Beruflich Dokumente
Kultur Dokumente
v.
KPMG International,
Defendant.
himself and his actions, and information and belief as to all other matters, as
follows:
INTRODUCTION
Company’s employees and other stakeholders, and the Company itself. Because
of this special responsibility the United States Supreme Court holds auditors like
company that both originated and purchased residential mortgage loans, the
majority of which were subprime loans. As the subprime mortgage market grew,
so did New Century — New Century’s reported assets grew from $300,000 in
precisely the type of risks an independent auditor is there to watch for and respond
to. New Century and the users of its financial statements depended on its
gatekeeper, KPMG, to ensure that those financial statements were fairly presented
in accordance with GAAP and free of material misstatement due to error or fraud.
When New Century finally announced its financial statements were false, its stock
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price dropped 90 percent, New Century could no longer borrow money to finance
its lending business and New Century went bankrupt owing billions.
significant ramifications not just for New Century, but for the public. New
Century was at the center of the housing market boom, and when it went bankrupt,
not only did thousands of people lose their jobs, but as the New York Times
lenders — ultimately rocking global financial markets, forcing banks around the
accountants performing audits matters. The failure of KPMG to do its job at New
Century demonstrates why. This complaint holds KPMG responsible for its
failure.
“member firms” around the world that, according to KPMGI, “act according to
common values” and provide clients with a “globally consistent” set of services.
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brand and the KPMG member firms around the world, including its agent in the
member firms’ work, including their audits, would meet professional standards
to which member firms must adhere to help ensure that the work performed by
and the member firm’s quality requirements applicable to their respective Audit,
KPMGI promised the public it would “maintain the quality and integrity of the
markets.”
consistent services” and include the most fundamental right — the right to take
away the “KPMG” brand and put member firms out of business. According to
KPMGI’s annual report, membership with KPMG can be terminated if a firm acts
for all auditors within KPMG member firms” and enforced its quality
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requirements through “an established set of supervisory, review and consultation
the public its requirement that member firms maintain the brand through strict
member firms were “independent,” the critical aspect of any KPMG member firm
conducting an audit:
avoiding conflicts of interest, and the rotation of audit partners when necessary.”
KPMGI thus not only sought to exact adherence to its own ethical standards – it
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used its member firms’ alleged integrity and professionalism as a selling point to
III. KPMG International Breaks Its Promises and Harms New Century
LLP and even terminate it as a “KPMG” firm, KPMGI did not ensure the stringent
quality control it promised the public. KPMGI touted the KPMG brand as adding
standards, yet did not ensure that audits under the KPMG name followed those
standards.
Century. KPMG LLP was the auditor for New Century, a mortgage finance
company that both originated and purchased residential mortgage loans, the
majority of which were subprime loans. Despite KPMGI’s promise that it would
ensure that KPMG LLP audit services would comply with professional standards
and regulatory requirements, KPMG LLP conducted grossly negligent audits and
reviews of New Century that violated both professional standards and regulatory
requirements.
previously issued financial statements would have to be restated because they did
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failure to keep its promise and exercise its right and obligation to strictly control
the quality of KPMG LLP’s audits cost New Century its existence.
would, KPMG LLP acted as a cheerleader for management to keep its client
happy.
20. When dissenters within KPMG LLP tried to point out the
misstatements in the financial statements, they were silenced by the KPMG LLP
relationship with New Century and KPMG LLP’s fees from New Century: When
accounting practice on the eve of the Company’s 2005 Form 10-K filing, John
Donovan, the lead KPMG audit partner told him: “I am very disappointed we are
still discussing this. As far as I am concerned we are done. The client thinks we
issued its audit report before its audit was complete, falsely enabling New Century
issue its audit opinions and reviews, and thus its audits failed as a matter of law
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and ethics. KPMGI, as the principal, is responsible for the severely reckless and
23. KPMGI itself broadcasts to the public that it would hold its
member firms and their partners accountable for complying with its ethical and
people to be in full compliance with our global policies. To this end, we hold
through grossly negligent audits in this case prove the truth of the Supreme
Century to lose at least millions of dollars, and working people to lose their jobs.
