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Stewart v. Wilmington Trust SP Servs., Inc.

Court of Chancery of Delaware

March 26, 2015

THE HONORABLE KAREN WELDIN STEWART, CIR-ML, INSURANCE COMMISSIONER OF THE STATE OF DELAWARE, IN HER CAPACITY AS THE RECEIVER OF SECURITY PACIFIC INSURANCE COMPANY, INC. IN LIQUIDATION, SPI-202, INC. IN LIQUIDATION, SPI-203, INC. IN LIQUIDATION, and SPI-204, INC. IN LIQUIDATION, Plaintiff,
v.
WILMINGTON TRUST SP SERVICES, INC., JOHNSON LAMBERT & CO., LLP, JOHNSON LAMBERT, LLP, McSOLEY McCOY & CO., JAMES M. JACKSON, PAUL D. KING, KEVIN R. DAVIS, and STEPHEN D. KANTNER, Defendants

Submitted November 20, 2014.

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Editorial Note:

This opinion is subject to revision or withdrawal till it released for publication in the permanent law reports. This disposition will appear in a reporter table.

Diane J. Bartels, Esq., Wilmington, Delaware; Jeffrey B. Miceli, Esq., BLACK & GERNGROSS, P.C., Philadelphia, Pennsylvania; Attorneys for Plaintiff The Honorable Karen Weldin Stewart, CIR-ML, Insurance Commissioner of the State of Delaware, in her Capacity as the Receiver of Security Pacific Insurance Company, Inc. in Liquidation, SPI-202, Inc. in Liquidation, SPI-203, Inc. in Liquidation, and SPI-204, Inc. in Liquidation.

C. Malcolm Cochran, IV, Esq., Chad M. Shandler, Esq., Blake Rohrbacher, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Defendants Wilmington Trust SP Services, Inc. and Stephen D. Kantner.

Kevin A. Guerke, Esq., SEITZ VAN OGTROP & GREEN P.A., Wilmington, Delaware; Kevin M. Murphy, Esq., Alexander M. Gormley, Esq., CARR MALONEY P.C., Washington, D.C.; Attorneys for Defendants Johnson Lambert & Co. LLP and Johnson Lambert LLP.

John D. McLaughlin, Jr., Esq., CIARDI CIARDI & ASTIN, LLC, Wilmington, Delaware; Jonathan S. Ziss, Esq., Seth L. Laver, Esq., GOLDBERG SEGALLA LLP, Philadelphia, Pennsylvania; Attorneys for Defendant McSoley McCoy & Co.

OPINION

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PARSONS, Vice Chancellor.

The key issue in this Opinion is when, under Delaware law, a corporation may state claims against third parties, like auditors, who are implicated in the alleged misconduct of the corporation's directors and officers. The plaintiffs here are four Delaware-domiciled captive insurance companies, with the Insurance Commissioner of the State of Delaware prosecuting their claims as their receiver in liquidation. The complaint alleges an array of fraudulent conduct on the part of the four companies' president, CEO, and sole stockholder. The other directors of the corporations also are alleged to have breached their fiduciary duties by either assisting or failing to catch and report those fraudulent acts.

As relevant here, the complaint also includes claims against the companies' auditors and their administrative management company for breaches of fiduciary duty, breach of contract, negligence, and aiding and abetting breaches of fiduciary duty. Those defendants moved to dismiss, contending that the wrongdoing of the companies' officers and directors is imputed to each of the corporations themselves, and that the doctrine of in pari delicto bars the court fro intervening to adjudicate claims between wrongdoers. In addition,

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the moving defendants seek dismissal of the claims against them based on the defense of laches and for failure to allege the necessary elements of certain of the putative causes of action. The receiver disputes the applicability of these defenses and denies that in pari delicto should bar her claims for several different reasons.

I first conclude that Delaware law governs the entirety of the pending motions. Next, I reject the moving defendants' laches defense as without merit in the circumstances of this case. After that, I briefly address the motions of the auditors, the administrative management company, and its defendant-employee to dismiss the various claims for breach of fiduciary duties. I grant this aspect of the motions as to those defendants, except the defendant-employee who was a director of the plaintiff insurance companies. I then take up the issue of whether in pari delicto requires dismissal of the remaining claims.

For the reasons stated in this Opinion, I conclude that in pari delicto does apply in this case, and that it effectively would bar the relevant claims against the moving defendants, unless I found applicable one of the exceptions urged by the receiver. In the circumstances of this case, the well-known " adverse interest" exception does not apply. The receiver also contends that the Court should set aside the in pari delicto doctrine on public policy grounds tied to the specific concerns involved in the insurance receivership context. But, I conclude that the facts of this case do not support such a result.

