May 07, 2021

Accounting giant KPMG will have to face a certified class' claims that it helped the now-defunct Miller Energy Resources Inc. falsify financials about oil and gas assets, a Tennessee federal judge ruled Friday.

U.S. District Judge Thomas A. Varlan overruled KPMG's objections to a federal magistrate judge's report recommending certification for the class of Miller Energy investors, despite the auditor's assertion that it had, among other things, rebutted the presumption that all members of the class had relied on its public statements when deciding to invest.

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The judge also largely denied a bid to toss some of the claims facing KPMG in the 2016 suit, which alleges that 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 claim.

Around the same time, the U.S. Securities and Exchange Commission began asking about the value of the assets, and a financial website reported that the company had overvalued them, according to court filings.

KPMG endorsed the figures nonetheless, the investors allege. 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, according to the suit. Miller Energy filed for bankruptcy in late 2015.

The investors claim 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 SEC fined KPMG $6.2 million for its alleged Miller Energy audit failures in 2017.

In 2018, Judge Varlan concluded that a media report and questioning by the SEC 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.

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The judge also elected to accept U.S. Magistrate Judge Debra C. Poplin's recommendation that the Miller Energy investors be certified as a class despite KPMG's various objections, including that the investors had failed to prove that Miller Energy's stock was traded on an efficient market and that KPMG had rebutted the so-called presumption of class-wide reliance on its alleged misstatements.

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With the class certification issue decided, a stay in the case has been lifted, and the litigation will advance toward a trial set for February 2022.

Counsel for the investors told Law360 on Friday that the class was pleased with the court's decisions and looked forward to pushing forward with what is a "rare securities case brought against an auditor."

"Like the SEC found after the filing of the initial complaint in our case, we believe that KPMG failed miserably in its critical gatekeeping role in connection with the fraud at Miller Energy," Laura Posner of Cohen Milstein Sellers & Toll PLLC told Law360. "KPMG, no stranger to serious, regulatory and even criminal proceedings during the pendency of this case, misled investors into believing that their investments in Miller Energy were sound and that the company's financial statements were accurate."

The investors are represented by Steven J. Toll, Jan Messerschmidt and Laura H. Posner of Cohen Milstein Sellers & Toll PLLC and Gordon Ball of Gordon Ball PLLC.

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