PARTIES
1
The Liquidating Trustee stands in the shoes of the New Century debtors which are the following
entities: New Century TRS Holdings, Inc. (f/k/a New Century Financial Corporation), a Delaware
corporation; New Century Mortgage Corporation (f/k/a JBE Mortgage) (d/b/a NCMC Mortgage Corporate,
New Century Corporation, New Century Mortgage Ventures, LLC), a California corporation; NC Capital
Corporation, a California corporation; Homel23 Corporation (f/k/a The Anyloan Corporation,
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27. Less than two months after New Century’s February 7, 2007
violations of GAAP, on April 2, 2007 New Century and its operating subsidiaries
consultancy firms in the world. According to its website, “we have 137,000
United States. KPMGI reports its revenues on a worldwide basis on its web site,
www.kpmg.com.
30. This Court has subject matter jurisdiction over this action
1800anyloan.com, Anyloan.com), a California corporation; New Century Credit Corporation (f/k/a Worth
Funding Incorporated), a California corporation; NC Asset Holding, L.P. (f/k/a NC Residual II
Corporation), a Delaware limited partnership; NC Residual III Corporation, a Delaware corporation; NC
Residual IV Corporation, a Delaware corporation; New Century R.E.O. Corp., a California corporation;
New Century R.E.O. II Corp., a California corporation; New Century R.E.O. III Corp., a California
corporation; New Century Mortgage Ventures, LLC (d/b/a Summit Resort Lending, Total Mortgage
Resource, Select Mortgage Group, Monticello Mortgage Services, Ad Astra Mortgage, Midwest Home
Mortgage, TRATS Financial Services, Elite Financial Services, Buyers Advantage Mortgage), a Delaware
limited liability company; NC Deltex, LLC, a Delaware limited liability company; NCoral, L.P., a
Delaware limited partnership; and New Century Warehouse Corporation (“NCW”), a California
Corporation.
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32. This Court has personal jurisdiction over Defendant KPMGI.
KPMGI’s contacts with the United States and New York are regular, profitable
and purposeful. KPMGI contracts with its agent KPMG LLP, with its principal
offices in New York and offices throughout the United States. This contract
provides the basis for KPMGI’s pervasive rights to control KPMG LLP, a certified
public accounting firm that owed a duty to the public, the citizens of the United
States.
33. KPMGI released annual reports into New York and the
United States promising supervision and quality control over KPMG LLP’s
position – and serves as a road map to help guide actions and behaviors while
working at KPMG.” Through the “high standards it sets for all our people
worldwide,” the Code permits “clients and other stakeholders [to] know what to
KPMG LLP, including KPMG LLP’s New York offices, for its marketing and
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quality control functions. KPMGI has regular and pervasive contact into New
York and the United States. These contacts include KPMGI’s quality control
review of audits in the United States and New York. KPMGI even reaches into
New York and the United States to require how KPMG LLP conducts its business
from its audits to even the parameters of marketing the KPMG brand.
site on which it represents to New York residents that it supports its American
firms through policies and regulations including submission to the KPMG quality
review process.” KPMGI also advertises that member firms’ compliance with
so much emphasis on bringing our shared values alive within member firms and
helping to ensure that everyone follows our Global Code of Conduct”– the very
FACTUAL ALLEGATIONS
of mortgage loans. Throughout its twelve year existence – and without regard to
whether it held those loans to collect interest, resold the loans to secondary lenders
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at a profit, or securitized them – New Century’s success, like that of all lenders,
was tied to the quality of its loan portfolio and its reserve for risks.
Century’s financial statements were misleading to the public and to New Century
itself. First, if the correct factors were not included in the reserve calculation,
New Century could not properly plan for changes that might affect its business. It
would continue to take on risks and expand its business when the prudent course
would have been otherwise. Second, when those incorrect factors were used in the
reserve calculation, the reserves were incorrect, causing the financial statements to
39. This dynamic came into particular focus for New Century
when, beginning in the early part of this decade, it started to more aggressively
to lenders. The risk can be increased by borrowers with marginal credit scores or
this higher risk in exchange for higher interest rates, typically 2 percent higher
than borrowers with better credit, higher down payments, or better documentation.
