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A federal court has refused to dismiss a putative class action lawsuit in which accounting firm KPMG L.L.P. is being charged with securities law violations in connection with its audit of a now-bankrupt energy firm.
Huntsville, Tennessee-based Miller Energy Resources Inc. retained KPMG, whose United States headquarters is in New York, as its independent auditor in 2011, according to Thursday’s ruling by the U.S. District Court in Knoxville, Tennessee, in Lewis Cosby et al. v. KPMG L.L.P.
Plaintiffs in the litigation are common and preferred stock shareholders of the firm, who claim Miller Energy grossly overstated the value of assets the company purchased in Alaska, according to the ruling.
In December 2017, the Securities and Exchange Commission settled cease and-and-desist proceedings it filed against the company and four of its senior executives and ordered the company to pay a $5 million penalty.
The SEC said in its statement that the officials and firm had materially overstated the value of certain oil and gas assets it had acquired in Alaska.
The court held plaintiffs could proceed with their allegations of violations of the Securities and Exchange Act and the Securities Act. Plaintiffs have adequately alleged “that defendant’s conduct was an ‘egregious refusal to see the obvious, or to investigate the doubtful,’” said the opinion, in quoting an earlier case.
When Miller Hired KPMG, the accounting firm “did not complete an independent audit but relied on previous reports and defended the valuation of the assets,” said the ruling.
Even after a financial publication questioned Miller Energy’s assets valuation, KPMG “represented to shareholders that the valuation was accurate and that the article was inaccurate,” it said.
Plaintiffs have also shown numerous “red flags,” including the publication’s article and SEC inquiries, “which should have put defendant on notice of possible violations,” the ruling said.
Plaintiffs have also successfully shown loss causation, the ruling said. They “have provided detailed allegations of loss, and they have clearly asserted that his loss was a direct result of disclosures regarding Miller Energy’s operating loss and questionable cost figures,” said the ruling.
“At this stage, plaintiffs are not required to articulate an exact chain of evidence leading from the alleged fraud to the loss,” the court said, in refusing to dismiss the case.
(Reuters) — U.S. securities regulators have accused a KPMG partner and two other individuals of insider trading on tips about three pending corporate mergers on which the accounting firm was providing advice.