Finally, I address the argument that Delaware law should recognize an " auditor exception" to the in pari delicto rule, as some states have done. Because I do not read the applicable Delaware cases as supporting the conclusion the receiver urges, and I am not convinced that Delaware public policy would be well-served by a broad auditor exception, I reject that argument as it relates to the claims for breach of contract and negligence and dismiss those claims on grounds of in pari delicto. I decline to dismiss the claims for aiding and abetting a breach of fiduciary duty on that basis, however, because I conclude, based on Delaware case law and the relevant policy concerns, that the well-established " fiduciary duty" exception to in pari delicto would cover those claims.

Finally, I examine the aiding and abetting claims against each of the auditors and the administrative management company. Based on the allegations in the Complaint, I deny the motions to dismiss those claims, except as they relate to the auditor that was retained second.

I. BACKGROUND[1]

A. The Parties

This case concerns Security Pacific Insurance Company, Inc. (" Security Pacific" ), SPI-202, Inc. (" SPI-202" ), SPI-203, Inc. (" SPI-203" ), and SPI-204, Inc. (" SPI-204," and collectively, the " SPI Entities" ). All of the SPI Entities are Delaware corporations. From December 31, 2007, to June 15, 2011, they operated as Delaware-domiciled special purpose captive insurance companies.

On June 15, 2011, this Court entered an order in a related action placing the SPI Entities into liquidation pursuant to 18 Del. C. § 5906 (the " Liquidation Action" ).[2]

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Plaintiff in this action is the Honorable Karen Weldin Stewart, the Insurance Commissioner of the State of Delaware, who brings this action as Receiver of the SPI Entities in liquidation. The Complaint initially named eleven Defendants: Wilmington Trust SP Services, Inc. (" Wilmington Trust" ); Johnson Lambert & Co., LLP; Johnson Lambert, LLP; McSoley McCoy & Co. (" McSoley McCoy" ); Ryan Building Group, Inc. (" Ryan Building Group" ); Kevin R. Davis; James M. Jackson; James L. Jackson; Stephen D. Kantner; Paul D. King; and Anthony P. Munoz.[3]

As relevant to this Opinion, Wilmington Trust, a Delaware corporation with its principal place of business in Wilmington, Delaware, provided management and administrative services to the SPI Entities. Defendant Kantner, an individual residing in Delaware, was an employee of Wilmington Trust and also a member of the boards of directors of the four SPI Entities. Johnson Lambert & Co., LLP, is a South Carolina limited liability partnership based in South Carolina, and Johnson Lambert, LLP, is a Virginia limited liability partnership based in North Carolina (together, " Johnson Lambert" ).[4] As discussed in further detail below, Johnson Lambert and McSoley McCoy, a Vermont corporation with its principal place of business in Vermont, each provided certified public accountant and independent auditor services to the SPI Entities. Currently before the Court are motions to dismiss filed by Johnson Lambert and McSoley McCoy (together, the " Auditor Defendants" ), and by Wilmington Trust and Kantner (collectively, the " Moving Defendants" ).

B. Facts

1. The SPI Entities

In 2005, Defendant James M. Jackson formed Security Pacific Insurance Company, Inc., as a captive insurance company incorporated in the District of Columbia (" SPIC-DC" ). In general terms, a " captive insurance company" is a business entity formed as a subsidiary of a non-insurance parent company for the purpose of insuring the parent's business risk, or the risk of the parent's affiliates or customers. It is a self-insurance mechanism in which the insurer is wholly owned by the insured. In the State of Delaware, captive insurance companies, like all commercial insurers, are subject to extensive regulatory oversight and requirements, ranging from licensure and reporting to minimum capital and reserve thresholds.[5]

Jackson,[6] through a wholly owned holding company, was the sole owner of SPIC-DC. He also owned an insurance brokerage company, nonparty J. Mading Financial and Insurance Services, Inc. (" J. Mading" ), which, in collaboration with SPIC-DC,

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designed and marketed insurance solutions using captive insurance companies. For example, Ryan Building Group, a client of J. Mading's, was insured by a subsidiary of SPIC-DC, and nonparty OOM, LLC was insured by another. Those two clients, which engaged in residential construction, apparently entered into participation agreements by which SPIC-DC and its " cells," or subsidiary captives, would provide warranty reimbursement, general liability, property, excess, and environmental liability insurance coverage.