exponentially in the early 2000s. The reasons for the growth of the subprime
mortgage industry are many and include low interest rates and equity appreciation
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adjustable rate mortgages – that were designed to allow potential homebuyers who
could not afford or qualify for conventional (lower interest rate) mortgages the
growth stood out. By 2003, the subprime mortgage market had become highly
by the twenty-five largest lenders. Of those, New Century was consistently among
the four largest lenders and, in some time periods, was the second largest
42. The reasons for New Century’s explosive growth lay in its
openly risky plan. As it repeatedly disclosed in public filings, New Century took
borrowers through temporarily lowered interest rates and “layering” its risks by
taking on borrowers with multiple risk factors – for example, combining weak
the mortgage loans it originated, some of that risk redounded back to New
loans in the event of certain conditions, such as early payment default (“EPD”), a
default which occurs within several months following the loan’s sale, or in the
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event of a material breach of the representations or warranties made by the
the rate at which it was required to repurchase loans – in addition to having to take
back bad loans and repay lost fees and interest, repurchased subprime loans were
more difficult to resell, and were resold at significant discounts to their repurchase
price.
II. KPMG LLP: New Century’s Auditor, Reviewer and Internal Control
Tester
45. To account for the risks it was taking, and to provide comfort
to creditors and investors to whom it disclosed these risks, New Century hired a
financial statements. The auditor was KPMG LLP. KPMG LLP was retained
when the company was formed in 1995, and served as New Century’s outside
auditor until April 27, 2007, when it resigned, having issued twelve unqualified
each of New Century’s consolidated balance sheets and the related consolidated
cash flows.
served several other functions. In addition to its year-end audits, KPMG LLP
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year-end audited financial statements, New Century’s quarterly financial
statements were filed with the Securities Exchange Commission (“SEC”) for the
public. Beginning in 2004, KPMG LLP also performed audits of the effectiveness
these audits, which were required by the 2002 Sarbanes-Oxley Act, KPMG LLP
was required to audit New Century’s assessment of the effectiveness of its internal
control over financial reporting and identify any significant deficiencies and
stakeholders rely on the company’s audits for assurance that the financial
statements presented fairly, in all material respects, the financial condition of the
company in conformity with GAAP. In the case of New Century, KPMG LLP
should have been aware that GAAP compliant financial statements were a
present its lenders with GAAP compliant financial statements would, among other
conduct its business, causing irreparable harm to the Company. This is precisely
what occurred.
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48. The harm to New Century resulting from materially misstated
financial statements should have been foreseeable to KPMG LLP at all times for
mortgage loans, the company was required to repurchase the loans it had sold or
obligation was required by New Century’s loan sale agreements with secondary
market lenders.
the loan. Thus, generally, if a loan failed within the first 90 days of a secondary
market lender’s purchase from New Century, the purchaser was contractually
permitted to require New Century to take back the loan. In addition, the purchaser
could require New Century to repurchase the loan if New Century was in default
on any warranty it had made regarding the loan, regardless of when that breach
was discovered.
Century, all of them negatively. When New Century repurchased loans, it realized
expenses and losses. In addition to repaying the principal amount of the loan, it
was also required to repay the premium that the lender had paid to purchase the
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loan, any interest due on the loan that had not been paid to that investor, and any
losses that had been incurred. Further, as New Century acknowledged in its public
repurchase price, if at all.” As a result, “they are typically also sold at a significant
their loans, New Century was required to repurchase increasing numbers of bad
loans that it would be forced to put back on its books, and to repay the purchasers
the premiums and lost interest to which they were entitled. More broadly, the
trend of increasing repurchases indicated that the most significant piece of New
53. KPMG LLP was fully aware of this trend. Its own
workpapers note that the repurchases had more than doubled from 2004 to 2005,
going from $135.4 million to $332.1 million. Even with this increase in the rate of
although KPMG LLP expressly acknowledged in its workpapers that the risk
associated with the portfolio had gone from low to high, KPMG LLP did not
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IV. Accounting for the Loan Repurchases: The Loan Repurchase Reserve
for in New Century’s financial statements through its allowance for repurchase
requires the establishment of a loan repurchase reserve for losses and expenses
statements, this amount is the “Company’s estimate of the total losses expected to
occur” in connection with the loan repurchase exposure related to loan sales. The
larger the reserve, the greater the volume of loans that New Century expected to
repurchase.
