MIAMI (Reuters) –
Accounting giant KPMG was hit with a billion-dollar lawsuit on Wednesday over claims its "grossly negligent audits" helped trigger the collapse of a top subprime mortgage lender at the start of the U.S. housing crisis.
New Century Financial Corp, the largest independent provider of home loans to people with poor credit, filed for bankruptcy two years ago amid mounting customer defaults.
Its failure rippled across the U.S. mortgage lending industry, sparking a string of other bankruptcies that roiled financial markets as banks booked losses on billions in mortgage-linked securities at the heart of the current global financial crisis.
The lawsuit, on behalf of a liquidating trust formed by New Century debtors, was filed against both KPMG International (KPMG.UL) and its U.S. arm, KPMG LLP.
It accuses KPMG of helping cover up "catastrophic" problems at New Century -- including accounting and financial errors -- that led to its collapse.
"As New Century's auditor, KPMG failed its public watchdog duty," the suit says.
KPMG spokesman Dan Ginsburg said he had not seen the suit and had no immediate comment. But the company said in a statement that it had acted "in accordance with professional standards" in it dealings with New Century.
"We will vigorously defend our audit work. Any implication that the collapse of New Century was related to accounting issues ignores the reality of the global crisis. This was a business failure not an accounting issue," the statement said.
The suit demands at least $1 billion in damages.
At one point, KPMG "did the unthinkable for a public auditor," the lawsuit alleges. It issued an audit report on New Century's 2005 financial results before its audit was complete, "falsely enabling" New Century to file its annual report with the U.S. Securities and Exchange Commission.
Many of the problems at New Century stemmed from aggressive business practices that saw the company grow from originating $357 million in mortgage loans in its first year of operation in 1996 to about $60 billion in 2006.
Despite its denial of wrongdoing, an independent report requested by the U.S. Department of Justice found that KPMG either initiated accounting fraud at New Century or stood idly by as it committed fraud in 2005 and 2006.
"Despite KPMGI's promise that it would ensure that KPMG LLP audit services would comply with professional standards and regulatory requirements, KPMG LLP conducted grossly negligent audits and reviews of New Century that violated both professional standards and regulatory requirements," the complaint says.
The suit was filed by Venice, California law firm Thomas Alexander & Forrester LLP. Different, but overlapping versions of the complaint, targeting the Netherlands-based parent company (KPMGI) and U.S. arm of KPMG, were filed in federal courts in New York and Los Angeles, respectively.
The New York suit could mark the first time a Big Four auditing firm is held legally liable for the actions of its U.S. subsidiary, said Steven Thomas, the lead attorney for the plaintiff.
"This wasn't an audit failure that affected a small company, it wasn't an audit failure that just affected their creditors, or even just affected the U.S. financial system. This had a worldwide impact," Thomas told Reuters.
(Editing by Maureen Bavdek, Leslie Gevirtz)