After finishing the undergraduate program, I had opportunity to work for a forensic accounting firm. I worked on more then few high profile court cases. One of the cases, that I was required to obtain and maintain knowledge was litigation against Castor Holding.
Castor Holding was a Montreal based financial intermediary company for real-estate financing that declared bankruptcy in 1992. As a private company, Castor Holding was able to operate as an unregulated Financial Investment bank like organization. Auditor of Castor Holding Coopers & Lybrand (C&L currently known as as PWC ) was sued by the investors. In 2011, judge ruled in the favour of the investors seeking more then 1-billion in damages resulting from claims of professional negligence by the auditors Coopers & Lybrand.
Castor presented itself as a spread lender, placing deposits and loans from private & institutional investors, bank into high-yield mortgage and equity loans. Castor makes its profit from the difference between cost of borrowing and rate of lending. But in reality, castor was acting more like an equity partner. It continued lending money to most of its borrowers with very few exceptions, when it was obvious that the borrower would not be able to meet their financial obligations. As any other Ponzi scheme Castor Holding continue to raise increasing amount of money from her lenders and investors to satisfy its outstanding and exponentially increasing financial obligation as well as to support her borrowers insatiable cash needs.
Poor Internal Control:
At that time, in general, the concept of internal control was almost non-existent and any time higher management can override any internal control. The owners of Castorl Holding Mr. Stolzenberg and Mr. Warsebe were very diligent to convene there steps. They put tremendous amount of pressure on their employee to falsify the reports. The management of castor was able to get away for so long with this fraud because of the regulatory slack that was existed at that time. Sarbanes-Oxley Act (SOX) may have prevented this corporate Fiasco. SOX is a good benchmark for public companies to ensure proper internal control but still it is far from perfect.
Dysfunctional Behaviors of Corporate managers:
The fraud was committed by the owners of Castors. They were vary diligent hiding the truth. Even though, many argues that GAAS were not followed by C&L, however according to many other independent expert witness express their opinion which stated: there were plenty of evidence that GAAS were followed and there were many red flags that were caught by C&L. However they closed their eyes consciously and purposefully and allowed a massive fraud to be perpetrated. There were many more events that I could name that are similar to this corporate fiasco like: Worldcom, Enron, Bernard Madoff, Earl Zones. This kind of dysfunctional behaviors will continue until people’s morel and ethical sense is raised to a level that prevents this.
Disclaimer: All the facts of this story is publicly available information. Therefore, author can’t be responsible for expressing his/her opinion.