O'Melveny & Myers and KPMG have been slammed in a highly anticipated report into the collapse of sub-prime mortgage company, New Century Financial filed yesterday (Wednesday 26 March) in the US bankruptcy court in Delaware.
K&L Gates partner Michael Missal's 550-page report heavily criticises the business practices at New Century and slams the company's auditors, KPMG. It highlights examples of improper conduct by both New Century and its auditors, KPMG and lists several causes of action available, including claims for negligence. According to the report, "These causes of actions could seek millions of dollars in recoveries".
In a related issue, the conduct of New Century's external lawyers, Suzzanne Uhland and Ben Logan from O'Melveny & Myers was severely criticised by Missal in an earlier interim report, filed last November.
Missal claimed the O'Melveny team had not been "forthright" over an issue during the investigation that centred on whether New Century had improperly spent cash collateral after it filed for bankruptcy. The company and O'Melveny's actions significantly delayed the investigation, Missal said.
Sources suggest the firm could find its fee, estimated at around $25m, cut significantly as a result. An O'Melveny spokesperson commented: "The professional fees in this case are subject to the review and approval of the Court."
In the report filed yesterday, it is KPMG that comes in for particular criticism. The report highlights an email exchange between KPMG executives over a particular accounting issue in which the lead partner said: "I am very disappointed we are still discussing 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."
A KPMG spokesman said: "We strongly disagree with the report's conclusions concerning KPMG and we believe that an objective review of the facts and circumstances will affirm our position."
Missal's report concludes an eight-month investigation that began with his appointment as bankruptcy court examiner by the US Department of Justice in June 2007. His report is noteworthy not only for its criticism of New Century and KPMG but also for the detailed insight it provides into the roots of the sub-prime market collapse.
New Century was once the second-largest originator of sub-prime residential mortgages in the US, originating $60bn in mortgage loans in 2006. It filed for Chapter 11 bankruptcy protection on 2 April last year after revealing in February it needed to restate its 2006 interim financial statements. According to Missal's report, this event "caused a dramatic and swift descent of the company".
New Century's stock price plummeted and its banks eventually shut off credit lines. The company stopped accepting new loan applications on 8 March and the NYSE delisted its securities five days later.