Risk Management

Verdict Against KPMG Could Lead to $41M Payment

Cast Art Industries wins New Jersey case in which it had claimed malpractice and negligence over the accountancy's opinions about an acquired company.
Roy Harris and Stephen TaubOctober 14, 2008

In an earlier version of this story, the amount of the jury award against KPMG was given as “more than $41 million,” although the actual dollar amount cited by the jury was $31.8 million. The $41-million-plus figure reflects interest on that amount. The original headline also incorrectly identified Cast Art Industries as a former KPMG client.

A New Jersey Superior Court jury said that KPMG must pay $31.8 million for professional malpractice and negligence for failing to detect financial fraud at a former client, according to the law firm representing the plaintiff in the case. With interest, the award could top $41 million, the law firm said.

KPMG plans to appeal the verdict.

Events in the case date back to December 2000, when Cast Art Industries LLP, a maker of pottery products, acquired Papel Giftware Inc. for nearly $50 million. Cast Art sued KPMG in 2003 for professional malpractice and negligence for failing to detect a massive financial fraud at Papel, KPMG’s client prior to the acquisition, according to Eagan O’Malley & Avenatti LLP, Cast Art’s attorney.

The plaintiff claimed that for three years prior to the acquisition of Papel, KPMG repeatedly affirmed that Papel’s financial statements were accurate when in reality the company’s management had engaged in a number of fraudulent schemes designed to inflate the value of the company to potential buyers.

A KPMG spokesman, Dan Ginsburg, told CFO.com that the accountancy does not believe that there is a factual basis for the verdict, and is “confident it will be reversed on appeal.” He added, “KPMG had issued going-concern audit opinions stating that there was substantial doubt about the [Papel’s] ability to continue as a going concern on the very financial statements that plaintiffs relied on to purchase Papel Giftware.”

Cast Art had alleged that Papel’s management booked tens of thousands of fraudulent transactions by, among other things, purposely shipping product to phony customers and double- and triple-shipping the same product to the same customer. The case was tried in New Jersey’s Middlesex County.

In one E-mail uncovered during the lawsuit, a member of Papel’s management described how the company had “raped and pillaged to an extreme” in order to meet its forecasts, according to the law firm. A KPMG partner later acknowledged, in a memorandum he sent to others at KPMG, that Papel’s management could not be trusted, the law firm also said.

“Despite this, KPMG repeatedly represented to Cast Art and others that Papel’s financial statements were accurate and no fraud had occurred,” according to a press release back in July that announced that the New Jersey Superior Court judge had ordered the case go to trial.