An island-based arm of accountancy giant KPMG is to face a £100m claim in Douglas high court over allegations of professional negligence.
The claim has been brought by the liquidator of island-incorporated Heather Capital Limited, which operated an investment scheme that lent money in the property market, but was suspended in 2009 and subsequently wound up by order of the court.
Heather Capital’s two executive directors were Gregory King and Santo Volpe who are both alleged by the liquidator to have been fraudsters, although neither have been charged with any criminal offence, the court heard.
KPMG Audit LLC had been Heather’s auditor from August 2006.
Heather’s liquidator alleges that in the course of its audits KPMG negligently failed to detect and report frauds and imprudent lending by Heather’s management and as a result the company and its shareholders suffered substantial losses. KPMG denies this.
The liquidator issued three sets of proceedings against KPMG based on these allegations of professional negligence - to recover damages for losses allegedly suffered by Heather and its shareholders, Aarkad plc and Lomond Capital LLC. Total damages claimed exceed £100m.
Between October 2005 and February 2007 Heather made loans of approximately £95m to 10 special purpose vehicles incorporated in Gibraltar.
The liquidator alleges these loans were fraudulent – they were not genuine investments but a means for Mr King and Mr Volpe to divert money from Heather for purposes of their own.
This alleged fraud took place before KPMG’s alleged negligence, however, and the liquidator recognised that KPMG cannot be held responsible for any losses suffered on the loans themselves.
During the course of KPMG’s audit work it discovered, in March 2007, that the documentation for the SPV loans was unsatisfactory.
In the meantime the loans were repaid but the liquidator alleges this was achieved by circular loans made by Heather routed through two companies called Mathon and Bathon and ultimately back to Heather.
The liquidator alleges that KPMG should have detected and reported that Mr King and Mr Volpe were operating a ‘Ponzi’ scheme under which repayments to Heather were funded by Heather itself and that the SPV loans were not genuine.
Mr Volpe took the blame for the SPV loans and resigned as a director of Heather in September 2007.
KPMG, which denies all allegations of negligence, applied for the case against it to be struck out, arguing that it could not be held responsible for the losses.
But Deemster Andrew Corlett said he was not persuaded that any of the three sets of proceedings should be struck out. He said the case should proceed to trial as expeditiously as possible.