Ernst & Young Faces Fraud Allegations in Brooge SPAC Case

NEW YORK, December 19, 2024 – Ernst & Young LLP (EY), one of the world’s largest audit ​companies, is the subject of a trial in the United States District Court for the South District of ​New York concerning allegations of fraud in connection with a merger ​of ​a Special ​Purpose Supply Company (SPAC) involving Brooge Petroleum and Gas Investment Company FZE. The claim, filed by ​investors Stephen Cannon, Bryant Edwards and Neil Richardson, accuses EY of not detecting revenues invented ​in Brooge’s financial statements, causing significant losses to investors.

Background

Brooge Petroleum, an oil storage ​rental company based in the United Arab Emirates (UAE), was established in 2013. In 2019, the company merged ​with a NASDAQ PSPC to provide public commerce. According to the complaint, Brooge submitted false financial data from 2018 to 2020, manufacturing between 30 and 80% of its revenues. These false statements ​included false invoices and transactions involving ​affiliated parties, illustrating a misleading picture ​of the financial health of the company.

The claim states that EY played a positive role in this system by issuing unqualified audit opinions that supported the invented financial statements. According to the complaint, ​EY prepared explanations on the payments made by the related entities and the absence of payments from ​Brooge’s main customer. This allowed ​Brooge to convince PSPC investors to change ​their ​securities for ​Brooge, ​in a transaction worth more than $1 billion in NASDAQ.

Impact on investors

The fraudulent ​activities were highlighted following an investigation by the United States Securities and Exchange Commission (SEC), which filed a ​complaint against ​Brooge ​in 2023. The ​company was created with the SEC by agreeing to pay a $5 million fine. However, the damage to investor confidence and financial losses was serious. Brooge’s share price rose from a peak of $12.99 in ​March 2020 to ​$1,585 in ​December ​2024, leaving almost useless assets to investors, including claimants.

According to the communication, the applicants claim that the ​Brooge system could not have been successful without EY’s “critical support” to certify fraudulent funds. They ​claim compensatory and punitive damages for their losses, as well as pre-trial and post-trial interest and ​legal costs.

Brooge’s biggest operations and ​connections

Brooge’s operations focus mainly ​on oil storage and leasing. ​One of its trading partners was Coral Energy Pte. Ltd., later marked as 2Rivers, which was sanctioned by the United Kingdom for its participation in Russian oil trade. In addition, Brooge ​is one of its shareholders Mohammed bin Khalifa, ​the ​eldest son of the former President of the United Arab Emirates. Despite its influential ties, the company’s reputation was affected by the SEC’s accusations ​of fraud and ​fell later.

In September 2024, Gulf Navigation, a Dubai shipping company, approved the acquisition of assets and companies from Brooge, including an increase in capital. This movement is seen as an attempt to stabilize Brooge’s operations and improve ​its financial situation in the midst of ongoing legal challenges.

EY and ​Brooge’s responses

EY refused to comment on the complaint by citing its policy on ongoing judicial proceedings. ​Similarly, Brooge ​did not ​answer media ​questions about the complaints. The audit firm is currently examining its ​role in merging with the CCPC and whether its audit processes ​have not detected or possibly facilitated fraudulent practices. This is in addition to the ​growing debate on the role of auditors in accountability.

The application, filed under the name of Anvil Trust v. Ernst & Young (#1: 24-cv-09731), could have far-reaching impacts on EY, Brooge and the PSPC ecosystem. PSPCs, which are public commerce holding companies designed to facilitate mergers with ​private ​companies, have criticized their apparent lack of transparency and accountability. Brooge illustrates ​the risks associated with inadequate monitoring of PSPC operations.

Legal ​and industrial consequences

Legal experts believe that the case could serve as a stage for future prosecution ​of auditors involved in ​PSPC operations. “The charges against EY ​highlight a critical gap in the hearing industry,” said corporate lawyer David X. Sullivan. “If proven, this case could lead ​to a more rigorous regulatory review and reform of PSPC’s merger audit practices

The complainants are represented by Aegis ​Law Group LLP, which argues for ​EY’s accountability. The application highlights the financial and reputational risks that auditors face when their oversight fails. It also focuses on ​Brooge’s shareholders and affiliates, whose role in the regime is still under investigation.

The outcome of this case could influence investor ​confidence in PSPC ​and its ​associated companies. As ESA is already adjusting regulations on the ​dissemination of space-based ​information, this may lead to further reforms aimed at protecting investors and ​ensuring greater ​transparency in financial reporting.

As the case progresses, financial and audit ​stakeholders will closely ​monitor developments, ​particularly with regard to the accountability of auditors in high-performance operations.