Photo Credit: David VekslerBack in April of 2020, streaming service Akazoo, which claimed to have a material presence in emerging markets, faced accusations of fraud in a damning report. Akazoo fired its CEO and saw its stock price tumble shortly thereafter, and investors have now filed a $40 million lawsuit against the accounting firm that audited the defunct company’s financials.
Said accusations of fraud against Akazoo came to light in a comprehensive analysis from Quintessential Capital Management, which had in 2015 exposed the below-board business practices of a company called Globo PC. In brief, New York-based Quintessential cast doubt upon most every component of the “barely used” Akazoo’s operations, stating that the business looked “like an accounting scheme.”
Not long after Quintessential’s research-backed takedown of Akazoo began making waves, the streaming platform – which had merged with an entity deriving from a special purpose acquisition company, Modern Media Acquisition Corp. (MMAC), to arrive on the stock market – fired its CEO and was suspended from trading on NASDAQ, as mentioned.
Finally, regarding the alleged streaming-service scam’s details, October of 2021 brought with it a court order indicating that Akazoo was “liable for disgorgement of $38.8 million representing net profits gained as a result” of conduct alleged in a lawsuit from the Securities and Exchange Commission (SEC).
Now, the parties that directly or indirectly dropped cash on “essentially worthless” Akazoo stock have officially taken aim at the U.K.-based accounting firm that handled the entity’s books and pre-NASDAQ audit.
The irritated investors at hand, “PIPE Investors and SPAC Investors who collectively invested approximately $40 million to fund the business combination between Old Akazoo and MMAC,” refer to Akazoo as a “complete sham” in their firmly worded complaint (spanning nearly 100 pages) against one Crowe U.K. LLP.
Crowe’s “false written and oral representations” caused these plaintiffs (including a number of trusts and companies) “to invest tens of millions of dollars into a company whose supposed business was essentially a complete fiction with fictional revenues, fictional expenses and fictional assets,” the no-holds-barred suit relays at the outset.
Crowe specifically served as “the independent auditor” for pre-merger Akazoo’s “consolidated financial statements for the years ended December 31, 2018, 2017, and 2016,” the complaint indicates. Akazoo claimed in late 2018 to have north of four million subscribers and over $100 million in revenue from 2017, the legal text highlights.
“Notably, although Old Akazoo was a private company with only European investors during 2017, Crowe represented that it conducted the 2017 audit under the rules applicable to public companies in the United States,” the document reads. “Crowe understood that it had been hired to conduct its audit in this manner because the audit was intended for use in the SEC filings to be used in raising funds from investors in what would become a public company.”
Bearing in mind the alleged significance of said audit, “Crowe knew full well” that Akazoo’s purported relationships with ISPs, telecommunications companies, and others, through which the platform claimed to reach new users, were “utterly false,” the plaintiffs state.
“Instead, Crowe had been told by the management of Old Akazoo that the Company had agreements with three otherwise unknown companies it referred to as ‘aggregators’ [which] allegedly had some sort of unknown arrangements with telecommunication[s] companies all over the world under which the telecommunications companies would market to their subscribers Akazoo’s streaming music service.
“For example, a cell phone company in Brazil might include Akazoo’s streaming service on phones sold to customers. … The three aggregators were named Smart Mobile, Aragona, and Zed Media” and “accounted for more than 90% of Akazoo’s reported revenue.”
Save for top-level employees, Akazoo team members’ communication with these aggregators was “almost non-existent and was tightly controlled,” per the document.
“As a result, no one working at Old Akazoo—other than [CEO] Zervos and [CFO] Paris—purported to know anything about the aggregators. Surely, over the four years that Crowe audited Old Akazoo, someone from Crowe must have uncovered this suspicious fact.
“As of April 2019, there is zero evidence that anyone from Crowe made any effort whatsoever to even communicate directly with the aggregators, let alone performed professionally mandated audit procedures,” proceeds the all-encompassing action.
Considering the accounting firm’s alleged lack of communications with the aggregators that Akazoo claimed generated the vast majority of its revenue, the lawsuit likewise highlights discrepancies in the streaming service’s books, “fake reports” created by execs, and “back-dated paperwork” used to craft “bogus information” that Crowe then utilized to perform its audits.
Crowe did not follow “proper procedures to confirm the validity of the transactions with the aggregators” or “conduct its audits in accordance with the relevant professional standards governing such audits as it was required to do and specifically claimed to have done in their Audit Report,” the complaint alleges, claiming later that the firm had “committed fraud.”
At the time of this piece’s publishing, Crowe UK hadn’t commented publicly on the multimillion-dollar lawsuit in the news section of its website. In February, Crowe announced that it had “been named Risk Consultancy Firm of the Year by InsuranceERM” for the third year running.
