the audit

Journal‘s Awesome Pang Story Gets Quick Results

April 17, 2009

The Wall Street Journal‘s epic story on the, um, questionable past of financier Danny Pang is already getting results.

The paper reports today that the Justice Department and the SEC have opened inquiries into the matter and that Pang and the firm’s chief financial officer have stepped aside at his firm Private Equity Management Group.

And the Journal reports that Taiwanese groups, which made up the bulk of Pang’s investors, somehow thought he had insurance that would cover any downside on their investments. So, if I’m correct here, they not only got notes at above-market rates but also believed they were protected from losses? Smart!

PEMGroup’s main insurance coverage for its investors is provided by an affiliate the firm established in the British Virgin Islands, Fides Insurance Co. Asked how well Fides is capitalized, PEMGroup’s spokesman said earlier this week that it met all statutory requirements in the British Virgin Islands and is audited annually. He said PEMGroup also bolsters its coverage with reinsurance.

One Taiwanese institution, Taichung Commercial Bank Co., said Thursday its PEMGroup investments were backed by German insurer Talanx AG. Talanx said its exposure is limited to $20 million. It couldn’t be learned immediately whether PEMGroup has other reinsurance.

And the Taiwanese banks apparently marketed investments in Pang’s funds to investors.

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Yesterday, reporter and editor Mark Maremont, who broke the Pang story, wrote that several of PEMGroup’s investment funds don’t undergo audits and that the trustee for its asset is a two-person law firm—both huge red flags.

Not to have an auditor for some of the investment funds “is unusual,” said Bill Sturman, a private-equity attorney at Akin Gump Strauss Hauer & Feld LLP. “Without that Good Housekeeping seal of approval, there’s no confidence in the numbers you’re being provided.” Typically, he said, such funds are audited by one of the Big Four accounting firms.

And the PR hits keep coming from disaster PR “specialist” Michael Sitrick (emphasis mine):

A spokesman for PEMGroup said the lack of an auditor at some funds isn’t a problem. “Investors can look at any and all records they so choose,” said the spokesman, Mike Sitrick. He said one investor, which he didn’t name, recently brought in its own auditor to comb through the books of a PEMGroup fund and “came away completely satisfied.”

Again, I like that Maremont and the Journal are quoting Sitrick by name, something that’s usually not done for spokespeople. This is indeed necessary information.

And about that trustee:

Timothy Mungovan, a hedge-fund attorney at Nixon Peabody LLP in Boston, said that it is typical to have a major bank as a trustee in such a fund and that having a small law firm in the role is “highly unusual.” Speaking in general and not about PEMGroup, he said: “If I were reviewing this on behalf of a client, that would be a red flag.”

And it just so happens that the two-person law firm has deep connections to Pang:

The second partner in the trustee law firm, William Knudson, serves as registered agent for many of PEMGroup’s affiliates, according to Nevada records. He and Mr. Pang also are the sole officers in two private Nevada companies.

The scandal deepens.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.