Financial Times reported today that two of the people in the middle of KPMG’s 2018 PCAOB inspection cheating scandal (extensive write-up here if you’ve been under a rock for approximately five years) are likely limping away scot-free minus any Google searches of their name being forever dominated by stories about cheating audit inspections.
Two people found guilty in a corruption scandal involving KPMG and the US audit regulator are set to have their convictions dropped, after prosecutors conceded they had misinterpreted the law.
David Middendorf, a former KPMG managing partner for audit quality, and Jeffrey Wada, who worked at the Public Company Accounting Oversight Board, were convicted of fraud over claims that Wada passed confidential information to KPMG to help the firm prepare for PCAOB audit inspections, in the hope of being given a job at the Big Four firm.
The Department of Justice conceded this week in a court filing that its reading of wire fraud statutes was incorrect, in light of subsequent legal judgments in unrelated cases. It said it would ask for the jury verdict to be set aside and the charges dismissed.
Another KPMG audit quality partner, David Britt, who was deported to Australia after pleading guilty to a similar charge, is now planning to ask the court to allow him to reverse his plea so he can return to the US, his lawyer told the Financial Times.
When we last checked in on David Middendorf in early 2020 he was suspended by the SEC due to his conviction in United States v. Middendorf, 18-CR-36. Let’s run through the indictment quickly while we’re here.
KPMG LLP (“KPMG”) is an accounting firm subject to the PCAOB’s GNF program. KPMG fared poorly in its 2013 and 2014 PCAOB inspections, so in 2015 the firm began making a concerted effort to improve its inspection performance. The Indictment alleges that in addition to KPMG’s various lawful efforts, a handful of KPMG and PCAOB employees orchestrated a scheme to give KPMG access to the PCAOB’s confidential list of audits selected for inspection. Defendants are alleged to have participated in that scheme.
There are six relevant players. Brian Sweet, Defendant Cynthia Holder, and Defendant Jeffrey Wada started out as employees of the PCAOB, assigned to the team tasked with inspecting KPMG. Defendants David Middendorf, Thomas Whittle, and David Britt were employees of KPMG and, in various capacities, were responsible for maintaining audit quality at KPMG. Both Sweet and Holder left the PCAOB and began employment with KPMG in April and August of 2015, respectively.
The Indictment alleges that shortly before Sweet’s last day of employment with the PCAOB in April 2015, he downloaded and copied various confidential PCAOB documents to a personal hard drive. Among these documents was a “planning spreadsheet” containing a list of KPMG audits that had been selected for inspection in 2015—most of which had not yet been officially noticed for inspection by the PCAOB. The Indictment alleges that in response to requests from Middendorf, Whittle, and Britt, Sweet shared this 2015 inspection list with Britt and Whittle, who then passed it on to Middendorf. The Indictment alleges that throughout 2015, Sweet continued to share confidential information, including risk factors used by the PCAOB in making inspection selections, with Defendants Middendorf, Whittle, and Britt.
It seems the conviction hinged on a determination that the Public Company Accounting Oversight Board’s confidential list of planned audit inspections constitutes intangible “property” for the purposes of wire fraud. Thanks to a recent Supreme Court decision in ‘Bridgegate’ (by recent we mean 2020), wire fraud is no longer the junk drawer of convictions.
WSJ:
At issue were the 2016 convictions of Bridget Kelly, a onetime aide to former Gov. Chris Christie, and William Baroni, a Christie appointee at the Port Authority of New York and New Jersey. They were found to have participated in a 2013 scheme to create traffic backups in Fort Lee, N.J., by limiting motorists’ access to the George Washington Bridge that crosses into New York—in retaliation against Fort Lee’s Democratic mayor, Mark Sokolich, for not supporting the re-election bid of Mr. Christie, a Republican.
Jurors found that Ms. Kelly and Mr. Baroni falsely claimed the lane closures were for a traffic study.
“Time for some traffic problems in Fort Lee,” Ms. Kelly said in an August 2013 email after the endorsement didn’t materialize.
The court, in a unanimous ruling by Justice Elena Kagan, said the defendants’ actions involved an abuse of power and political payback, but “not every corrupt act by state or local officials is a federal crime. Because the scheme here did not aim to obtain money or property, Baroni and Kelly could not have violated the federal-program fraud or wire fraud laws.”
David Britt’s lawyer told FT he will try to get the guilty plea reversed and expunged so Britt can return to the US to be reunited with his three adult children and wife who still live here.
