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KPMG Settles Novel Fund Liability Case

KPMG LLP of New York last week saved itself and the accounting industry from the potential of a court case that could have expanded the liability of accountants who audit mutual funds.

KPMG agreed to pay $13.9 million to approximately 8,000 investors who suffered losses as a result of their investment in the Piper Institutional Government Income Fund from 1991 to 1994, according to filings made March 13 in U.S. District Court in St. Paul, Minn. The court must approve the settlement.

Had KPMG litigated the case and lost, the decision could have provided legal precedent to support the investors' novel theory that fund auditors could be held liable for failing to detect inappropriate fund investments.

KMPG admitted no liability in settling the case.

"KPMG believes that the settlement represents a successful resolution and we consider the matter closed," said John Fidler, a KPMG spokesperson. He declined to comment further.

A final hearing to approve the settlement proposal is not expected before summer, said Vernon Vander Weide, a lawyer at Head Seifert & Vander Weide of Minneapolis, Minn. and one of the lawyers representing investors in the case.

The Piper Institutional fund sank in value in 1994 when interest rates rose sharply. Derivatives that the fund held lost value as interest rates rose. Shareholders in their class action lawsuit contended that the derivatives' riskiness was inconsistent with the investment restrictions of the fund. KPMG had a duty to identify the derivatives, conclude that they violated the fund's investment restrictions and disclose that fact, according to the lawsuit.

U.S. District Court Judge Donovan W. Frank ruled in August that the case could go to trial. (MFMN 9/13/99) KPMG and lawyers for the shareholders reached an agreement in principle to settle the case on the eve of the scheduled Feb. 1 trial, Vander Weide said. Lawyers worked out details of the proposed settlement in recent weeks, Vander Weide said.

Because of the settlement, Vander Weide expressed skepticism that the case would provide a precedent for future litigation against accountants. Although earlier rulings in the case allowed it to proceed to trial, the KMPG case appears to be rare and perhaps unique, Vander Weide said.

Since 1994, the accounting profession has changed the rules that govern how far a fund auditor must go when conducting an audit. A key allegation in the KPMG case was that the firm had violated the 1994 audit standards, Vander Weide said. With changes in the profession's standards, it should be more difficult to hold accountants liable for assessing whether particular investments are inconsistent with a fund's investment objectives, Vander Weide said.

That was cold comfort for some accountants. While the settlement may not provide formal legal precedent, it may encourage more plaintiffs' lawyers to file cases against accounting firms, some accountants said.

"I think it's going to be wrongly interpreted," said Anthony Evangelista, a partner at PricewaterhouseCoopers of New York, of the settlement. "I think it opens the door for frivolous lawsuits to be entertained."

Lawyers for shareholders in the KPMG case intend to ask for fees equal to one-third of the settlement amount in addition to expenses, Vander Weide said. Lawyers have litigated the case since 1994 through various appeals and pre-trial fact-finding.