated five bank accounts Cowan had used in his schemes and never told the law firm about this.
Durban High Court Judge Trevor Gorven has agreed and now PKF will be joined as a defendant in the seven matters relating to the fraud pending before the court.
The law firm, in its pleadings, says Cowan told PKF that he was acting on behalf of the firm and dealing with the firm’s clients.
In his judgment, Judge Gorven said the law firm put forward facts in support of its contention that PKF knew, or ought to have known, that the accounts were not being conducted properly.
He said the accounting firm was aware the money should have been paid into the law firm’s trust account, but that Cowan did not want this.
“It is difficult to conceive how this could not have been understood by the third party (PKF) to mean that Cowan did not want the transactions to be traced or traceable by the law firm, or subject to the scrutiny of its auditors.
Overdrawn
“It is reasonable to hold that at a prima facie level, the known refusal of Cowan to use the trust banking account would probably have led the third party (PKF) to conclude that he wanted to avoid the standards and the scrutiny which accompanies the exclusive use of the trust account.”
The judge said that evidence could be led at the trial regarding the fact that some of the accounts were overdrawn at times, and the significance of this, because no account opened with money of an attorney’s client is allowed to be overdrawn.
He said it had been stated in the pleadings that withdrawals had been authorised orally, by e-mail and by SMS.
“Evidence may establish that the third party knew that firms of attorneys would not function in this way. Evidence may be led that this raised a flag in the mind of the third party (PKF) that Cowan was on a frolic of his own.”
He said accounting firms had to be vigilant when they allowed others to use accounts under their control.
“It would be contrary to public policy to exonerate a third party when it allowed its facilities to be used in what it believed to be an operation run by the law firm which was clearly being conducted in a manner inimical to the strictures of the legal profession,” he said, dismissing PKF’s bid for an exception to the firm’s third party claim.
The law firm has filed similar third party claims against Umhlanga financial adviser Patrick Robert – who it alleges acted as an agent for Cowan – and his Nerak family trust, into which certain investors’ money was paid. Robert and the trust have also opposed the claims, and the matter was argued in early December before Judge Isaac Madondo. Judgment was reserved.
It is expected that once this judgment is handed down, further papers will be filed in all seven matters and they will be set down for trial.