56. The significance of the reserve was not lost on New Century,
nor unknown to KPMG LLP. Indeed, KPMG LLP regularly participated in Audit
Committee meetings where it was questioned about the reserve calculations. For
example, and as reflected in the July 26, 2006 Audit Committee meeting notes:
“[KPMG LLP Manager] Mr. Kim reported that KPMG was in the
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reserves and Mr. Donovan [KPMG LLP] and Ms. Dodge
responded.”
57. KPMG LLP knew that the estimation of this loan repurchase
reserve was a critical accounting policy and could significantly impact New
which indicated that New Century’s reserve estimation process was not well-
Century’s internal controls in 2004 and 2005, KPMG LLP found that New
Century had internal control deficiencies because it had not adopted formal
policies and procedures for the reserve estimation process. Based on these
findings, KPMG LLP advised New Century to adopt such formal procedures and
policies. When New Century did not take KPMG LLP’s recommendation and
adopt formal policies and procedures, KPMG LLP — knowing of New Century’s
inability to accurately estimate the reserve — did nothing to change its audit
For example, and inexplicably, KPMG LLP never required New Century to
loans that had not been paid by the borrower — in calculating an appropriate
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reserve. More ominously, the KPMG LLP audit team repeatedly was alerted to
their errors, but consistently ignored the advice of their own expert personnel.
60. The loan repurchase reserve that KPMG LLP audited failed to
account for large numbers of loan repurchase claims more than ninety days old
that were already known to New Century — and KPMG LLP — and logged into
depending on the basis for the claim. The request for repurchase could only be
made if the default occurred within a time period set by the sale contract; however,
the decision whether to repurchase the loan could take much longer. The
decentralization within New Century for dealing with repurchase claims created a
LLP accepted a repurchase reserve calculation that assumed that all repurchases
were made within 90 days of the date New Century sold the loans and did not
— are plainly faulty. KPMG LLP claims to have tested the company’s
assumption that repurchases could only happen within 90 days of the date New
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Century sold the loan in two ways. First, KPMG LLP says it reviewed the loan
sale agreements to confirm that they required repurchase in the event of repayment
defaults that occur within 90 days of purchase. Second, KPMG LLP claims it
about repurchases to confirm that repurchases generally were being made within
grossly negligent manner. First, the loan sale agreements, which widely varied in
remained outstanding beyond the 90 day cut-off period. Second, even a cursory
review of the repurchased log would reveal that a material and growing number of
Backlog Claims — the claims existing from the sale of loans beyond 90 days —
65. If KPMG LLP had done its job as an auditor, the problem
with the loan repurchase reserve calculation would have been discovered before it
reserve was calculated at least every quarter, if the formula had been correct, New
Century would have seen its loan repurchase reserve grow on an incremental
basis. Instead, KPMG LLP permitted New Century to improperly calculate the
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approximately $224 million of unresolved repurchase claims, of which
approximately $170 million were more than 2 months old and approximately $75
loan repurchase reserve, and KPMG LLP was aware that they were not properly
accounted for as early as the 2004 audit. On January 26, 2005, as part of that
audit, KPMG LLP inquired of New Century for the reason in the “jump” in
repurchased loans. New Century informed KPMG LLP at that time that the reason
was that “many of the loans were from prior quarters and months leading to the
change its audit approach and the company’s public filings brazenly announced
that only claims from within the quarter are considered for purposes of calculating
the loan repurchase reserve. Indeed, as part of its 2004 audit procedures, KPMG
LLP concluded that “based on the review of the Company’s repurchase log and
69. KPMG LLP agrees today that the Backlog Claims should
have been reflected in New Century’s financial statements in the loan repurchase
reserve.
