April 21, 2022
A federal judge last month granted preliminary approval to a settlement in which KPMG LLP, the global auditing firm, agreed to pay $35 million to shareholders of the now-defunct Miller Energy Resources, Inc. The substantial settlement, which culminated six years of litigation, is a significant victory for the class of investors, who needed to clear the high bar for auditor liability in securities fraud cases. On June 30, plaintiffs are scheduled to seek final approval of the settlement from Judge Thomas A. Varlan of the U.S. District Court for the Eastern District of Tennessee.
Cohen Milstein serves as court-appointed Co-Lead Counsel for the class of Miller Energy investors in the case, which was originally filed in March 2016. In their complaint, plaintiffs alleged that KPMG recklessly or intentionally failed to meet its obligations as the independent auditor of Miller Energy and perpetuated a massive fraud by signing off on the oil and gas firm’s $480 million valuation of its Alaskan oil reserve assets, which were later revealed to be largely worthless. KPMG’s role in Miller Energy’s fraud, plaintiffs alleged, led to millions of dollars in investor losses and Miller Energy’s eventual bankruptcy.
Miller Energy catapulted itself from an oil and gas penny stock to a behemoth company traded on the New York Stock Exchange following its 2009 acquisition of the Alaskan oil assets. Though Miller Energy purchased those oil reserve assets for only $2.25 million in a bankruptcy fire sale, the company spent the next five years telling investors that the assets were in fact worth $480 million. After Miller Energy replaced its small auditing firm with the global powerhouse KPMG in 2011, the company continued to file financial statements that represented the gargantuan valuation of the Alaska assets, all with KPMG’s blessing.
But as the Securities and Exchange Commission (SEC) would later find, KPMG’s tenure as Miller Energy’s auditor was replete with “repeated instances of [highly] unreasonable conduct.” By 2014, the truth finally began to emerge, with Miller Energy announcing a staggering $265.3 impairment charge to the Alaska assets, followed by a $149.1 million impairment the following year. Over the following months, the company announced it was suspending dividend payments, the SEC filed charges against the company, the New York Stock Exchange delisted Miller Energy stock, and, in October 2015, Miller Energy filed for Chapter 11 bankruptcy, later admitting that the Alaska assets were worthless all along—and that its years of financial statements to the contrary, all with KPMG’s blessing, were a sham.
In August 2017, the SEC confirmed what plaintiffs had alleged, announcing charges against KPMG and its lead partner on the Miller Energy engagement “for “improper professional conduct and securities law violations by KPMG” relating to its review and audit of Miller Energy’s financial statements. The SEC concluded that KPMG repeatedly turned a blind eye to evidence that the Alaskan assets were grossly overvalued, in violation of its legal and professional duties as an independent auditor. As a result of its misconduct, the SEC ordered KPMG to conduct a comprehensive review of its quality controls for audits and training materials with the oversight of an independent monitor, pay a civil money penalty of $1 million, and disgorge all of its Miller audit fees plus interest, a total of more than $5 million.
From the very start, however, plaintiffs faced tough odds in their attempt to hold KPMG liable. Courts typically require plaintiffs to meet a higher standard for finding auditors liable for securities fraud than defendant companies or their officers and directors, making it rare for auditor cases to even withstand motions to dismiss, let alone reach a favorable settlement or judgment. For the next five years, though, Cohen Milstein successfully fought against KPMG’s determined effort to defeat the lawsuit, surviving three motions to dismiss and multiple rounds of class certification and Daubert briefing in both the district court and the Sixth U.S. Circuit Court of Appeals.
Coming on the heels of the successful motion to dismiss decision obtained by Cohen Milstein in a separate case pending against Deloitte, another “Big Four” audit firm, the $35 million settlement agreement with KPMG shows that even under the high standards applicable to such cases, auditors can be held to account if they fail to adhere to their obligations to objectively and independently evaluate the accuracy of a public company’s financial statements.