Big Four auditing firm KPMG, LLP has been ordered by a New Jersey Superior Court judge to stand trial in a massive accounting fraud lawsuit.

Eagan O'Malley & Avenatti today announced that Big Four auditing firm KPMG, LLP has been ordered by a New Jersey Superior Court judge to stand trial in a massive accounting fraud lawsuit. Cast Art Industries, LLP v. KPMG, LLP, Superior Court of New Jersey Law Division - Middlesex County (Docket No. MID L-3295-03). Cast Art sued KPMG in 2003 for professional malpractice and negligence for allegedly failing to detect a pervasive financial fraud at Papel Giftware, Inc. prior to Cast Art acquiring Papel in December 2000 for nearly $50 million.
In a just released written opinion, The Honorable Judge Heidi Willis Currier found sufficient evidence for a jury trial to proceed against KPMG, Papel's auditor. In one e-mail uncovered during the lawsuit, a member of Papel's management described how the company had "raped and pillaged to an extreme" in order to meet its forecasts. A KPMG partner later acknowledged, in a memorandum he sent to others at KPMG, that Papel's management could not be trusted. Despite this, KPMG repeatedly represented to Cast Art and others that Papel's financial statements were accurate and no fraud had occurred.
"Wall Street, Main Street, investors, and the public at large depend on auditing firms to be truthful and accurate when reporting on the financial condition of company," stated Michael Avenatti, a lawyer for Cast Art. "In this case, like in too many others, KPMG cut every possible corner and fell woefully short." Earlier this year, a court-appointed investigation blasted KPMG for sanctioning dubious accounting practices at New Century Financial Corp., thereby assisting in the collapse of the subprime lender and contributing to the subprime market meltdown.
Cast Art claims that for three years prior to its acquisition of Papel, KPMG repeatedly affirmed that Papel's financial statements were accurate when in reality the company's management had engaged in a number of fraudulent schemes designed to inflate the value of the company to potential buyers. Cast Art alleges that Papel's management booked tens of thousands of fraudulent transactions on the company's books and records by, among other things, purposely shipping product to phony customers and double and triple shipping the same product to the same customer. Cast Art plans to seek close to $50 million at trial. Cast Art is represented in the lawsuit by Michael J. Avenatti of the California law firm Eagan O'Malley & Avenatti, LLP and Alan Wasserman of the New Jersey law firm Wilentz, Goldman & Spitzer, P.A.
Opening statements are expected to begin in the trial on September 15, 2008