B. Inventory Severity/LOCOM
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70. In the second and third quarters of 2006, New Century
because the decision was based on KPMG LLP’s faulty advice that the loss was
analysis.
decided that accounting for the loan repurchases as part of the reserve was in
effect “double counting” and resulted in New Century being over reserved. New
Century was surprised by the changed view of the accounting but, undoubtedly
reclassified to a valuation account to appropriately value loans held for sale at the
lower of cost or fair value. After the second quarter 2006 change, the inventory
severity factor was no longer used to effect this valuation. Because of the
interplay between New Century’s loan repurchase reserve and the inventory
material overstatement of loans held for sale on New Century’s balance sheet.
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74. Thus New Century, at the behest of KPMG LLP, dropped its
overstatement in loans held for sale, which was already overstated to begin with
75. Again, KPMG LLP was alerted to the wrongness of its policy
this time by its own audit staff. When KPMG LLP auditor Christina Chinn
reviewed the repurchase reserve in connection with KPMG LLP’s second quarter
2006 review, she noticed that the inventory severity component of the reserve had
been removed and asked for a memorandum from New Century discussing the
basis for the removal. Rather than support her inquiry, the senior KPMG LLP
audit manager told Chinn to “please do not ask the client regarding this anymore.”
In accordance with this directive no further analysis was performed in the second
quarter of 2006.
76. New Century materially overstated its loans held for sale in
2005 and for the first three quarters of 2006, and KPMG LLP failed to properly
apply GAAP to New Century’s accounting for loans held for sale in its 2005
reviews, its 2005 audit, and in its 2006 reviews of New Century’s financial
statements.
C. Hedge Accounting
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77. New Century used derivative instruments to manage its
exposure to interest rate risks associated with its financing on mortgage loans held
for sale, mortgage loans held for investments and residual interests.
instruments and hedging activities are governed by FAS 133, “Accounting for
inception of the hedge, formal documentation of the hedging relationship and the
entity’s risk management objective and strategy for undertaking the hedge, the
method which will be used to assess the effectiveness of the hedging derivative,
and the measurement approach to determine the ineffective aspect of the hedge.
enlisted the help of its internal specialist group, Financial Derivatives Resources
80. During the 2005 audit, the FDR Specialists informed the audit
including New Century’s lack of a comprehensive and effective set of policies and
81. These issues fell on deaf ears. On the eve of filing New
Century’s Form 10-K for 2005, a disagreement regarding the company’s hedge
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accounting practices and documentation came to a head. John Klinge and Ray
Munoz, KPMG LLP’s FDR Specialists, held up KPMG LLP’s issuance of its audit
report because they disagreed with KPMG LLP’s treatment of New Century’s
hedge accounting.
82. For the year-end audit, Klinge and Munoz had been assigned
to provide specialized expertise and quality control on the derivatives and hedging
issues that arose in the context of the audit. Their primary task was to determine
83. As of March 15, 2006, Klinge still was not prepared to sign
off on the FDR Review of the New Century Audit, having failed to receive
notwithstanding the fact that KPMG LLP had not completed its audit work, so that
the reason for any delay would not become public and New Century’s Form 10-K
would be filed on time. KPMG LLP succumbed to the pressure and issued its
opinion minutes before the Form 10-K was due and New Century timely
completed its filing. Klinge was instructed by KPMG LLP to prepare a signoff
85. KPMG LLP issued its audit report before the audit was
completed. At the time the audit report was issued KPMG LLP did not know one
way or the other whether New Century’s financial statements were fairly
presented in all material respects with GAAP. In doing so, KPMG LLP violated
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the audit standards on evidential matter and on generally accepted accounting
principles.
open issues, KPMG LLP was not independent. Therefore, the audit opinion filed
with New Century’s Form 10-K was a nullity and violated auditing standards.
