Report States KPMG Allowed Fraud At New Century

(RTTNews) - A report released Thursday suggested that auditor KPMG LLP either initiated accounting fraud at New Century Financial (NEWCQ.PK) or stood by as the mortgage lender committed fraud in 2005 and 2006. The independent report penned by court examiner Michael Missal had been requested by the U.S. Department of Justice.

The massive report concluded that the mortgage lender "engaged in a number of significant improper and imprudent practices related to its loan originations, operations, and financial reporting."

The study focused in on how New Century accounted for losses on troubled loans that it was forced to buy back. It concluded that had the company not changed its accounting, it would have seen a loss in the second half of 2006 rather than the reported profit of $63.5 million. The report stated that earnings grew 8% in the quarter according to the firm, when in actuality earnings declined at least 40%.

http://biz.yahoo.com/law/080327/07ae0adc90caf148afb926e67a975b73.html?.v=1

Subprime Autopsy Scorches KPMG and O'Melveny & Myers

Thursday March 27, 3:02 am ET

Dan Levine, The Recorder

In the probe of failed subprime lender New Century Financial, a court-appointed investigator had to tell O'Melveny & Myers lawyers to stop meeting with witnesses it did not represent, according to a report unsealed Wednesday. Bankruptcy court examiner Michael Missal, a partner at Kirkpatrick & Lockhart Preston Gates Ellis, criticized O'Melveny -- which represented New Century -- for discovery delays in his investigation. Missal also wrote that O'Melveny lawyers met with one former New Century officer "and likely more" before Missal could interview them.

"The examiner informed counsel for the Company in October 2007 that he did not consider it appropriate for them to give witnesses they did not represent a preview of the examiner's interviews as it could harm the integrity of his investigation," Missal wrote, adding that the lawyers said they would not do so in the future.

Ben Logan, the senior O'Melveny partner on the matter, didn't respond to a message seeking comment, and other partners who were reached Wednesday afternoon could not comment.

Compared to New Century's executives and their KPMG accountants, the O'Melveny lawyers got off relatively unsoiled in the examiner's report: Missal does not recommend any creditor committee litigation against the law firm, which handled New Century's corporate work as well as its bankruptcy.

The widely anticipated, 581-page document provides a damning dissection of KPMG's failures at New Century and a veritable road map of what went wrong in the subprime industry. It also gives several clues as to what the SEC may be probing in the case.

Take corporate disclosure. New Century issued a rosy press release on Sept. 8, 2006, reporting a "modest" increase in the "repurchase rate" of early mortgage defaults, which was a key indicator of the health of New Century's loan portfolio.

But at 8:50 p.m. the night before, CEO Brad Morrice and CFO Patti Dodge got an e-mail from another executive, warning that "we got our teeth kicked in" regarding the repurchase rate, Missal's report says.

"Morrice responded at 9:56 p.m.: 'How can we find out about this just hours after we send a positive press release about this and after sending a positive report to the board?'" according to the report. Morrice demanded better coordination among his finance staff, but Missal's report noted no one at New Century took any steps to stop the press release from going out.

A New Century spokesman said the company was "pleased" the examiner's report was completed. "We can take the next steps of confirming the plan of liquidation, therefore substantially concluding the bankruptcy process," said Ronald Low.

Regarding KPMG, Missal found that the auditors suggested many of the accounting changes that allowed the ailing company to show a profit.

After the company announced the need to restate earnings, it hired San Francisco Heller Ehrman partner Michael Shepard to conduct an internal investigation -- even though Heller represented KPMG in the past. The accounting giant refused to cooperate with Heller's probe, and Shepard quickly wrapped up after the bankruptcy court appointed Missal.

In his probe of KPMG, the bankruptcy examiner wielded subpoena power.

"At a time when KPMG was aware, as evidenced in its own workpapers, that market conditions were worsening and repurchases were increasing," Missal wrote, "KPMG made a recommendation to New Century to remove a component of the repurchase reserve that had the effect of decreasing the reserve ... and then failed to inform the Audit Committee of the change to this critical accounting policy."

In addition, more senior KPMG personnel on the New Century account silenced members of their own staff who tried to raise questions about accounting changes.

In one instance, the KPMG engagement partner on New Century rebuked one of his specialists on the eve of filing New Century's 10-K, even though the specialist later turned out to be right.

"I am very disappointed we are still discussing this," the partner wrote. "As far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off."

One of KPMG's likely defenses against a claim from the estate, Missal wrote, is one of in pari delicto: If New Century is found to have participated in the fraudulent conduct, it will not be allowed to collect.

"We strongly disagree with the report's conclusions concerning KPMG," said Dan Ginsburg, a spokesman for the accounting firm. "We believe that an objective review of the facts and circumstances will affirm our position."

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.