Auditor Held Accountable For $40m Investment In 'Sham' Streaming Company

Investors who unwittingly put $40 million into a "fictitious" music streaming service sued Crowe UK in federal court in Georgia, arguing the firm knew or should have known the streamer was "a total fake" that should not have obtained a "clean" audit report.

Investors who claim they were duped by Akazoo Ltd.'s digital music streaming service informed a Georgia federal court that Crowe UK LLP's seal of approval played a significant role in their choice to invest in the music streaming platform. According to the investors, the auditor "bears direct responsibility" for their losses because it was the only one with access to the streamer's inner workings but failed to raise red flags when it found "clear hallmarks of fraud" during its analysis of the company's financials.

Crowe analyzed Akazoo's financial accounts in 2016, 2017, and 2018 - the 3 years before the streaming service combined with a special purpose acquisition company in a $469 million deal, according to the investors. However, rather than warning prospective investors that the firm and its assets were mostly fictitious, the auditor published a "clean" audit report ahead of a merger that facilitated Akazoo's fraudulent plan, according to the investors.

"Clearly, the financial statements offered a wholly misleading image of the company's financial condition, results of operations, and cash flow, because practically all of the income, costs, and assets were fictitious," the investors stated."At best, Crowe made these misrepresentations extremely carelessly; at worst, Crowe behaved with a reckless contempt for the truth and purposefully engaged in the plaintiffs' fraud."

According to investors, Akazoo appeared to have connections with telecommunications providers that combined the streaming service with smartphones, resulting in over 4 million users globally. According to the allegation, neither the partnerships nor the customers existed.

One of the most obvious flaws in Crowe's auditing was its inability to investigate three "aggregators" who were meant to manage practically all of Akazoo's commercial activities. The three aggregators, however, were wholly made up, which the investors claim Crowe missed since it "did practically nothing to check the authenticity of these businesses."

The investors also told the court that Akazoo was only able to "carry off the fraud" by giving "two separate tales" about its operations, one to withstand audit scrutiny and one to "deflect investor queries." According to the investors, Crowe was the only one who was aware of the "shape-shifting business story, but never uttered a word."As per the complaint, the investors claim Crowe helped push the "investor-friendly" corporate story while knowing it was misleading.

In January 2019, Akazoo combined with Modern Media Acquisition Corp., a special purpose acquisition company, to form a single firm valued at around $469 million. As part of the agreement, Through a private investment in public equity, or PIPE, transaction, Akazoo raised $40.6 million from investors. The newly created firm, Akazoo SA, began trading on the Nasdaq Stock Market as a consequence of the merger.

Modern Media LLC, a Macquarie Capital subsidiary, created the SPAC involved in the transaction.

MMAC shareholders and PIPE investors are among the investors that have filed a federal lawsuit in Georgia. Crowe is accused of breaking federal securities legislation, careless misrepresentation, fraud, and intentionally or recklessly aiding and abetting Akazoo's wrongdoing in a four-count complaint.

In October, the UK's auditing agency initiated a probe into Crowe's Akazoo audits. A settlement deal between Akazoo SA and the US Securities and Exchange Commission was authorized by a New York federal court the same month. According to the judgment, Akazoo's disgorgement fee of $38.8 million would be paid if the business pays $35 million to investors who were allegedly cheated in connection with other class action cases against the firm.

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