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