KPMG Sued For Giving Tom Hicks "Clean Audit" a Year Before $525-Million Loan Default

By Robert Wilonsky Wed., Mar. 30 2011 at 12:08 PM

Categories: Biz, Sports

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Courthouse News has the lawsuit: GSP Finance LLC v. KPMG LLC, an alphabet soup's worth of names that sounds thoroughly uninteresting. Until, that is, you crack open the case and discover that GSP Finance is the lending arm of Galatioto Sports Partners -- the same company Hicks hired in February 2010 to find prospective investors in or a buyer for the Dallas Stars after Hicks Sports Group defaulted on that $525 million in loans in the spring of '09. Says the suit, GSP Finance loaned Hicks's HSG Sports Group $67 million based upon KPMG's audit, which said everything was fine even though it was far from.

The suit was filed yesterday in the Supreme Court of the State of New York, and in it GPS alleges that KPMG "was well aware of the desperate financial condition of Hicks Sports" -- specifically, the Texas Rangers and Dallas Stars -- when it was hired to conduct the '08 audit. From the suit, which goes on to detail HSG's losses beginning in 2003:

Given access to all of Hicks Sports' financial records, KPMG knew that Hicks Sports lacked the capacity to meet its obligations as they came due and was in breach of a covenant in the credit agreements limiting the debt total it was permitted to assume ("Debt Covenant"). Despite the knowledge, KPMG disregarded the professional duties it owed to GSP and its lenders, and fraudulently issued a clean audit opinion to Hicks Sports.

KPMG's fraud inflicted significant losses on GPS and the lenders. Had KPMG exercised professional due care, its March 31, 2008 independent auditor's report would have disclosed both Hicks Sports' inability to continue as a going concern and its breach of the Debt Covenant. Hicks Sports' failure to obtain a clean audit opinion and certification of its compliance with the Debt Covenant would have resulted in a default of the credit agreement. This would have permitted the lenders to exercise several rights to ensure full repayment of the loans, including terminating the credit agreements and asserting control over the equity interested Hicks Sports held in the Stars and Rangers.

The suit says Hicks Sports Group suffered losses of $113 million in 2002, $67.8 million in '03 and $95 million in '04. Till the Stars are sold, it won't be clear exactly how much Hicks's lenders have lost. But we know they netted around $300 million from the sale of the Rangers last summer.