Beginning in July 2007, Jackson sought to re-domicile SPIC-DC and its subsidiary cells to Delaware. According to Jackson's plan, SPIC-DC would merge into Security Pacific, the Delaware corporation at issue in this case, and SPIC-DC's cells would merge into the newly incorporated SPI-202 and SPI-203 entities. SPI-204 would be created to insure the risk of Alexa Holding Company, LLC, another entity solely owned by Jackson. Pursuant to the relevant statutory provisions, Jackson submitted an application for authorization to the Delaware Department of Insurance (" DDOI" ). In the application documents, Jackson represented that the SPI Entities would hold initial capital amounts, in the aggregate, of roughly $2.7 million, with some additional reserves in the form of letters of credit.[7] Included in these application documents were SPIC-DC's audited financial statements covering the time period from its inception in 2005 to December 31, 2006, which reported that SPIC-DC had total assets of roughly $4.8 million.[8] Those audited financial statements were prepared and certified by Johnson Lambert.

In October 2007, SPIC-DC entered into a Management Services Agreement (the " MSA" ) with Wilmington Trust, whereby Wilmington Trust agreed to serve as Security Pacific's " captive manager" in Delaware by providing administrative, compliance, and other related services.[9] Wilmington Trust also would ensure that the SPI Entities conformed with certain statutory requirements, by, for example, providing a " place of business" in Delaware, and retaining all of the SPI Entities' original documentation and books and records here.[10] Consistent with the legal requirements, Defendant Kantner, who was employed as an Accounting Supervisor at Wilmington Trust, served as a " resident" director on the boards of each of the SPI Entities.[11]

As relevant here, the captive management services provided by Wilmington Trust included bookkeeping, financial account reconciliation and review, and preparation of unaudited financial statements. In this regard, Wilmington Trust regularly reviewed information regarding the SPI Entities' bank accounts. The Complaint alleges that Jackson provided monthly financial statements for the relevant accounts via an online data link run through J. Mading.[12] The Complaint also avers that Jackson's position as the intermediary between Wilmington Trust and Bank of America, Wells Fargo, and Wachovia-the banks housing the SPI Entities' financial

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accounts-was critical to his fraudulent scheme.[13]

In November 2007, SPIC-DC engaged Johnson Lambert to prepare audited financial statements for the calendar year ending December 31, 2007 (the " 2007 Audited Financial Statements" ).[14] On December 31, 2007, the DDOI approved the SPI Entities' application for a certificate of authorization, contingent on satisfactory receipt of the 2007 Audited Financial Statements, and Security Pacific, SPI-202, SPI-203, and SPI-204 were incorporated in Delaware as special purpose captive insurance companies.

2. The 2007 Audited Financial Statements are prepared and approved amidst irregularities

The allegations relating to the 2007 Audited Financial Statements span 120 paragraphs and over 40 pages of the Complaint. They describe in remarkable detail a process in which Wilmington Trust and Johnson Lambert, from February to December 2008, struggled to obtain the necessary confirmations to complete the audit. In the interests of brevity and clarity, I recount the well-pled facts relating only to the most significant areas of irregularity in this process. The first such area involved confirming the cash surrender value of a " key man" life insurance policy issued by Hartford Life and Annuity Insurance Company (" Hartford Life" ) in December 2005, which insured the life of Jackson for a face value amount of about $23.5 million (the " Key Man Policy" ).[15] That policy was owned by SPIC-DC, and its purported cash value comprised the bulk of the assets Security Pacific claimed in its application to the DDOI. The 2005 and 2006 audited financial statements of SPIC-DC, prepared by Johnson Lambert, certified that the Key Man Policy had a cash value of $628,783 as of December 31, 2006. As discussed below, the audited financial statements for 2007, 2008, and 2009 continued to " confirm" the policy's cash value. In reality, the policy had lapsed in May 2006 and was worthless.

