The auditors must have believed the company holding the cash was a 100% owned subsidiary of EGMI. Either LC and LB purposely misrepresented it as such (they reported the assets on a consolidated basis, which would be correct if it were a true subsidiary) or they were complete idiots and believed themselves this was a properly structured subsidiary/parent entity and it really wasn't.
Legal snafu, incompetence or fraud, it doesn't really matter because the end result is the same. Shareholders got screwed.
My belief is that Donovan, Christianson, and maybe Houssels were the white hats in all this. When Donovan brought in a legitimate CFO (who turned tail immediately), the issue was brought to light.
Wish we knew the real story.