Fannie Files $2 Billion Lawsuit

In a lawsuit filed in Washington D.C. Superior Court, Fannie accused KPMG of “professional negligence” and “breach of its duties.” Fannie is seeking more than $2 billion in damages, which includes more than $1 billion to redo its books.

“For more than 30 years Fannie Mae turned to KPMG to analyze its accounting policies and perform (a) critical watchdog function,” Fannie said in the lawsuit. “Fannie Mae paid KPMG tens of millions of dollars to do so.”

But, Fannie claims,”KPMG did nothing more than rubber-stamp Fannie’s internal accounting decisions, in defiance of KPMG’s professional obligations and the very purpose for which it was hired.”

Fannie fired the auditor in December of 2004 after the Securities and Exchange Commission ordered that Fannie restate two years of earnings. The debacle resulted in a major management shake up at Fannie and invited more government and Congressional scrutiny of the government-sponsored enterprise, or GSE.

A KPMG spokesman would not comment directly on the allegations but said the auditor is pursuing its own legal claims against Fannie.

“The issues involved in the lawsuit filed by Fannie Mae are already pending in federal court in Washington,” KPMG spokesman Tom Fitzgerald told MortgageDaily.com.”Accordingly we removed the suit to that same federal court where we intended to pursue our own claims against Fannie Mae.”

James B. Lockhart III, director of the Office of Federal Housing Oversight, or OFHEO, said in a statement that the lawsuit is “appropriate and consistent” with its own probe of Fannie’s accounting.

“Fannie Mae’s filing today of a complaint against KPMG alleging malpractice, breach of contract and negligence for its failures in providing advice and services to the enterprise and for its role in contributing to billions of dollars in direct damages and other harm to the enterprise is appropriate and consistent with the findings of OFHEO’s Special Examination reports,” Lockhart said in the statement.

Fannie made has had to pay millions of dollars to settle claims against the company. It paid $400 million to the federal government and still faces shareholder and other lawsuits.

Fannie claims that a KPMG accountant who worked on its books had problems with another large company.

Joseph Boyle worked on the Fannie account as well as on the books for Xerox, according to the suit.

Boyle, Fannie said, agreed to a Securities and Exchange Commission fine and suspension from practice “for failing to abide by professional audit standards in connection with KPMG’s audit of Xerox.”

“During some of the years that Mr. Boyle presided over the failed auditors of Xerox he also served as KPMG’s ‘client service partner’ for the Fannie Mae audit,” according to the lawsuit.

Earlier this month, the Office of the Comptroller of the Currency fined Grant Thornton LLP $300,000 for reckless conduct in performing the audit of First National Bank of Keystone’s financial statements for 1998.

Grant failed to comply with Generally Accepted Auditing Standards in conducting an acknowledged maximum risk audit by, among other things, ignoring “unequivocal, written evidence” that nearly 25 percent of First National’s assets could not be accounted for, OCC reported.

PricewaterhouseCoopers recently agreed to settle with investors of PinnFund USA for $39.5 million, according to court documents. The plaintiffs in that case claimed the auditors failed to notify them of an audit that was aborted upon the discovery of financial fraud.

PwC was accused of not revealing irregularities it found during an aborted audit of two limited partnerships set up to invest in loans issued by PinnFund, which effectively aided the funds’ general partner in defrauding them.

Similar:

Auditors Fined for Failed Bank’s Financials
The Office of the Comptroller of the Currency has fined an auditing firm $300,000 for standing behind the financial statements of a bank that was found to be insolvent shortly thereafter.

Aborted Audit Excruciates Auditors
Auditors have settled for nearly $40 million a lawsuit charging them with failing to notify investors of an audit that was aborted upon the discovery of financial fraud. The settlement caps the sensational history of a mortgage banker that used hundreds of millions of dollars intended to fund mortgage loans for his own lavish lifestyle — buying himself a yacht, giving his adult-film actress girlfriend a mansion, and driving his company into a massive bankruptcy.

Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: PatCrowley@MortgageDaily.com