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KPMG
Settlement Disclosed in Court Documents
Accounting firm KPMG Peat
Marwick has agreed to settle a case with mutual fund
shareholders and establish a settlement fund of $13.9
million, according to documents filed with the federal
district court in St. Paul, MN. Rodney v. KPMG Peat
Marwick LLP, 4-95-CIV-800 (D.C. Minn.) The unusual
move comes months after KPMG's Motion for Summary
Judgment, originally granted by the court, was
reversed and remanded by the Eighth Circuit Court of
Appeals (Federal Securities Law Reports, 1998 CCH Dec.
¶90,208). A short time after the settlement agreement
was filed with the court, the trial judge entered an
Order Preliminarily Approving the Settlement. The
order incorporates the settlement agreement,
establishes a procedure for notice to potential
settlement class members and sets a date for
finalization of the agreement.
The stipulated agreement, signed
by all the parties to the litigation, calls for
creation of the settlement fund, appointment of an
escrow agent and outlines the procedure by which KPMG
will deliver the settlement funds once a final order
is entered. The agreement also establishes a method by
which the settlement class will be determined. For
their part, KPMG will be released from any further
obligations or responsibilities to the plaintiff
class. All fees and costs associated with the
plaintiff's litigation will be paid from the
settlement fund.
Basis of
the Plaintiff's Original Claims
The original complaint in this
case was brought in May 1994 by shareholders of the
Piper Funds' Institutional Government Income Portfolio
against the fund, its managers and other individuals.
A second complaint, naming KPMG as a defendant, was
filed in August 1994. For a brief period the cases
were consolidated and shareholders subsequently
settled their action against the fund in 1995. The
claims against KPMG continued to move toward trial.
The central focus of the
complaint alleges, in part, that the fund violated its
stated investment objectives, policies and
restrictions and KPMG failed to alert shareholders of
these and other problems. Specifically, the fund was
accused of investing in derivatives "and using
leverage in the form of mortgage dollar rolls."
Then, the complaint states, as a result of the Federal
Reserve Boards' move to tighten monetary policies and
a resulting slow-down in mortgage refinancing, the
fund lost a disproportionate value due to its
investment in these mortgage-related securities.
The plaintiffs allege that KPMG,
as auditor for the fund, made false and misleading
statements in the fund's prospectuses, registration
statements and annual reports. The complaint alleges,
among other acts and omissions, that KPMG did not
audit the fund according to generally accepted
accounting standards. The plaintiffs further allege
that KPMG failed to note, in the condensed financial
information, that investment results were obtained by
investment practices inconsistent with the fund's
objectives, policies and restrictions.
In its discussion of KPMG's
allegedly flawed analysis of the fund, the complaint
states that a principal objective of a fund audit is
to determine whether transactions are authorized and
if there are reasonable assurances that the fund is
complying with restrictions under its investment
objectives and policies. Another purpose of the audit,
the complaint states, is to test all portfolio
valuations as of the date of the fund's financial
statements. The plaintiffs claim that had KPMG
conducted the audit in the proscribed manner it would
have discovered the fund was "engaging in the
wrongful conduct" alleged by the plaintiffs. As a
secondary result of these omissions, the plaintiffs
state, rating services such as Morningstar were
mislead as to the funds' strength.
Reversal of Fortunes
After several months of
pre-trial litigation in 1998, the district court
granted KPMG's Motion for Summary Judgment based upon
the accounting firm's argument that anything they may
have omitted, which they denied doing in the first
place, would not have materially altered their audit
findings. The U.S. Court of Appeals for the Eighth
Circuit reversed the district court's ruling in a 2-1
decision and sent the case back for further
proceedings. A second Motion for Summary Judgment made
by KPMG was denied and the parties soon after entered
into the Stipulation of Settlement.
For its part, KPMG has largely
relied on the settlement agreement to express its
position. "KPMG strongly denies any wrongdoing or
liability relating to matters alleged in the
complaint," the Stipulation states.
"Nonetheless, defending this case has been
expensive and time-consuming, so that KPMG has
concluded that proceeding further with the litigation
would, in light of the proposed settlement, be unduly
expensive, burdensome and protracted ... KPMG has,
therefore, concluded that it is in its best interests
to settle the litigation in the manner and upon the
terms and conditions set forth in th[e]
stipulation."
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