Century’s right to future cash flows or assets that remained in the trust created for
the securitization after the payment to senior interests. New Century’s income
from and valuation of its residual interests depended on the securitized loan pool
actually producing income. Thus, residual interests were directly related to the
populate each securitization models with actual data. The model then would be
rolled forward from the prior month to calculate the current residual interest based
on various assumptions (including, most importantly, the prepayment rate, the loss
rate, and the discount rate) that were built into the model at the outset. Changes to
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90. If the models had been done correctly, the residual interest
91. The models were wrong. The models used the wrong
discount rates, used stale information from the late 1990s to calculate prepayment
rates and inexplicably assumed that the loans would be sold at par value if the
audit procedures to the models. KPMG LLP was grossly negligent in not
detecting the errors, or when it did detect control deficiencies, not taking steps to
protect the public and New Century. As was its practice, KPMG LLP was not
defender of management. KPMG LLP allowed the models to be used even though
the discount rates were plainly too low and allowed Management to artificially
93. For example, in 2005 when experts within KPMG LLP found
that the Company’s documentation of the discount rate used was insufficient and
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the discount rate was too low, the KPMG LLP audit team sided with Management
94. In 2006, experts within KPMG LLP tried again, and again the
KPMG LLP audit team sided with Management instead of the public interest.
KPMG LLP’s audit team and Management’s interest won again, and no change
was made.
95. KPMG LLP’s audit team knew that the problems were more
than theoretical. KPMG LLP repeatedly discovered that the models used to
calculate the residual interest valuations generated errors. KPMG LLP also had
actual knowledge of errors in the data New Century was putting into the models.
96. KPMG LLP ignored these problems despite the fact that only
a few years earlier, in 2000, a calculation error in the residual interest models led
to a $70 million write down and New Century’s first loss in its history.
Management was determined to not let this happen again, and KPMG LLP
did not exercise professional skepticism, which required KPMG LLP to adopt “an
attitude that includes a questioning mind and a critical assessment of the audit
evidence.” Moreover, auditing standards required KPMG LLP to test – not just
those assumptions.
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98. Even when KPMG LLP repeatedly noted deficiencies in the
models, and indeed New Century’s lack of any consistent criteria in the models,
KPMG LLP failed to take the necessary steps to ensure that the residual interests
specialists to do so;
models; and
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100. These problems existed at least as early as 2004, and thus
again KPMG LLP could have stopped the problem before these problems helped
lead to New Century’s demise. However, by the third quarter of 2006, New
Century held residual interests in over thirty securitizations structured as sales that
proper assumptions were applied in the valuation of its residual interests, its
from the amounts at which they were valued as of September 30, 2006.
Financial Statements.” Such audits over internal control were required by law in
response to the Enron-era of financial reporting and accounting, when the public
asked “Where were the auditors?” The law required KPMG LLP to audit and
report on (i) management’s assessment of internal control and (ii) the effectiveness
again in 2005, and again in 2006, but failed to take appropriate steps to protect the
direct knowledge of the lack of proper internal control, it did not take appropriate
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steps in its audits of the financial statements to detect material misstatements due
to error or fraud.
controls of the exact same issues that caused the now admitted material
Century to declare bankruptcy. KPMG LLP stated in its letters to New Century
that “we considered internal control in order to determine our auditing procedures
internal controls for the now admitted material misstatements arising from the
calculation of residual value and allowance for loan losses. KPMG LLP found
calculations.”
control deficiencies relating to the residual interest valuation alone. Still, KPMG
LLP took no steps in its audits to correct for the lack of control, repeatedly giving
in to Management’s wishes.
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107. In 2006, KPMG LLP incredibly still found that
KPMG LLP done its job in 2004, the incorrect residual interest valuation would
internal controls for the calculation of the loan repurchase were inadequate and
failed. As late as 2007, KPMG LLP declared that there was a “material weakness”
in internal controls because “there were no controls in place to monitor the buildup
connection with the 2005 audit, KPMG LLP was specifically informed in an email
repurchase requests of $188 mm at year end.” However, KPMG LLP accepted the
flawed, 90-day back formula that estimated only $70 million repurchases.
KPMG LLP identified problems with the LOCOM internal control, including that
LOCOM analysis.
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111. New Century publicly acknowledged in 2007 that there were
Company’s consolidated financial statements for the year-end 2005 (the “2005
Financial Statements”) and interim financial statements for each of the first three
quarters of 2006 (the “2006 Financial Statements”, and together with the 2005
(b) failed to properly account for and report the lower of cost or
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(f) should not be relied upon.
114. The deficiencies that existed during at least 2005 and 2006 in
New Century’s system of internal control over financial reporting included, but
interests;
requests.
