July 28, 2020
Shareholders suing global auditing firm KPMG, LLC for its role in a massive fraud by Miller Energy, LLC cleared an important hurdle on June 29, 2020, when a federal magistrate judge granted their motion for class certification and appointment of lead plaintiffs and Cohen Milstein as co-lead counsel and denied defendant’s attempt to disqualify the shareholders’ expert. This ruling is a significant victory for investors. The extremely high legal standard for finding auditors liable for securities fraud makes it rare for auditor cases to withstand motions to dismiss, let alone achieve class certification.
The lawsuit accuses KPMG of violating the Securities Exchange Act of 1934 and the Securities Act of 1933 by allowing Miller Energy to enormously inflate the value of oil and gas reserves in Alaska it had purchased out of bankruptcy for less than $4 million. After Miller Energy claimed the assets it had purchased were worth over $480 million, its stock price soared by 982%.
A little over a year later, Miller Energy replaced its small auditing firm with national powerhouse KPMG. But KPMG failed to perform the required due diligence or force Miller Energy to come clean about its misstated valuations. Instead, KPMG committed a series of profound auditing failures, turning a blind eye to red flags about the asset valuation—including concerns raised by KPMG’s own internal valuation specialists.
The fraud began unraveling in December 2013, as it became clear that the assets’ valuation was significantly overvalued, eventually resulting in Miller Energy taking impairment charges exceeding $300 million. By the end of 2015, Miller Energy’s securities had been de-listed from the New York Stock Exchange and the SEC had assessed a $5 million civil penalty against the company and $125,000 civil money penalties against each of two senior executives and officers. The company went into bankruptcy and all its stock was ultimately voided.
On August 2, 2018, shareholders in this case overcame defendants’ motion to dismiss. Then, after extensive expert discovery, lengthy briefing, and a five-and-half-hour oral argument, on June 29, 2020 the federal magistrate judge issued a report and recommendation that shareholders’ motion to certify two classes of shareholders of common stock and two series of preferred stock be granted. In granting class certification, Magistrate Judge Debra C. Poplin found that the proposed class satisfied all requirements of Federal Rule of Civil Procedure 23, including the vigorously disputed issue of whether the market for Miller Energy’s stock was efficient.
Notably, while Magistrate Judge Poplin concluded that the number of days demonstrating a cause-and-effect relationship between earnings announcements and market reaction was not high, the court found that the evidence of a relationship, along with other evidence, weighed in favor of finding market efficiency. Magistrate Judge Poplin also denied defendant’s motion to exclude the testimony of plaintiffs’ expert witness, finding his opinion credible.
Magistrate Judge Poplin’s decision also reinforces that market efficiency may be demonstrated through multiple methods and that the cause-and-effect analysis is one factor to be considered but is not dispositive—something particularly noteworthy in this case since there are two separate series of preferred stock at issue in addition to common stock.
In the coming weeks, defendants may appeal the magistrate judge’s ruling to the district court. Cohen Milstein looks forward to defending the federal magistrate judge’s correct ruling and continuing to pursue a meaningful recovery for the class of injured investors.