A Tennessee federal judge on May 7 greenlighted class certification in a multiyear lawsuit against KPMG by investors of the now-defunct oil and gas company Miller Energy Resources Inc., despite KPMG’s best efforts to get the lawsuit thrown out.
According to Law360, U.S. Magistrate Judge Debra C. Poplin had recommended that the Miller Energy investors be certified as a class despite KPMG’s objections, including that the investors had failed to prove that Miller Energy’s stock was traded on an efficient market.
Last week Judge Thomas Varlan of the U.S. District Court for the Eastern District of Tennessee agreed with Poplin’s recommendation and sided, in this instance, with the plaintiffs. Law360 reported:
Judge Varlan overruled KPMG’s objections to a federal magistrate judge’s report recommending certification for the class of Miller Energy investors, despite the auditor’s assertion that it had, among other things, rebutted the presumption that all members of the class had relied on its public statements when deciding to invest.
“Defendant therefore fails to identify what was in error about [the magistrate judge’s] reasoning, or why defendant’s presented cases are more persuasive, other than that they reach defendant’s desired conclusion,” Judge Varlan said.
The judge also largely denied a bid to toss some of the claims facing KPMG in the 2016 suit, which alleges that Miller Energy paid $4.45 million for oil and gas assets in Alaska that it then claimed to be worth $480 million. Two years after the purchase, in 2011, investors pressured Miller Energy to hire an accounting firm such as KPMG, the investors claim.
Around the same time, the U.S. Securities and Exchange Commission began asking about the value of the assets, and a financial website reported that the company had overvalued them, according to court filings.
A 2011 blog from The Street Sweeper, which was published on the financial markets news website Seeking Alpha, was skeptical of the value of assets that Miller Energy purchased in late 2009. At the time, Miller Energy said the assets were valued at more than $327 million, but The Street Sweeper quoted an energy executive who estimated the assets were worth “only $25 million to $30 million and were offset by $40 million worth of liabilities,” according to an article by the Knoxville News Sentinel.
Judge Varlan said in August 2018 that after KPMG was hired by Miller Energy in 2011, the firm failed to complete an independent audit but instead relied on published reports and defended the valuation of the assets:
Even after a report from TheStreetSweepers questioned the valuation of Miller Energy’s assets, defendant represented to shareholders that the valuation was accurate and that the article was inaccurate.
As Law360 noted, Judge Varlan ruled at that time that the blog post and questioning by the SEC should have opened KPMG’s eyes to Miller Energy’s financial misstatements, and he determined that the investors adequately alleged that as the financial irregularities became apparent, shares of Miller Energy declined. The plummeting value of the shares resulted in Miller Energy stock being delisted by the New York Stock Exchange, according to Law360. Miller Energy filed for bankruptcy in late 2015.
The lawsuit claims Miller Energy and KPMG used “a plethora of false statements, fraudulent accounting, and other fraudulent reporting devices to falsify the financial results of Miller Energy, conspiring to perpetrate a massive fraud on plaintiff and others in member of the investing public.”
The investors also claim that KPMG violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 by making material misrepresentations in relation to the sale or purchase of securities. And they argue that KPMG’s review of Miller Energy’s quarterly financial statements were not in compliance with GAAP, GAAS, and Public Company Accounting Oversight Board standards.
KPMG reached a $6.2 million settlement with the SEC on Aug. 15, 2017, for failures related to its audit of Miller Energy, including:
- Not properly assessing the risks associated with accepting Miller Energy as a client and not properly staffing the audit;
- Not considering and addressing facts known to them that should have raised serious doubts about the company’s valuation; and
- Failing to detect that certain fixed assets were double-counted in the company’s valuation.
The lead engagement partner, John Riordan, also settled charges against him, agreeing to a $25,000 fine and a suspension to practice before the SEC.
According to Law360, the trial is expected to begin in February 2022.