A second area in which Wilmington Trust and Johnson Lambert encountered difficulty in producing audited financial statements for the SPI Entities was confirming the cash and cash equivalents held in the several accounts they maintained at Bank of America, Wachovia Bank, Wachovia Securities, and Wells Fargo. As with the Key Man Policy, Johnson Lambert had confirmed the balances in these accounts in connection with the 2005 and 2006 audits of SPIC-DC.[16] By the time the Receiver took control of the SPI Entities in 2011, however, several of the bank accounts were basically empty, even though the 2007, 2008, and 2009 audits had " confirmed" that they had held several million dollars in the aggregate in those years.

a. The Key Man Policy

The interactions between Jackson, Wilmington Trust, and Johnson Lambert in connection with the confirmation of the Key Man Policy exemplify the larger pattern of delay tactics, deception, and otherwise questionable conduct that the Receiver ascribes to Jackson. In February 2008, Johnson Lambert asked Allan Drost of Wilmington Trust to obtain from Jackson a full, signed copy of the Key Man Policy. Drost emailed Jackson, who responded that he would assemble the necessary documents later that same day. Several

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months passed, however, without any follow-up from Jackson.[17] In early June 2008, Drost sent a series of confirmation forms to Jackson for him to sign and submit to Johnson Lambert. Around the same time, Drost advised Thomas Bolton of Johnson Lambert that Wilmington Trust intended to send a letter to the DDOI, advising it that the SPI Entities' audited financials were delayed, but would be provided by the end of July. Bolton agreed that that timeframe was not a problem.[18]

On July 23, 2008, Justine Holeman of Johnson Lambert received a letter from Hartford Life informing Johnson Lambert that, because the confirmation inquiry they had submitted to Hartford Life was not signed by Jackson, they had forwarded the requested information to Jackson rather than to Johnson Lambert directly.[19] On the same day, Hartford Life sent Jackson a letter informing him that the Key Man Policy lapsed on May 21, 2006, and " does not have any value or coverage at this time." [20] A week later, Colleen Handy of Johnson Lambert emailed Jackson to ask if there was " any resolution" on the Key Man Policy confirmation and request that " someone from your office forward it on to us," because Hartford Life told Johnson Lambert that they sent it to Jackson.[21]

The Receiver alleges that Johnson Lambert knew, or should have known, that it was a breach of its internal policies and generally accepted auditing standards for it to seek the requested confirmation from Jackson, instead of directly from Hartford Life.[22] In any event, ten weeks went by without Jackson providing Johnson Lambert any confirmation regarding the Key Man Policy. Handy again emailed Jackson on September 29, 2008. He still did not respond.[23]

Unbeknownst to Handy, that same day Jackson faxed another confirmation request to Hartford Life. By letter dated October 10, 2008, Hartford Life responded, again informing Jackson that the Key Man Policy was no longer active. The Receiver alleges that this second request from Jackson was a ruse, and that he sent it simply to obtain the name and title of a different Hartford Life employee, which he got in the October 10 letter.[24] According to the Complaint, Jackson used this information to alter the original confirmation inquiry form Johnson Lambert had sent to Hartford Life in July 2008.

On October 24, 2008, nearly eight months after her initial request, Handy of Johnson Lambert reported to Drost of Wilmington Trust that she had received confirmation that the Key Man Policy was current and held a cash value of $716,000 as of December 31, 2007.[25] This confirmation was a forgery, allegedly sent via facsimile to Handy from Jackson, who had disguised the transmission as having come from Hartford Life. The faxed confirmation form stated that the original would be mailed, but no original ever arrived. Yet, Johnson Lambert never inquired further.[26]

b. The bank account confirmations

The alleged irregularities surrounding the SPI Entities' bank account confirmations

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are even more suspicious than the long-delayed and apparently forged Key Man Policy confirmation. The bank confirmation process unfolded during the same time period as that regarding the Key Man Policy, starting in June 2008. As with the Key Man Policy, Jackson delayed or failed to respond to the initial requests from Wilmington Trust. In mid-July, Jackson signed request forms that Handy sent to the banks, with the instruction that the banks should confirm the relevant account balances and return the original confirmation requests, or " confirms" as they were called, by mail directly to Johnson Lambert.[27]

Six bank account confirms evidently were needed to prepare the 2007 Audited Financial Statements. In late July and August 2008, as Handy at Johnson Lambert was receiving the account confirms from the banks, she was having difficulty matching them up with the account statements that Jackson had given to Wilmington Trust.[28] In addition, one of the larger accounts, a Wachovia Securities money market account, could not be confirmed because, according to Wachovia, Jackson had not paid the nominal confirmation processing fee.[29] As August drew to a close, Drost emailed Jackson a list of issues that were preventing Johnson Lambert from completing its audit. The issues included that: (1) Johnson Lambert needed to contact Jackson's person at Wachovia to expedite the confirms on several of the banking accounts; (2) a Wachovia Securities account confirm showed a balance that was $300,000 less than the corresponding bank statement Jackson provided; (3) the confirm for a Wells Fargo money market account owned by SPI-203 reflected a balance of only $104, while the corresponding statement submitted by Jackson showed a balance of $2,361,706; (4) another Wells Fargo account was apparently closed, while Jackson's statement showed it open and holding a $10,000 balance; and (5) there were discrepancies with three Bank of America confirms, but the bank would not discuss them with Johnson Lambert.[30] One would think that item (3), at least, screamed for attention.

