Score:   1
Docket Number:   SD-NY  1:18-cr-00036
Case Name:   USA v. Middendorf et al
  Press Releases:
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that DAVID BRITT, a former KPMG partner who was the co-head of the Banking and Capital Markets Group within the audit group of KPMG’s Department of Professional Practice (“DPP”), pled guilty today to participating in a scheme to defraud the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections.  BRITT pled guilty to one count of conspiracy to commit wire fraud before the Honorable J. Paul Oetken.

Manhattan U.S. Attorney Geoffrey S. Berman said:  “David Britt, a former KPMG partner, admitted today to obtaining confidential lists that contained the information on which KPMG audits would be reviewed by the PCAOB.  Using the playbook he illicitly acquired, Britt used that information to improve the results his of firm’s audits.  Independent reviews of accounting firm audits exist to ensure their integrity and accuracy.  David Britt corrupted that process and now faces time in federal prison.”

According to the allegations contained in the Indictment filed against BRITT and statements made in related court proceedings, including the trial of co-defendants David Middendorf and Jeffrey Wada:

The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms with respect to the financial statements of publicly traded companies.  The PCAOB inspects the largest U.S. accounting firms on an annual basis.  As part of the inspection process, the PCAOB chooses a selection of audits performed by the accounting firm for a closer review.  Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an auditor does not perform additional work or modify its work papers in anticipation of an inspection.  Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or “comments” with respect to both the specific audits reviewed and the accounting firm more generally. 

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections, and in 2014 received approximately twice as many comments as its competitor firms.  By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel, including Brian Sweet.  At the time, BRITT was a partner in DPP, which was broadly responsible for the quality of KPMG’s audits and KPMG’s performance in PCAOB inspections.

KPMG’s efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, BRITT, David Middendorf, Thomas Whittle, Cynthia Holder, Brian Sweet, and Jeffrey Wada worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results.  For example, during Sweet’s first week of employment at KPMG in 2015, BRITT, Middendorf, and Whittle began asking Sweet for confidential PCAOB information about which KPMG audits would be inspected by the PCAOB that year. 

In March 2016, Holder obtained the PCAOB’s confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion.  Wada – who was not responsible for KPMG inspections at the PCAOB– accessed and stole valuable confidential information from the PCAOB and passed it on to Holder.  Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to Middendorf, Whittle, and BRITT.  Middendorf, Whittle, BRITT, and Sweet then agreed to launch a stealth program to “re-review” the audits that had been selected.  In order to cover up their illicit conduct, BRITT gave other KPMG engagement partners a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder.  At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG.  Sweet shared the preliminary inspection selections provided by Wada with Whittle and BRITT, while noting that the information was only preliminary.  Whittle’s response was to ask Sweet to confirm that they would get the final list as well.

In February 2017, Wada texted Holder saying “I have the grocery list. . . .  All the things you’ll need for this year.”  Wada then spoke to Holder and provided her with the full confidential 2017 final inspection selections.  Holder again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and BRITT, so that it could be acted upon to improve the audits on the list. 

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, and it was ultimately reported to KPMG’s Office of General Counsel. 

*                      *                      *

DAVID BRITT, 56, pled guilty to one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense.  Sentencing is scheduled for May 8, 2020 before the Honorable J. Paul Oetken. 

The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentence for the defendant will be determined by the judge.

Mr. Berman praised the investigative work of the United States Postal Inspection Service and also thanked the Securities and Exchange Commission, which has brought an administrative proceeding against BRITT. 

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jordan Estes, Margaret Graham, Martin Bell, and Rebecca Mermelstein are in charge of the prosecution.

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that DAVID MIDDENDORF, the former head of KPMG’s National Office, also known as the Department of Professional Practice (the “DPP”), was sentenced today to one year and one day in prison for participating in a scheme to defraud the Public Company Accounting Oversight Board (the “PCAOB”) by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections.  Middendorf was convicted of wire fraud charges in March 2019 following a month-long trial before U.S. District Judge J. Paul Oetken, who imposed today’s sentence. 

Manhattan U.S. Attorney Geoffrey S. Berman said:  “As the head of the KPMG department responsible for the quality of its audits, David Middendorf was at the top of a chain of corruption that threatened to corrupt KPMG and the PCAOB’s inspections process.  Today’s sentence recognizes the harm this fraudulent scheme caused to the PCAOB and the auditing profession more generally.” 

According to the evidence presented at trial:

The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms (“Auditors”) with respect to the financial statements of publicly traded companies (“Issuers”).  The PCAOB inspects the largest U.S. accounting firms on an annual basis.  As part of the inspection process, the PCAOB chooses a selection of audits performed by an accounting firm for a closer review, commonly referred to as an inspection.  Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an Auditor does not perform additional work or modify its work papers in anticipation of an inspection.  Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or “comments” with respect to both the specific audits reviewed and the accounting firm more generally. 

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms.  By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel.  At the time, MIDDENDORF was head of KPMG’s DPP, which was broadly responsible for the quality of KPMG’s audits and KPMG’s performance in PCAOB inspections. 

KPMG’s efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, MIDDENDORF and others worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected in an effort to game the system and improve inspection results.  For example, beginning in 2015, Brian Sweet, a former PCAOB employee who had joined KPMG, provided MIDDENDORF, Thomas Whittle, and others with the PCAOB’s confidential 2015 list of inspection selections, at MIDDENDORF’s request, so that the information could be used by MIDDENDORF, Whittle, and others to improve KPMG’s performance on PCAOB inspections. 

