Pioneer Bank sues accounting firm for $34M lost in MyPayrollHR scheme

A Pioneer Bank branch in downtown Schenectady.

A Pioneer Bank branch in downtown Schenectady.

ALBANY — Another lawsuit has been filed in the long-running, many-tentacled MyPayrollHR/ValueWise debacle, as a bank tries to recover a $34 million loss from the accounting firm that audited ValueWise’s financials for a decade.

One of the largest fraud schemes in Capital Region history caused more than $100 million in losses to several hundred businesses and individuals when it collapsed at the end August 2019.

The main perpetrator, Michael T. Mann of Saratoga County, outlined his actions to federal authorities in September 2019, then pleaded guilty in August 2020 to state and federal charges that could net him up to 30 years in prison.

Mann’s co-mingling of funds, outright fraud, and money transfers known as kiting — the rapid-fire moves totaled more than $1 billion in August 2019 alone — went undetected for years.

Ultimately, the nation’s second-largest bank became aware of the chicanery everyone else had missed. Bank of America had a relatively tiny piece of the scheme, which was so weak that it rapidly fell apart when BofA froze outgoing transfers on Mann’s accounts on Aug. 30, 2019.

Efforts to recover the money are far from over but their prospects are far from certain. Mann doesn’t have the money to make anywhere near full restitution, his attorney has said, and federal prosecutors have conceded this is probably correct — most of the money was recycled into his money-losing businesses and is gone.

Soon after the scheme collapsed, in an attempt to recover money it lost on a line of credit, Pioneer Bank sued Mann, MyPayroll HR and several other companies Mann owned or controlled.

But more recent lawsuits have centered on the legitimate corporate entities that became enmeshed in the fraud scheme (and still have money to pay damages), rather than on Mann and his companies, many of which were only shell entities.

Berkshire Bank and Chemung Canal Trust Company, which had bought into the line of credit shortly before the scheme collapsed, separately sued Pioneer claiming a combined $19 million in losses.

The U.S. Department of Justice took Pioneer to court to get an accounting of — and to seize with accrued interest — what it expects is about $7.3 million worth of income tax money withheld from paychecks issued by more than 800 employers who contracted with one of Mann’s companies for payroll services.

And on Tuesday, Pioneer sued Teal, Becker & Chiaramonte CPAs seeking $34,099,589 plus interest — the amount of money it says it lost through the scheme. The lawsuit in state Supreme Court, Albany County also names as defendants Pasquale M. Scisci, a managing shareholder of the Albany accounting firm, and Vincent Commisso, a shareholder.

Pioneer claims it sustained the massive loss due to professional malpractice of the CPAs in auditing the annual statements of ValueWise Corporation and its subsidiaries for fiscal years 2010 through 2018.

This contention is a variation on some of the other legal maneuvering underway: When Berkshire and Chemung sued Pioneer in February, Pioneer’s CEO told The Daily Gazette that the two other banks had full access to MyPayrollHR’s financials and should have looked harder at them. Those banks’ losses were due to their own failure as experienced lenders to do so, he said.

Now, with the new lawsuit, Pioneer is saying it didn’t have to look closely at the financials because a professional accounting firm prepared them, and the accounting firm is liable because its failings were the cause of the bank’s losses.

(Without providing details, Pioneer’s CEO did tell The Gazette in February that there had been certain failings on Pioneer’s part and that they were being addressed.)

Teal, Becker & Chiaramonte responded to the lawsuit with a prepared statement:

“Michael Mann is a convicted criminal who has pled guilty to a staggering number of now well-documented financial crimes. Mann hid these criminal acts from Teal, Becker & Chiaramonte (TBC), provided our firm with false financial information, and altered TBC’s audit reports, which he then submitted (along with other fabricated and altered documents) to financial institutions, including Pioneer Bank.

“We are disappointed that Pioneer Bank has chosen to bring ill-conceived claims against TBC for Pioneer’s own lending and other decisions related to Mann and his companies (all of which are the subject of several separate lawsuits and regulatory inquiries against Pioneer). TBC will vigorously oppose Pioneer’s claims and looks forward to being vindicated through the judicial process.

“The professional services TBC provided adhered to all applicable audit and accounting standards and we are extremely proud of our unassailable 50-year track record of providing excellent and ethical accounting services to our clients.”

Pioneer’s lawsuit makes the following assertions and allegations:

  • TBC was aware Pioneer would be relying on audited financial statements to evaluate whether for provide loans to the ValueWise entities.
  • TBC issued unqualified clean opinions of financial statements that later proved to be glaringly false and contained numerous misstatements as a result of massive criminal fraud perpetrated by Mann, which TBC failed to detect for nearly a decade.
  • Pioneer issued a line of credit to the ValueWise entities starting in 2009 that reached $42 million by August 2019.
  • Mann admitted to law enforcement agents in September 2019 that he’d begun his fraud in 2010 or 2011. He repeated this admission upon his guilty plea. TBC was auditing the ValueWise entities through this period.
  • When the scheme collapsed, the ValueWise entities defaulted on the line of credit, resulting in tens of millions of dollars in losses to Pioneer.
  • Mann was able to perpetrate his massive crimes for so long because of TBC’s professional malpractice. In particular, ValueWise entities’ purported accounts receivable jumped from $4.1 million to $52.2 million from 2010 to 2018, which should have raised warning signs. Purported revenue meanwhile surged from $11.4 million to $168.9 million.
  • The line of credit was primarily secured by those receivables, and Pioneer would not have extended the line of credit had they not been so robust.
  • Mann told TBC that Pioneer required the audits before loaning money and TBC expressly agreed to perform the audits for that purpose.
  • TBC failed to use appropriate audit methodologies and failed to follow Generally Accepted Audit Standards in numerous aspects. It failed to take steps to understand the risks inherent in the growing number of industries the ValueWise entities were involved in and failed to plan audits accordingly.
  • Mann admitted to creating ValueWise subsidiaries for the sole purpose of furthering his fraud scheme. Had TBC properly assessed those subsidiaries, it would have identified the fraudulent nature of these shell companies.
  • TBC advertises itself as having a higher standard of excellence, performing audits that go beyond statutory or regulatory requirements. This obliges it to exceed the GAAS rather than fall short.

Pioneer seeks judgment in an amount to be determined at trial but not less than $34.1 million, plus interest.

Pioneer notes in the legal papers filed Tuesday that it obtained a consent judgment for $35.84 million plus interest in November 2019 but has collected just $1.73 million.

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