Legal News

Examiner?s Report for New Century Singles Out Accountants, Lawyers

By Dan Slater

Those who were anticipating yesterday’s unsealing of the report on collapsed mortgage lender New Century — written by court-appointed bankruptcy examiner Michael Missal, a partner at Kirkpatrick & Lockhart — surely expected to read about a litany of wrongdoing at New Century. And they got it: Among other damning findings, Missal said New Century’s loan-production department trained mortgage brokers in sessions it referred to “CloseMore University.” However, also in the report, filed in bankruptcy court in Delaware and unsealed yesterday, was alleged misconduct by an accounting firm and a law firm, to boot.

According to the WSJ, Missal concluded that New Century’s auditor, KPMG, devised some of improper accounting strategies that allowed the company to hide its financial problems, and that New Century might be able to recover money for its creditors — it owes them more than $1 billion — by suing KPMG for negligence.

In one instance, according to Missal’s report, a KPMG partner castigated a subordinate who questioned one of New Century’s accounting practices. The KPMG partner reportedly told the subordinate in an email: “I am very disappointed we are still discussing this. As far as I am concerned, we are done. The client thinks we are done. All we are going to do is p- everybody off.”

The Journal story adds that the DOJ, in an inquiry being handled out of the Santa Ana office, is also looking at individuals at KPMG who audited the company, though they’re not currently a target of the investigation. And Bloomberg reports that the SEC is also reviewing KPMG’s role as New Century’s auditor and has subpoenaed the accounting firm, citing two people familiar with the matter said.

This morning’s story from The Recorder points out that Missal also singled out New Century’s law firm, O’Melveny, for discovery delays and for meeting 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.

Ben Logan, the senior O’Melveny partner on the matter, didn’t respond to calls from The Recorder seeking comment, that paper said.

Dan Ginsburg, a spokesman for KPMG, said, “We strongly disagree with the report’s conclusion concerning KPMG. We believe that an objective review of the facts and circumstances will affirm our position.”

A spokesperson for New Century said in a statement: “The Company is pleased that the Examiner’s report is finally completed and that we can take the next steps of confirming the plan of liquidation, therefore substantially concluding the bankruptcy process.”

Full post as published by Law Blog - WSJ.com on March 27, 2008 (boomark / email).