caalley logo

The alley for Indian Chartered Accountants

US: Accounting firm sued over Ponzi scheme

March 4, 2024

Investors have filed a lawsuit against an accounting firm alleging it helped a client maintain a Ponzi scheme involving cash advances that led to the loss of millions of dollars.

The case involves FGMK LLC, a firm based in Bannockburn, Illinois, and a New York investor identified as K Group, which invested in Nitrous Funding LLC, a Florida-based company that operated the cash advance scheme. K Group alleges the firm instructed its client, Nitrous Funding LLC, to maintain its financial records in a misleading manner and misrepresent the profitability of its accounting client, which induced K Group to invest $2.7 million in Nitrous's merchant cash advance portfolio.

"Basically the fund went belly up," said Joshua Kon, an attorney with Fort Lauderdale-based Stok Kon + Braverman representing the investors. "If we're right and it was functioning as a Ponzi scheme, once they paid themselves, the managers of the fund took out substantial monies, hundreds of thousands of dollars, up to about $2 million, while it was losing money, and they were telling their clients who were losing their money it was actually profitable."

FGMK denied the allegations, but declined further comment because of ongoing litigation. "FGMK vehemently disputes and denies any issues associated with its service," said Brendan Nelligan, an attorney with Pretzel & Stouffer in Chicago.

The lawsuit alleges FGMK directed Nitrous's leadership and its bookkeeper in Florida to maintain the financials in a misleading way. In the 2015 profit and loss statement delivered prior to K Group investing substantial funds in the portfolio, the financial statements said the income for the portfolio included over $1.1 million in commissions and another $158,624 in "Q&E commissions," for a total income of over $1.3 million in "services-commissions." In reality, no commissions or "Q&E commissions" were earned by the portfolio, according to a complaint filed last October. Instead, the only revenue was $182,710 in "lending income." Instead of earning net income of $755,517, the actual net income was negative $339,368, according to the lawsuit, and even worse after taking into account expenses such as the $250,000 in "distributions" made to Nitrous.

"They were taking out money during this time," said Kon. "The fund, whether it had money or not, we don't know. But when we took the depositions of these managers, they all pointed to FGMK under oath, saying that the designations that they got in 2015, the way they would call that line item 'commissions,' they got that from FGMK. And the reason why they testified to that is because we had taken their bookkeeper's deposition."

The bookkeeper had little training outside of what she learned from her employers. "They didn't have an accountant on staff. They just had a bookkeeper," said Kon. "And when I was asking her questions about what certifications she has, and what experience, I was very surprised to find out that she had worked as an assistant manager at a gas station. I think at one point, she had been promoted to a manager of a different gas station and convenience store. And then she had worked in a chiropractic office and her certification was in Reiki techniques, which is some type of Eastern medicine having to do with meditation and energy, nothing to do with accounting so she had no idea what she was doing. She blindly relied on FGMK's accountants and what they told her. They're pointing fingers at each other. We're taking a step back and saying you both are responsible and we just need to be paid for the losses incurred."

The plaintiffs are asking for damages, costs, interest, attorney's fees, forensic accounting fees and more. Kon and his fellow attorneys are receiving and reviewing the discovery materials that a judge ordered the defendants in late January to provide, which are trickling in now, and the next step will be a hearing on a motion to dismiss the case.

[Accounting Today]

Read more on:
Don't miss an update!
Subscribe to our newsletter