116. On February 7, 2007, a day before its 2006 fourth quarter and
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that it needed to restate its earnings for the first three quarters of 2006 due to its
failure to account properly in accordance with GAAP for probable and estimable
expenses and losses in its loan repurchase reserve. In particular, New Century
properly consider, in each of the first three quarters of 2006, the growing volume
time between the whole loan sales and the receipt and processing of the repurchase
request.”
control over financial reporting for the year ended December 31, 2006.”
filing with the SEC, in which it stated, among other things, that:
* * *
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earnings and profitability when compared to the same
periods in 2005. The Company currently expects that
it will report a pretax loss for both the fourth quarter
and full year ended December 31, 2006.
119. On March 12, 2007, New Century reported that the majority
of its lenders had declared New Century in default and as a result had accelerated
outstanding repurchase requests. New Century further disclosed that it lacked the
liquidity to keep pace with repurchase requests. In addition, by the end of March,
all of New Century’s lenders discontinued financing for the Company and New
fell by more than 90 percent and was delisted by the New York Stock Exchange.
121. On May 24, 2007, New Century publicly announced that the
Audit Committee had concluded “that it is more likely than not that . . . errors in
[Company’s] 2005 Financial Statements,” and that the Board had concluded “that
United States Bankruptcy Court for the District of Delaware to orderly liquidate.
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after his appointment, the Examiner released a 551-page final report that was filed
with the Bankruptcy Court on February 29, 2008 (the “Examiner’s Report”).
its audits. Moreover, the Examiner concluded that “the engagement team acted
more as advocates for New Century, even when its practices were questioned by
thus faced a shifting market without an independent public accountant, and with
false assurances that it had resources it could use instead of reserve. Had KPMG
LLP done its job and upheld its public duty, the problems that caused New
could have been stopped before they started and materially misstated financial
statements would not have been issued in the public marketplace. Moreover, had
its financial statements been fairly presented in accordance with GAAP, New
Century could not and would not have incurred billions in liabilities to repurchase
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126. KPMGI has the right to control KPMG LLP through
agreements and policies that dictate how KPMG LLP conducts its business,
manifests its understanding that member firms like KPMG LLP will act on
KPMGI’s behalf and subject to its control. By agreeing to the terms set forth in
the membership agreement and by its actions, KPMG LLP accepts its role as
KPMGI’s agent.
stresses the quality of its global network and the stringent standards and quality
KPMG LLP. KPMGI creates and fosters the belief that the audit reports issued by
it and its member firms should be relied on because they are backed by the
129. KPMGI promises the public that it will strictly control the
• “To provide high quality services across the globe, KPMG recognizes
performance.”
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• “KPMGI promulgates policies of quality control including
with reasonable assurance that its member firms comply with relevant
firms must adhere to help ensure that the work performed by member
• “To strengthen and enhance quality control, KPMGI and its member
• Audit engagement teams in all member firms follow the KPMG Audit
Methodology.
the right to put the KPMG logo and name on audited financial statements,
including the audited financial statements for New Century at issue in this case.
negligent conduct of the New Century audits included a series of systemic failure
40
of standards and quality controls that damaged New Century – in other words, the
conduct an audit, through its member firm, in accordance with auditing standards,
KPMGI failed New Century, its audit client, and is therefore responsible for
LLP and the policies imposed by KPMGI and accepted by KPMG LLP, KPMGI
acknowledged that KPMG LLP would act for it, and KPMG LLP accepted that
undertaking.
135. KPMGI had the right to control KPMG LLP pursuant to the
agreements between the KPMGI and KPMG LLP and the policies imposed by
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139. KPMGI had the power to direct the policies and practices of
business practices. KPMGI promised to strictly control its agent KPMG LLP to
entice the public, including consumers, its clients and New Century to use KPMG
LLP’s services.
144. KPMGI knew that its promises were false when made.
145. KPMGI broke its promises and breached its public duty by
failing to strictly control the quality of KPMG LLP’s audits, including the audits
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PRAYER FOR RELIEF
proven;
3. restitution;
4. treble damages;
5. punitive damages;
practices;
9. such other and further legal and equitable relief as the Court deems
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JURY DEMAND
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