Fraud Charges Against Sports Company Linked with Accounting Firm’s ‘Clean Audit’

Lucas Gilmore, “Big 4″ observer
April 01, 2011 /

The US member firm of global accounting firm KPMG has been implicated in fraud charges against a sports company owned by Tom Hicks for keeping mum on the company’s gloomy financial position before going bust in 2009.

New York-based GSP Finance said in a lawsuit filed in US court that the accounting firm abetted the Hicks Sports Group’s (HSG) failure to disclose to creditors its ailing finances.

“KPMG’s fraud inflicted significant losses on GPS and the lenders. Had KPMG LLP exercised professional due care, its March 31, 2008 independent auditor’s report would have disclosed both Hicks Sports’ inability to continue as a going concern and its breach of the Debt Covenant,” the suit said.

Hicks owns the American sports group, which holds the Dallas Stars hockey team and Texas Rangers baseball team. The sports company defaulted on a $540 million credit in 2009.

HSG suffered major losses shortly before Hicks acquired the Liverpool FC in 2007. According to GSP, the sports company lost $113 million in 2002, $67.8 million the year after, and $95 million in 2004.

GSP said it could have recovered the $67 million borrowed by HSG if only the accounting firm did raise concerns about HSG’s inadequate cash to sustain interest payments and debts.

The suit added that the lenders could have claimed full loan repayment had KPMG LLP not given HSG a clean audit. This would then result in a default of credit agreement between the sports company and creditors ahead of time.

Although HSG paid the loans under the agreement before March 2009 ended, the sports company’s loan covenants were already in default in 2008, which KPMG failed to address, GSP claimed.

According to the finance company, the accounting firm raised no question in its March 2008 audit about HSG’s inability to meet loan agreements after it had exceeded the $600 million credit agreement.

GSP said that HSG “added more than $100 million in liabilities to its balance sheet, attempted to affect a sale of the Texas Rangers that would have diverted millions away from the lenders.”

The sports company had also timed its default on March 2009 to keep control of its assets, disabling lenders to “accelerate and foreclose on the amounts owed at a time when the capital markets were deteriorating.”

According to the lawsuit, proceeds of the loan covenant were used by HSG to restructure its debt and finance its ailing subsidiaries. But even the proceeds failed to save the sports company from losing tens of millions of dollars a year.

HSG’s further attempt to sell the Rangers was blocked by creditors, but to no avail after the sports company filed Chapter 11 (bankruptcy protection) and then finally sold the team.

GSP, which is owed $300 million, seeks full compensation and punitive damages.

Meanwhile, the suit charges the accounting firm with abetting fraud, negligent misrepresentation, and civil conspiracy.

 

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