The NandoTimes - Friday, December 13, 2002
The Missouri Department of Insurance on Thursday sued KPMG, alleging it misrepresented the financial statements of its client General American Life Insurance Co. and didn't disclose the risk of an investment product the life insurer sold in the 1990s.
The suit was filed against the New York City-based member of the global accounting network headquartered in the Netherlands in Jackson County Circuit Court in Kansas City.
The suit claims that KPMG, acting in conflicting roles as consultant and auditor, advised General American Life to develop and sell risky so-called Stable Value funding agreements.
The product was attractive to investors because it paid relatively high rates and could be redeemed with only seven days' notice. But a ratings downgrade resulted in demands by holders for billions in their investment in August 1999.
Given enough time, the insurance company could have paid off investors, but the insurer couldn't meet requests to cash out customers in only seven days, said Eric Martin, chief counsel for the Missouri Department of Insurance.
That forced the General American Holding Company to go into receivership and sell its only significant asset - ownership interest in the insurance company - at a greatly reduced price.
The Missouri Department of Insurance, which regulates the industry, arranged for General American Life Insurance Co. to be sold to Met Life for $1.2 billion.
The state agency, acting as receiver of the holding company, is seeking unspecified damages, in its lawsuit against KPMG.
Among the allegations, the lawsuit claims KPMG concealed information, failed to disclose the insurance company's several-billion-dollar liability exposure and failed to exercise due care in performing audits. The suit also says KPMG tried to cover up its actions during the state's investigation of the company's liquidity crisis.
KPMG spokesman Bob Zeitlinger declined comment, saying the accounting firm hadn't seen the lawsuit.