Investor sues NTG auditor
Ellin & Tucker among defendants in case
John M. Collard, Chairman, Strategic Management Partners, Inc. was interim CEO for Network Technologies Group, Inc.
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John M. Collard, Chairman, Strategic Management Partners, Inc. was interim CEO for Network Technologies Group, Inc.
John M. Collard, Chairman, Strategic Management Partners, Inc. was interim CEO for Network Technologies Group, Inc.

Investor sues NTG auditor
Ellin & Tucker among defendants in case
        Text
by Larry Rulison, BBJ Staff
 

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Investor sues NTG auditor

Ellin & Tucker among defendants in case

By Larry Rulison, BBJ Staff
March 7, 2003

Baltimore accounting firm Ellin & Tucker Chartered is one of 10 defendants named in a $6 million lawsuit filed by a Connecticut private equity fund that lost $1 million investing in now-defunct Network Technologies Group Inc.

John M. Collard, Chairman, Strategic Management Partners, Inc. was interim CEO for Network Technologies Group, Inc.
'This is the worst [situation] that I've been in because this was dead before I walked in,' says NTG's John M. Collard

The lawsuit, which was filed March 3 in Baltimore City Circuit Court by the Bon Secours Community Investment Fund LP, represents the first public accusation that Ellin & Tucker bears any responsibility for an alleged accounting fraud scandal at NTG. The scandal resulted in millions of dollars in losses for NTG's bank, Mercantile-Safe Deposit & Trust Co., and two investors, including the Bon Secours fund.

Ellin & Tucker was NTG's auditor when the telecommunications firm collapsed in July 2002 after the alleged fraud was uncovered. All 125 NTG employees were laid off, and the company's assets were liquidated a month later.

NTG officers indicted

Four NTG officers were indicted Jan. 22 on 10 counts of fraud for allegedly doctoring financial records to obtain more than $5 million in financing from Mercantile, the Bon Secours fund and Baltimore's venerable Abell Foundation.

Ellin & Tucker Managing Partner Edwin Brake could not be reached for comment. Robert B. Curran, an attorney for Ellin & Tucker, said he had not yet seen the lawsuit and did not comment.

The $20 million Bon Secours Community Investment Fund was started in 2000 with a $5 million investment by the Bon Secours Health System Inc. of Howard County. But its day-to-day operations are managed by Smith Whiley & Co., a Hartford, Conn., investment firm. The fund is a licensed Small Business Investment Company and is significantly leveraged with money from the federal Small Business Administration so that it can invest in low- and middle-income areas, including Baltimore, Detroit and Richmond, Va.

The fund gave $1 million to NTG in March 2002 for 353,714 shares of convertible preferred stock. Those shares are now worthless in light of NTG's collapse.

The fund is now suing NTG, company officers, board members and Ellin & Tucker for $1 million. It is also seeking $5 million in punitive damages.

Ellin & Tucker has repeatedly denied culpability in the NTG case, saying it was unable to complete the company's 2001 audit and had not expected to uncover fraud. The accounting firm is based in downtown Baltimore and is the tenth-largest accounting firm in the area with 52 accountants, according to Business Journal research.

However, the lawsuit says Ellin & Tucker should have done a better job in uncovering any financial irregularities at NTG. It claims financial projections and other financial documents prepared for NTG with the help of Ellin & Tucker were used by Smith Whiley to decide whether to invest the Bon Secours money in NTG. Smith Whiley began its due diligence of NTG in September 2001, and Ellin & Tucker began field work for NTG's 2001 audit in November 2001, the lawsuit says.

'Misleading statements'

"Defendants provided financial information, including financial statements that had been audited by E&T and other financial information prepared with the assistance of E&T, which contained material false and misleading statements and omissions concerning NTG's cash flows, income and net worth, and upon which Bon Secours was intended to rely and did rely to purchase securities," the lawsuit says.

The lawsuit also claims that NTG officials did not tell Smith Whiley that Todd Feuerman, a principal at Ellin & Tucker and the lead auditor for NTG, performed "many of the functions of the chief financial officer" before NTG hired Thomas Bray as CFO in October 2000. Bray was one of the four NTG executives indicted on Feb. 22.

"Feuerman's multiple roles were not disclosed to Bon Secours and severely compromised his independence and the independence of E&T," the lawsuit says. "E&T knew or should have known that its failure to disclose or rectify this lack of independence would be material and could cause financial harm to Bon Secours."

Feuerman was not named a defendant in the lawsuit. He could not be reached for comment.

Peter H. Gunst, the attorney representing the Bon Secours fund and Smith Whiley, declined to comment.

'Appropriate steps'

Peggy Moseley, a spokeswoman for the Bon Secours Health System, noted that the health system did not bring the suit it was the fund through Smith Whiley.

"I believe Smith Whiley is pursuing the appropriate steps," Moseley said.

Besides Ellin & Tucker, NTG and Bray, the other defendants named in the case are Michele A. Tobin, NTG's former CEO; Victor J. Giordani Jr., the former chief operating officer; and Beverly Baker, the former controller.

Also named in the suit were four former board members: Nora Zietz, the former manager of the Abell Venture Fund; Robert M. Stewart, a general partner with Spring Capital Partners; John Picciotto of Towson; and Gerhard Pilcher of the H.B. Rowe & Co. of Mount Airy, N.C.



2003 American City Business Journals Inc.

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