KPMG Sues Over O.C. Bankruptcy Probe

The firm that audited Orange County’s books before its unprecedented bankruptcy sued the state of California on Friday for allegedly conducting a “tainted” investigation aimed at helping the county collect damages from the accountants.

The lawsuit was filed in Sacramento Superior Court on behalf of the accounting firm KPMG Peat Marwick LLP and one of its accountants, Margaret J. McBride. The firm paid Orange County $75 million in May to settle a lawsuit arising from the December 1994 bankruptcy in which the county lost $1.64 billion on speculative investments.

In addition to unspecified monetary damages, the lawsuit asks the court for a temporary restraining order to suspend any ongoing investigation of the accountants. It asks a judge to order accusations against the firm withdrawn and to order a new probe that would be conducted without the alleged bias of the first one.

KPMG “suffered severe harm to their business and professional reputations and throughout the United States as a result of an investigation that violated their due process rights,” the lawsuit alleges.

One example cited by the accounting firm’s attorneys from Sidley & Austin: State investigators “refused to communicate with or receive information from [the firm] for nearly the first two years of its purported ‘investigation,’ while instead communicating improperly with Orange County.”

Defendants named in the suit are: the state Board of Accountancy and the California Department of Consumer Affairs, under which the board operates. The former head of the consumer affairs agency, Marjorie Berte, two officials of the accountancy board, Carol Sigman and Gregory Newington, and board committee member Olaf Falkenhagen were also sued by KPMG.

A spokesman for the California Department of Consumer Affairs said he could not comment on pending litigation.

Sigman, the executive director of the Board of Accountancy, also declined to comment Friday but provided a written report of the state’s findings against KPMG. The findings accuse KPMG of “unprofessional conduct, including gross negligence.”