Patrick Theriault of Wilmington Trust emailed Jackson, saying that these issues were " puzzling to say the least," and that the " significant variances . . . do not appear to make sense." [31] On September 4, Handy emailed Drost of Wilmington Trust to say that she still had not received a signed request form from Jackson. Although Jackson told her that he tried to send it, but it " got bounced back to him," Handy considered that odd because Jackson had emailed her that day, and he " does have the right email address." [32] Around the same time period, Drost and Theriault told Jackson that these " logistical difficulties" could be avoided if Wilmington Trust had direct access to the bank accounts. Jackson allegedly ignored the request, and never took steps to give Wilmington Trust such access.[33]

As the process dragged on, the Wells Fargo, Wachovia Bank, and Wachovia Securities accounts proved the most difficult for Johnson Lambert to confirm and reconcile. In September 2008, Jackson instructed Wilmington Trust and Johnson Lambert that, instead of going through the

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audit departments at the banks, they should speak directly with Jackson's contacts--Joe Lobe or his assistant Pamela Goyette at Wells Fargo, and " Alpesh" or his assistant " Rachel" at Wachovia.[34] The Receiver avers that an Alpesh Patel was employed during this time by Wachovia Securities, but that the " Alpesh" and " Rachel" to whom Jackson referred were in fact " accomplices of [Jackson], if they existed at all." [35] Jackson apparently never provided the last name of " Alpesh." Moreover, the Complaint alleges that " a simple internet search" at that time would have revealed that the phone number Jackson provided for " Alpesh" was not a Wachovia number.[36] Instead, it appears that Jackson's own J. Mading used that phone number. Indeed, J. Mading had included it on its website and in other publications.[37]

On September 29, 2008, Handy notified Drost that the Wells Fargo and Wachovia account confirms were " rec'd and tied," without any further explanation. The Wachovia confirms allegedly were provided by " Rachel," the purported assistant of " Alpesh." [38] A day later, Handy told Drost and Theriault that she had attempted unsuccessfully to call " Alpesh" and Lobe multiple times. In response, Drost asked whether " the Wachovia contact [was] a different person for the Wachovia Securities confirm, or is this a contact for the regular retail banking accounts" " He also indicated that they should be " curious" about the Wells Fargo and Wachovia Securities confirmations, because of their " sudden resolution." [39] When Handy confirmed that " Alpesh" was the contact Jackson had given for both Wachovia Bank and Wachovia Securities, Drost observed that, " This is a little odd as Wachovia Securities is on the Trust side of the Wachovia structure," and that in his experience, " Most banks . . . have definitive separation . . . between their retail banking side of the business and the trust (investment) side." [40] Drost concluded that it " maybe, and hopefully is, OK," but that he would " try to contact both of them as well, to confirm if there was any specific reasons why suddenly now they are able to satisfy all the confirmations." [41]

Nearly a month later, as of late October, Handy still had not heard from either " Alpesh" or Lobe despite having left messages and asked Jackson several times to instruct them to call her, or to set up a conference call for all of them. The discrepancies between the statements provided by Jackson and the confirms received from Wachovia--which allegedly had exceeded $2,000,000--were the only things preventing the 2007 Audited Financial Statements from being completed. Through an email to Jackson, Drost joined in Handy's pleas. Their efforts persisted through November and most of December.

It was not until December 29, 2008, however, that Bolton of Johnson Lambert received a call from a person identifying himself as " Alpesh." The caller explained that the bank confirmation discrepancies purportedly appeared because " they sold ars [sic] securities before year end that took a while to clear." [42] Bolton attempted

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to verify this information with Drost, but Drost could not find any trades that might fit Alpesh's description. In a communication to Drost, Bolton stated that he thought " maybe they were sold from another account [and] then deposited into this one" At any rate does this make sense to you" He caught me at a bad time and the reception was not good, so it was hard to hear him." [43]

