Missouri Agency Sues KPMG
For Role in Collapse of Insurer

By ROBIN SIDEL
Staff Reporter of THE WALL STREET JOURNAL

The Missouri Department of Insurance filed suit against KPMG LLP, accusing the accounting firm of contributing to the 1999 collapse of General American Mutual Holding Co., in part by helping the insurer to use a risky product that eventually led to its downfall.

The lawsuit, filed Thursday in a Missouri state court, is the third in as many months filed by regulators against accounting firms. It comes amid scrutiny of the industry for conflicts of interest that arise when accounting firms collect consulting and other advisory fees from clients while also auditing their financial books.

Separately, the Securities and Exchange Commission's head of enforcement, Stephen Cutler, indicated that regulators may take a tougher stance against accounting firms (See related article)1, as opposed to individual accountants, involved in audit failures. "It is time to adopt a new enforcement model -- a new paradigm: one that holds an accounting firm responsible for the actions of its partners," he told an audience of roughly 1,800 auditors at an annual conference hosted by the American Institute of Certified Public Accountants in Washington. Mr. Cutler noted that he was recommending the approach for future actions, not as a formal proposal for the commission.

 

REGULATORS VS. ACCOUNTANTS

 SEC to Beef Up Audit Enforcement2
 
 FDIC Sues Ernst & Young, Citing Role in Bank Failure3
11/04/02

 
 Deloitte & Touche Is Sued Over Reliance Insurance4
10/17/02

 

 

 

 

 

The Missouri agency's civil lawsuit contends that KPMG allowed misrepresentations in the insurer's financial statements and didn't require disclosure of the risky nature of the investment product. As a financial adviser, KPMG also didn't disclose the risky nature of the product to outside board members and others, the lawsuit says.

Even as the potential for "huge financial losses" was building, the suit contends, "KPMG kept scooping up as much money in fees as possible." The lawsuit doesn't detail the amount of fees collected by KPMG, other than describing them as "millions." In addition to serving as General American's auditor and business adviser, KPMG also worked in the late 1990s to prepare the insurer for an initial public offering.

A KPMG spokesman declined to comment, saying the company hadn't yet seen the lawsuit.

The holding company and its General American Life Insurance Co. unit, St. Louis, ran into trouble in 1999 after it issued $6.8 billion of "short-term funding agreements." For years, money-market fund managers snapped up the products because they paid higher rates than other investments and could be redeemed with only seven days' notice. But a financial-strength ratings downgrade triggered a run on those investments, and the insurer couldn't meet requests to cash out its customers because many of its assets were invested in thinly traded, longer-term and exotic securities.

In January 2000, Metropolitan Life Insurance Co. bought the parent of General American Life Insurance Co. for $1.2 billion. The Missouri insurance department, meanwhile, oversaw the liquidation of the holding company, which was owned by its policyholders.

The lawsuit alleges that KPMG "decided to put its own interests first and failed to properly consider the interests of its clients and the public." The suit also contends that KPMG tried to cover up its actions during the Missouri insurance department's investigation into General American's liquidity crisis.

Much of the suit centers on KPMG's role in advising General American to develop and expand the "Stable Value" funding agreements. It alleges that KPMG knew of the risky nature of the product, yet the financial statements it audited failed to disclose "the existence of billions of dollars of liability exposure."

Last month, federal regulators sued Ernst & Young LLP for what they said was its role in the failure of Superior Bank FSBC last year. And in October, Pennsylvania's insurance department filed suit against Deloitte & Touche LLP, contending that the accounting firm ignored red flags in its audits of Reliance Insurance Co. that have cost investors hundreds of millions of dollars.

Ernst & Young disputes allegations that it was to blame for the failure of the bank and has said it intends "to vigorously defend all claims."

A spokeswoman for Deloitte & Touche said the allegations in the suit are false