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New Century Mortgage Bankruptcy Trustee filed lawsuit against KPMG

New Century Mortgage Bankruptcy Trustee filed lawsuit against KPMG

Ratings: (0)|Views: 203|Likes:
Published by 83jjmack
This is one of the lawsuits Judge Carey ordered the bankruptcy trustee for New Century Mortgage to file against KPMG, which was New Century's auditor.

There is a second case similar filed in California
This is one of the lawsuits Judge Carey ordered the bankruptcy trustee for New Century Mortgage to file against KPMG, which was New Century's auditor.

There is a second case similar filed in California

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Published by: 83jjmack on May 20, 2010
Copyright:Attribution Non-commercial

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10/24/2012

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Complaint for Declaratory Relief 
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Thomas, Alexander & Forrester LLP
 
Steven W. Thomas (State Bar No. 168967)Emily Alexander (State Bar No.
220595
)THOMAS, ALEXANDER & FORRESTER LLP14 27th AvenueVenice, California 90291
 
Tel.: 310 961-2536Fax: (310) 526-6852Attorneys for Claimant The New CenturyLiquidating Trust and Reorganized NewCentury Warehouse Corporation, by andthrough Alan M. Jacobs, as LiquidatingTrustee and Plan Administrator 
SUPERIOR COURT OF THE STATE OF CALIFORNIAIN THE COUNTY OF LOS ANGELES
The New Century Liquidating Trust andReorganized New Century WarehouseCorporation, by and through Alan M.Jacobs, as Liquidating Trustee and PlanAdministrator,Plaintiff,v.KPMG LLP,
 
a Delaware Limited LiabilityPartnershipDefendant.)))))))))))))))))Case No. ____________________ 
COMPLAINT FOR DECLARATORYRELIEF; NEGLIGENCE AND AIDINGAND ABETTING BREACH OFFIDUCIARY DUTY
1.
This is an action for declaratory relief, negligence and aiding andabetting breach of fiduciary duty against KPMG LLP (“KPMG”). By the allegationsherein, Plaintiff The New Century Liquidating Trust and Reorganized New CenturyWarehouse Corporation, by and through Alan M. Jacobs, as Liquidating Trustee and PlanAdministrator (the “Trustee” or “Plaintiff”) (together, “New Century”), seeks a
 
 -2-
Complaint for Declaratory Relief 
 
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Thomas, Alexander & Forrester LLP
 
declaration that the arbitration agreement between the parties is void because DefendantKPMG intentionally included a prohibition on punitive damages in the parties’ arbitrationagreement it knew was illegal, against public policy and unenforceable. Plaintiff alsoasserts claims for negligence and aiding and abetting breach of fiduciary duty againstKPMG as the auditor of New Century for its reckless and grossly negligent audits of NewCentury and its knowledge of and substantial assistance with the breaches of fiduciaryduty by New Century’s officers and directors.
INTRODUCTION
2.
Audits of financial statements can only be done by independent,certified
 public
accountants. Audits of public companies like New Century are required by law to protect creditors, the investing public, the Company’s employees and other stakeholders, and the Company itself. Because of this special responsibility the UnitedStates Supreme Court holds auditors like Respondent KPMG to be the “publicwatchdog.”
3.
KPMG failed its public watchdog duty. The result was catastrophic.
4.
Founded in 1995, New Century was a mortgage finance companythat both originated and purchased residential mortgage loans, the majority of which weresubprime loans. As the subprime mortgage market grew, so did New Century — NewCentury’s reported assets grew from $300,000 in 1996 to $26 billion in 2005.
5.
With the backdrop of New Century’s rapid growth, New Century’sBoard of Directors and Audit Committee questioned management’s incentives to manageearnings and therefore engage in aggressive accounting — precisely the type of risks anindependent auditor is there to watch for and respond to. New Century and the users of its financial statements depended on its gatekeeper, KPMG, to ensure that those financialstatements were fairly presented in accordance with GAAP and free of materialmisstatement due to error or fraud.
 
 -3-
Complaint for Declaratory Relief 
 
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Thomas, Alexander & Forrester LLP
 
KPMG
 
Was Not Independent
 
6.
KPMG did not act like a watchdog. Instead, KPMG assisted in themisstatements and certified the materially misstated financial statements.
7.
When specialists within KPMG tried to point out misstatements inthe financial statements, they were silenced by the KPMG partner in charge of the NewCentury audits to protect KPMG’s business relationship with, and fees from, NewCentury. When a KPMG specialist, John Klinge, continued to raise questions about anincorrect accounting practice on the eve of the Company’s 2005 Form 10-K filing, JohnDonovan, the lead KPMG audit partner told him: “I am very disappointed we are stilldiscussing this. As far as I am concerned we are done. The client thinks we are done.All we are going to do is piss everybody off.”
8.
KPMG then did the unthinkable for a public auditor — it issued itsaudit report before its audit was complete, falsely enabling New Century to file its Form10-K.
9.
KPMG acted as a cheerleader for management, not the publicinterest. KPMG lacked the independence required by the ethical and SEC rules thatgovern it. Because KPMG lacked independence, KPMG could not even issue its auditopinions, perform reviews, or audit the internal control of New Century. KPMG’s auditsand reviews thus failed as a matter of law and ethics.
KPMG Was Grossly Negligent
10.
Even apart from KPMG’s lack of independence, KPMG still performed grossly negligent audits and reviews. Because KPMG violated basic audit andreview requirements, KPMG failed to detect material errors in New Century’s financialstatements, including New Century’s residual interest asset in the loans it securitized andin its loan repurchase liability.
11.
KPMG’s audit and review failures concerning New Century’sreserves highlights KPMG’s gross negligence, and its calamitous effect — including the bankruptcy of New Century. New Century engaged in admittedly high risk lending. Its

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