Drost, admitting that he was " being optimistic," thought that the explanation given by " Alpesh" potentially could be chalked up to internal errors at the bank, and the lengthy delays and inconsistencies to the bank wanting to " save face." In any event, based on the new documents provided by " Rachel" and " Alpesh," Drost considered the bank confirmation to have been completed satisfactorily. According to the Receiver, in preparing the final 2007 Audited Financial Statement, Johnson Lambert used the fraudulent bank account balances from the documents that Jackson provided and " Alpesh" confirmed, rather than the different and significantly lesser amounts reflected in the written confirmations that it obtained directly from the banks.[44] As a result, the 2007 Audited Financial Statement, which was completed at the end of December 2008, reported that SPIC-DC held about $7.1 million in assets as of December 31, 2007.

c. The SPI Entities' Boards approve the 2007 Audited Financial Statements

Special meetings of the boards of directors of Security Pacific, SPI-202, SPI-203, and SPI-204 were held at the Delaware offices of Wilmington Trust on February 3, 2009 (the " February 2009 Meetings" ). The boards of the SPI Entities were identical; they consisted of Jackson, James L. Jackson, King, Davis, and Kantner. Drost and Theriault allegedly attended the February 2009 Meetings in person or by teleconference, and one of them served as secretary and recorded the meeting minutes.

Notably, the audited financials were accompanied by a letter addressed to the SPI Entities' boards from Johnson Lambert (the " Significant Matters Letter" ).[45] The Letter discussed the significant delay in completing the audit, and noted that six of the seven bank account confirmations diverged from the relevant account statements by " significant amounts ($2,361,602 in one case)" and that several follow-up inquiries were needed to resolve the discrepancies.[46] Johnson Lambert also addressed a letter to Jackson, as President and Chairman of Security Pacific, outlining several recommendations for improving operations (the " Jackson Letter" ). The Jackson Letter, which was provided to the entire Board, indicated that the identified issues were " not considered to be material weaknesses." [47] The minutes allegedly indicate that the directors reviewed the 2007 Audited Financial Statements and approved them with " no substantive discussions or debate." [48]

3. The 2008 Audited Financial Statements are prepared and approved

Wilmington Trust's MSA automatically renewed at the end of 2008, and it therefore

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remained the captive manager for the SPI Entities. Johnson Lambert again was retained to serve as the SPI Entities' certified public accountant and independent auditor for the preparation of the audited financial statements for the calendar year ending December 31, 2008 (the " 2008 Audited Financial Statement" ).[49] Wilmington Trust and Johnson Lambert began the process of preparing that statement early in 2009.

The Receiver's allegations with respect to the 2008 Audited Financial Statement are substantially similar to those relating to the 2007 Audited Financial Statement. In particular, the Complaint alleges that Jackson engaged in delay tactics and obfuscation in his dealings with Wilmington Trust and Johnson Lambert.[50] On June 23, 2009, Jackson allegedly delivered to Johnson Lambert another fraudulent confirmation for the Key Man Policy, after he had corresponded again with Hartford Life and received a second indication that the Key Man Policy lapsed in October 2006 and was worthless.[51] After receiving the fraudulent facsimile confirmation of the Key Man Policy from Jackson, Johnson Lambert never obtained the original or otherwise followed up with Hartford Life.

Also in June of 2009, Wilmington Trust and Johnson Lambert received allegedly fraudulent bank account confirmations from Jackson or his accomplice " Alpesh." Using that information, Johnson Lambert completed the 2008 Audited Financial Statement. As of September 2009, however, Johnson Lambert allegedly still was waiting for bank statements and other items from Jackson so that it could perform the confirmations needed for the " subsequent events" aspect of the audit.[52]

The boards of the SPI Entities held their annual meetings on October 8, 2009, at Wilmington Trust's Delaware office (the " October 2009 Meetings" ). As of that date, the composition of the boards had changed. The directors for each of the SPI Entities in October 2009 consisted of Jackson, Munoz, King, Davis, and Kantner. Drost and Theriault also attended the October 2009 Meetings.[53] At those meetings, the boards approved the 2008 Audited Financial Statement, again with little or no discussion.

Notably, there is no indication that Johnson Lambert ever followed up on the Significant Matters Letter or the Jackson Letter. As discussed above, those letters were provided to the Board in connection with the previous audit. They recommended that the SPI Entities change their procedures to conduct bank reconciliations on a monthly basis, and confirm accounts with the banks on a quarterly basis, in light of the " numerous differences" experienced in the 2007 Audited Financial Statements.[54] In a similar vein, Wilmington Trust had requested ...


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