KPMG Sanctioned for Hiding Documents

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Orange County Superior Court Judge Geoffrey Glass recently sanctioned KPMG LLP for hiding critical documents in a $50 million accounting malpractice lawsuit brought against the firm by Targus Group International, a mobile computer case and accessory supplier. The Court concluded in its ruling that KPMG "withheld or delayed in producing many responsive documents in order to gain unfair advantage."

Judge Glass sanctioned KPMG by ordering, among other things, that Targus will be allowed to present evidence at trial of KPMG's recklessness when performing audits and will be entitled to seek punitive damages. Judge Glass further directed that the jury will be instructed that KPMG failed to produce requested documents and "misled Targus about the existence and nature of those documents" and that the jury may consider KPMG's conduct when reaching its verdict. KPMG was also ordered to pay Targus $30,000 for KPMG's "abuse of the discovery process."

On January 30, 2003, Targus filed suit against KPMG for alleged professional malpractice. Targus will now be allowed to amend its complaint to allege recklessness and seek punitive damages.

Targus based its motions in court on KPMG's flagrant discovery abuse and other blatant litigation misconduct spanning over a two year time period from 2003 to 2005. Targus alleged that KPMG and its counsel intentionally hid and failed to produce to Targus critical "smoking gun" documents regarding its audit and business policies, and training programs in effect during 1996 through 2001. Targus was ultimately able to discover the existence of these documents, nearly all of which KPMG had stored on CDs in a KPMG library, earlier this year only through Targus' own continuing investigation.

From 1993 through 2001, Targus employed KPMG as it global auditors and business and tax consultants. Beginning in 1997 through 2001, Targus' then CFO, William Anthony Lloyd, embezzled over $40 million from Targus by utilizing the company's credit facilities and cash for his personal benefit. In connection with attempting to hide his embezzlement unknown to the company, Lloyd created false and fraudulent entrees on the company's books and records, all of which went undetected by KPMG during numerous audits for the company.

By way of its lawsuit, Targus alleges that had KPMG competently audited Targus' financial statements and met its professional obligations, Targus would have been alerted to Lloyd's embezzlement years before August of 2001 and would not have suffered significant financial harm. Instead according to Targus, KPMG recklessly and negligently performed its audits for Targus, including by way of failing to perform the most basic audit procedures and assigning incompetent, inexperienced, and in some instances, unlicensed accountants to supervise and manage Targus' audits. Among the auditors KPMG assigned to Targus was David Hori, a KPMG audit manager suspended by the Securities and Exchange Commission (SEC) in October 2004 for engaging in improper professional conduct as an auditor. As a result of KPMG's recklessness, Targus alleges that it has suffered approximately $50 million in embezzlement related losses.


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