News

New Century Trustee Sues KPMG Over Audits

By DONNA KARDOS
(Wall Street Journal, April 1, 2009)

NEW YORK -- A trustee of New Century Financial Corp., one of the first major casualties of the subprime mortgage mess that jump-started the credit crisis, is suing the company's auditor, KPMG LLP, and KPMG's international parent, alleging "reckless and grossly negligent audits" were conducted that hid the lender's financial problems and helped accelerate its collapse two years ago.

Legal firm Thomas, Alexander & Forrester LLP filed two suits Wednesday on behalf of the trustee -- one in California against KPMG LLP and another in New York against its parent, KPMG International. The suits allege, among other things, that KPMG LLP assisted in and certified "materially misstated financial statements," and that KPMG's international parent is responsible for "the severely reckless and grossly negligent acts of its agent."

KPMG didn't immediately respond to a request for comment.

New Century, an Irvine, Calif., mortgage lender, had been one of the country's largest mortgage lenders to people with poor credit histories. But after it disclosed accounting errors in early 2007 -- informing shareholders it was losing money rather than making it -- New Century's stock price plummeted 90%. Its outstanding repurchase requests soared to $8 billion and New Century soon collapsed as it was no longer able to finance its lending business.

New Century liquidators sue KPMG for $1bn

By Jennifer Hughes in London
(Financial Times, April 1, 2009)

KPMG is being sued for $1bn by the liquidators of New Century, the collapsed subprime lender, in the first big case against an auditor arising from the current financial crisis.

In a court filing on Wednesday, lawyers for New Century’s liquidators claimed that KPMG “assisted in the misstatements and certified the materially misleading financial statements” filed by the lender. They claim KPMG was responsible for its collapse because it allowed the lender to use inappropriate accounting that led it to underestimate the provisions it needed to cover bad loans. This made its position look better and gave it access to more funds.

“If the financial statements were accurate and its reserves correct, New Century could not have have got the loans to expand as it did,” said Steven Thomas of Thomas, Alexander and Forrester, lawyer for the liquidating trust, told the Financial Times.

A KPMG spokeswoman said the firm had not yet seen the complaint but that it would “vigorously defend” its audit work.

Bloomberg - KPMG 'Failed in its role as Gatekeeper'

By Sophia Pearson
(Bloomberg News, April 2, 2009)

April 1 (Bloomberg) -- KPMG International, which oversees the fourth-largest U.S. accounting firm, was sued by the trustee for bankrupt subprime lender New Century Financial Corp. over claims it failed in its role as “gatekeeper.”

Negligent audits and reviews by KPMG LLP, the U.S. member firm of KPMG International, led to New Century’s collapse, according to lawsuits filed today in state court in Los Angeles and federal court in New York. The suits, filed against both KPMG International and KPMG LLP, seek at least $1 billion in damages.

“Once an auditing firm lacks independence, then their audits aren’t worth the paper they’re written on,” Steven Thomas, an attorney for New Century Trustee Alan M. Jacobs, said today in a phone interview. “KPMG had a duty directly to New Century and a duty directly to the public. It was acting as a gatekeeper for a company that was at the center of the housing boom.”

New Century, once the second-biggest U.S. subprime mortgage lender, filed for bankruptcy in April 2007 after state regulators revoked its lending licenses and federal officials started two investigations. The company won court approval of a bankruptcy liquidation plan in July that pays unsecured creditors as much as 17 cents on the dollar.

Reuters - KPMG Hit with Billion-Dollar Lawsuit

By Tom Brown
(Reuters - April 1, 2009)

MIAMI (Reuters) - Accounting giant KPMG was hit with a billion-dollar lawsuit on Wednesday over claims its "grossly negligent audits" helped trigger the collapse of a top subprime mortgage lender at the start of the U.S. housing crisis.

New Century Financial Corp, the largest independent provider of home loans to people with poor credit, filed for bankruptcy two years ago amid mounting customer defaults.

Its failure rippled across the U.S. mortgage lending industry, sparking a string of other bankruptcies that roiled financial markets as banks booked losses on billions of dollars in mortgage-linked securities at the heart of the current global financial crisis.

Miami Herald - Jury Hits BDO for Millions More

By Patrick Danner
(Miami Herald, August 15, 2007)

A Miami-Dade jury socked accounting firm BDO Seidman for the second straight day, ordering it to pay more than $351 million in punitive damages for its negligence in failing to find massive fraud in a financial services company backed by a Portuguese bank.

The verdict, if it stand, could threaten BDO Seidman's financial operations, the firm's CEO testified. BDO Seidman is the world's fifth-largest accounting firm.

Wall Street Journal - Jury Rules BDO Must Pay $531 Million

By David Reilly
(Wall Street Journal - August 14, 2007)

A Florida jury, in a potentially crippling financial blow, ruled accounting firm BDO Seidman LLP is on the hook for $531 million for its failure to spot a fraud that led to the bankruptcy of a Miami-based financial-services company.

The jury ruled Tuesday that BDO must pay $532 million in punitive damages, a day after it had assessed a base damages award of $170 million against the firm.

Daily Business Review - BDO Seidman to Pay $522 Million to Banco Espirito Santo

By Billy Shields
(Daily Business Review - August 14, 2007)

BDO Seidman must pay Portugal's Banco Espirito Santo a total of $522 million for negligent audits at a company blamed for the larges bank fraud in Miami history, a state court jury has decided.

The Miami-Dade Circuit Court jury awarded nearly $532 million in punitive damanges Tuesday after accepting the bank's request for $170 million in compensatory damages late Monday.

AP - Jury: Firm Must Pay $521 Million in Damages Over Bad Audits

By Adrian Sainz
(AP Associated Press - August 14, 2007)

MIAMI (AP) - A jury ordered BDO Seidman, the nation's No. 5 accounting firm, to pay more than $351 million in punitive damages in a negligence case, bringing BDO's potential liability in the case to roughly $521 million, an amount he CEO said threatens its operations.

The jury had found BDO negligent for failing to find massive fraud in its audits of a financial services company backed by Portuguese bank. The amount will be added to the same jury's award of $170 million in compensation to the bank, Banco Espirito Santo.

NY Times - Global or Local? For Accounting Firms, It All Depends

By Floyd Norris
(The New York Times - March 14, 2008)

This is the era of the global firm, whether in finance or industry. A company like Toyota or Citigroup may have its headquarters in one city, but it has operations all over the world and gets capital from a similarly broad base. When Citi ran into difficulties, it turned to Abu Dhabi.

And then there is accounting.

At first glance it appears that there are also a handful of global accounting firms — the Big Four and a couple of...