EY Switzerland and investors in an Uzbek conglomerate have locked horns over the disclosure of documents relating to the second-largest bankruptcy in Switzerland after Swissair in a case that could cost the auditor billions.
New York-based hedge fund Lion Point Capital is suing auditor EY Switzerland for $1 billion over the bankruptcy of Zug-based mailbox company Zeromax, the «Financial Times» (behind paywall) reported at the beginning of the week.
But research by finews.com shows this is not yet the case. Lion Point wants the relevant documents held by longtime Zeromax auditor EY Switzerland to be shown in court, something the big-four accountancy company opposes.
Thus, the Central Swiss Canton of Zug, to where the Uzbek conglomerate transferred its headquarters from the U.S. in 2004, is the first stage of a lawsuit potentially involving billions of dollars.
Legal Successor to Zeromax?
Neither EY Switzerland nor Lion Point were willing to comment further on the case to finews.com.
When Zeromax filed for bankruptcy in 2010, creditors from Uzbekistan and Russia as well as German tradesmen registered claims totaling around 5.6 billion Swiss francs ($6.1 billion). The Swiss Federal Prosecutor's Office was also involved in this highly complex case.
EY could invoke auditing secrecy to prevent disclosure of the documents, but the plaintiffs are likely to see things differently.
Lion Point bought out claims against the bankruptcy estate in 2019. As a result, the hedge fund regards itself as the legal successor to Zeromax and therefore entitled to request documents from the former auditor, EY Switzerland, as the client.
This has now resulted in a legal tug-of-war. Were the documents to be released the lawsuit against EY Switzerland could proceed, and – according to finews.com’s research – it is conceivable that the claims could mount to well over $1 billion should EY be found to have civil, regulatory or criminal liability.
Prosecutors Freeze 800 Mln Francs
Its creditor are also linking Zeromax to Gulnara Karimova, the daughter of the late Uzbek president, Islam Karimov. She is involved in a longstanding money laundering case.
In 2012, the Federal Prosecutor's Office froze assets worth over 800 million francs linked to Karimova held in Swiss bank accounts in connection with corruption in the issuance of mobile phone licenses in Uzbekistan. This enormous sum is actually supposed to be returned to Uzbekistan.
However, the «Neue Zuercher Zeitung» (in German, behind paywall), has reported that there are still $555 million left in Switzerland.
According to media reports, Karimova was put under house arrest in 2014 after a family dispute in Uzbekistan. In 2018, the creditors in Zug filed criminal charges, alleging Karimowa actually controlled the company in a move to access the millions frozen by the prosecutor's office. Karimova denies any links to Zeromax.
Jewelry, Offshore Companies
The «Financial Times» reported that Zeromax spent over $37 million on jewelry in the years leading up to its bankruptcy, some of which apparently went to Karimova.
The official purpose of the limited liability company was related to the oil and gas business. Zeromax is also said to have siphoned off $288 million into offshore companies. The «Financial Times» said some of the money also went to companies courts in the U.S. and Sweden found were linked to the payment of bribes in connection with the mobile telephone licenses.
The accusation against EY Switzerland is that these transactions did not set off any of its alarm bells. In 2005, 2006 and 2007, the newspaper said, EY Switzerland gave Zeromax a clean bill of financial health only for it to go bankrupt in 2010 owing billions. In Switzerland, auditors are obliged to take legal action if a company becomes over-indebted.
Billions Spent on Better Auditing
Lion Point’s allegations threaten to be another stain on EY’s already sullied image. German fintech Wirecard’s bankruptcy in 2020 was particularly embarrassing. EY had signed off the fictitious accounts there for years. In the summer of 2020, former Wirecard investors filed a lawsuit against EY in Germany.
EY recently said it would spend around $2 billion over the next three years to improve the quality of audits worldwide. Some of this money will be spent in Switzerland. That announcement contrasts sharply with the looming multi-billion lawsuit and the legal wrangling over the Zeromax documents.