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There are many different types of audits and a SAS 70 audit is based on controls that the Company feels their clients are interrested in. The controls are not predetermined by the accounting firm nor are they specified by a regulating agency. SAS 70 audits are not mandated. Therefore if the Company did not include specific controls that they knew would reflect their financial difficulties then these areas would have been out of scope for the SAS 70 auditors and could easily have gone undetected. A SAS 70 reviews process controls and is far different from a SOX audit, applicable to publicly traded companies as specified by federal government legislation. I would be focusing on the internal auditors who would have had full scope and oversight responsibility of these financial dealings not the SAS 70 auditors.
I am suing KPMG also for discrimination. I worked for them at their "National Support Center" and the abuse, outright lies, discrimination and fraudulent ratings reports they provided to their own help desk employees was beyond unethical. First off the reports were generated that upper management knew for a long time was broken down and providing flawed ratings to their own people. These reports were the basis for performance bonuses. Imagine that! An accounting firm who's own internal systems were broken down and giving bad analysis information. These reports put women at the bottom of the departmental rankings but based on flawed data they were intentionally representing as accurate. Now for the most disgusting abusive discrimination of all. If a help desk analyst needed to call out sick they would take points off these reports each day they were out on an unscheduled day off. I was admitted to a hospital and another woman took her daughter to the ER and they still penalized us. Their attitude is "having a stroke, heart attack or birthing a baby prematurely? Cross your legs or wait until your scheduled day off. AI am suing KPMG also for discrimination. I worked for them at their "National Support Center" and the abuse, outright lies, discrimination and fraudulent ratings reports they provided to their own help desk employees was beyond unethical. First off the reports were generated that upper management knew for a long time was broken down and providing flawed ratings to their own people. These reports were the basis for performance bonuses. Imagine that! An accounting firm who's own internal systems were broken down and giving bad analysis information. These reports put women at the bottom of the departmental rankings but based on flawed data they were intentionally representing as accurate. Now for the most disgusting abusive discrimination of all. If a help desk analyst needed to call out sick they would take points off these reports each day they were out on an unscheduled day off. I was admitted to a hospital and another woman took her daughter to the ER and they still penalized us. Their attitude is "having a stroke, heart attack or birthing a baby prematurely? Cross your legs or wait until your scheduled day off. A woman testified in front of congress about “how wonderful KPMG is for women” and how “they promote family support”. I have seen the video testimony on the internet. The lies even extend to their Ethics & Compliance group. KPMG boasts and advertises about how they have a wonderful Ethics program that investigates every report. I made such an internal report. The group never once replied to me and when KPMG closed the report they did it with someone the intentionally misrepresented to me as a person from the Compliance group. A few weeks after the report was “officially closed” they misrepresented a situation and directly fired me. So much for their Ethics group’s fraudulent representation of “retaliation is not tolerated”. These are just a few of the things that they did. KPMG was brought up on charges regarding their turning a blind eye to improper accounting practices of a major client they didn’t want to lose. They also were sued by other employees regarding overtime pay disputes. This firm has NO ETHICS.
Please, please, please, please, please dear Lord Baby Jesus, lying there in your...your little ghost manger, lookin' at your Baby Einstein developmental...videos, learnin' 'bout shapes and colors..., we hope that you can use your baby Jesus powers to make this not screw up Hick's sale of the Stars. Amen.
Meanwhile, Hicks continues to enjoy the most expensive Estate in Dallas county...at OUR expense !
At this Corporate level, one has to wonder how many sets of "Financials" there are to review...My guess is KPMG got the "street" version !
I'm sure GSP had NO idea that HSG was in poor shape. Give me a break, these guys took a gamble and lost their asses and now they're trying to point the finger to find someone to blame.
In terms of whether its civil or not, it's based on whether the opinion issued was fraudulent or negligent. Basically, if KPMG had the information at hand and did their jobs properly but issued a clean opinion when they should have raised the going concern issue as a qualification, or emphasis, then its fraudulent and criminal. However, if they just didn't pick it up through lack of work and it isn't documented correctly on file, then it's negligent, which may be criminal or civil. Its actually quite difficult to explain here. As a former employee of KPMG I can say that it's easy to cover your bases and still make a mistake like this, but it's unforgivable to miss a debt covenant. They'll probably have their reasons for signing off on the going concern issue though.
Gee, that's intelligent. Did you ever think what audit workload (and thus quality) would do with only 3 of the Final Four remaining? (Hint: Answers are not "decrease" and "improve.") Andersen falling after Enron was a bad thing for the industry, and investors, not a good thing. And JAIL for the audit manager? (Just FYI it's audit PARTNERS that sign off on engagements, not 'managers.') I'm not even going to justify that tripe. This is civil, homeboy, not criminal. Lemme give you some advice. It's wise not to swallow the entirety of what one party's suit claims. KPMG, if it thought there was a going concern issue, would have stated that in their audit opinion (which I have not seen). If they did not, they'll likely have papered the issue thoroughly.
what does SOX have to do w/ it? the company is private, last time I checked
Rather extreme. Auditors will most likely lose a civil case and have to pay several million. It appears to be a violation of SOX.
KPMG's insurance will cover it.
......and people are surprised?
So did KPMG not due the job they were supposed to do in their audit or did they issue their lies based on some manager's approval. Either way all the CPAs involved should lose their right to practice revoked and the audit manager should get toplay house in some federal prison for a few years.