August 02, 2018
A Tennessee federal judge on Thursday kept alive the bulk of a proposed class action from investors accusing KPMG of helping the now-defunct Miller Energy Resources Inc. falsify financials about oil and gas assets, saying there is adequate evidence that the alleged scheme was known to KPMG and caused share prices to fall.
Chief U.S. District Judge Thomas A. Varlan concluded that a media report and questioning by the U.S. Securities and Exchange Commission could have alerted KPMG to Miller Energy’s financial misstatements, and determined that the investors adequately alleged that as the financial irregularities became apparent, shares of Miller Energy declined. The court declined to dismiss the suit on statute of limitations grounds as well, saying the investors wouldn't necessarily have known to investigate the conduct before an SEC probe in 2015.
“It's a terrific ruling, we think, because the judge touched upon a number of different issues he upheld which are important issues in a case against auditors,” said the investors’ counsel Steven J. Toll of Cohen Milstein Sellers & Toll PLLC.
The suit, filed in 2016, says Miller Energy paid $4.45 million for oil and gas assets in Alaska that it then claimed to be worth $480 million. Two years after the purchase, in 2011, investors pressured Miller Energy to hire an accounting firm such as KPMG, the investors said. Around the same time, the SEC began asking about the value of the assets and a financial website reported that the company had overvalued them, according to court documents.
KPMG endorsed the figures nonetheless, the investors said. Shares of Miller Energy began to decline in value when people realized the company was understating extraction costs and the stock was ultimately delisted by the New York Stock Exchange, the suit said. Miller Energy filed for bankruptcy in late 2015.
The court on Thursday said the investors sufficiently argued that KPMG concealed “adverse material information” about Miller Energy. The investors have said KPMG shielded Miller Energy from investor scrutiny by vouching for its financial statements even though the accounting firm had "unfettered access" to documents that would have exposed the fraud.
The investors adequately claimed KPMG exhibited an “egregious refusal to see the obvious, or to investigate the doubtful,” the order said.
Toll said establishing scienter, or alleged knowledge of wrongdoing, against an auditor on a motion to dismiss is especially difficult.
“So it was a very good thing to get that win,” Toll said.
The investors are represented by Gordon Ball of Gordon Ball PLLC, and Steven J. Toll, Times Wang and Laura H. Posner of Cohen Milstein Sellers & Toll PLLC.
The complete article can be accessed here.