In March 2016, Jeffrey Wada, an Inspections Leader at the PCAOB, provided Cynthia Holder, a KPMG employee, with confidential information on certain of the PCAOB’s 2016 inspection selections.  Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to MIDDENDORF, Whittle, and others.  MIDDENDORF, Whittle, Sweet, and others then agreed to launch a stealth program to “re-review” the audits that had been selected, and agreed to keep their stealth re-reviews within their “circle of trust.”  In order to cover up their illicit conduct, other KPMG engagement partners were given a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder, referring to it in a voicemail as the “grocery list.”  At the same time, Wada provided Holder with his resume and sought Holder’s assistance in helping him to acquire employment at KPMG.  Sweet shared with Whittle the preliminary inspection selections provided by Wada; Wada in turn shared them with MIDDENDORF, who approved their use to improve the audits on the list.

In February 2017, Wada texted Holder saying, “I have the grocery list. . . . All the things you’ll need for the year.”  Wada then spoke to Holder and provided her with the full confidential 2017 final inspection selections.  Holder again shared the stolen information with Sweet, who shared it with MIDDENDORF, Whittle, and others so that it could be acted upon to improve the audits on the list. 

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, and it was ultimately reported to KPMG’s Office of General Counsel.            

*                      *                      *           

            In addition to a prison sentence, MIDDENDORF, 55, of Marietta, Georgia, was sentenced to three years of supervised release.  A determination of the restitution amount was deferred to a later date.   

Mr. Berman praised the investigative work of the United States Postal Inspection Service and also thanked the Securities and Exchange Commission. 

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Rebecca Mermelstein, Jordan Estes, Margaret Graham, and Martin Bell are in charge of the prosecution.

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that CYNTHIA HOLDER, a former Public Company Accounting Oversight Board (“PCAOB”) Inspections Leader and KPMG Executive Director, was sentenced today to 8 months in federal prison for participating in a scheme to defraud the Securities and Exchange Commission (the “SEC”) and the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections, the results of which were shared with, and utilized by, the SEC in carrying out its governmental functions.  HOLDER pled guilty October 16, 2018, before U.S. District Judge J. Paul Oetken, who imposed today’s sentence.

Manhattan U.S. Attorney Geoffrey S. Berman said:  “As a former employee of the PCAOB, Cynthia Holder understood the importance of the organization’s work:  to protect investors and the public by overseeing the audits of public companies.  But she undermined the Board’s and the SEC’s regulatory missions when she stole confidential inspection information and provided it to KPMG, her new employer.  KPMG, in turn, used this confidential information to cheat on PCAOB inspections.  Holder’s sentence should be an example to others that stealing confidential information and corrupting regulatory processes are crimes that this Office takes very seriously.”

According to the allegations contained in the Indictment filed against HOLDER and statements made in related court filings and proceedings:

The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms (“Auditors”) with respect to the financial statements of publicly traded companies (“Issuers”).  The PCAOB inspects the largest U.S. accounting firms on an annual basis.  As part of the inspection process, the PCAOB chooses a selection of audits performed by the accounting firm for a closer review.  Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an Auditor does not perform additional work or modify its work papers in anticipation of an inspection.  Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or “comments” with respect to both the specific audits reviewed and the accounting firm more generally.  The PCAOB transmits these Inspection Reports to the SEC, which utilizes them in carrying out its agency functions.     

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms.  By 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel such as HOLDER and HOLDER’s co-conspirator, Brian Sweet. 

KPMG’s efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, HOLDER, David Middendorf, Thomas Whittle, Jeffrey Wada, Sweet, and others worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results.  For example, after Sweet began employment at KPMG, but while HOLDER was still employed by the PCAOB, HOLDER fed Sweet confidential PCAOB information about certain pending inspections.  HOLDER did so while simultaneously seeking employment at KPMG.  During the pendency of her efforts to obtain employment at KPMG, HOLDER – in violation of PCAOB rules – continued to work on KPMG inspections at the PCAOB.  Once she secured a job at KPMG, HOLDER stole valuable confidential information on her way out of the PCAOB and then passed it on to Sweet, her new boss at KPMG.     

In March 2016, HOLDER obtained the PCAOB’s confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion.  Wada – who was not responsible for KPMG inspections at the PCAOB

– accessed and stole valuable confidential information from the PCAOB and passed it on to HOLDER.  HOLDER, in turn, provided the 2016 inspection selections to Sweet, who passed them to Middendorf, Whittle, and others.  Middendorf, Whittle, Sweet, and others then agreed to launch a stealth program to “re-review” the audits that had been selected.  In order to cover up their illicit conduct, the KPMG engagement partners were given a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to HOLDER.  At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG.  Sweet shared the preliminary inspection selections provided by Wada with Whittle and Britt, while noting that the information was only preliminary.  Whittle’s response was to ask Sweet to confirm that they would get the final list as well.

In February 2017, Wada texted HOLDER saying, “I have the grocery list. . . . All the things you’ll need for this year.”  Wada then spoke to HOLDER and provided her with the full confidential 2017 final inspection selections.  HOLDER again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and others.  Middendorf, Whittle, and Sweet agreed to inform engagement partners on the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections. 

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, as a result of which KPMG’s Office of General Counsel launched an internal investigation.  Thereafter, HOLDER and Sweet took a number of steps to destroy or fabricate evidence relevant to the investigation.  For example, HOLDER deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a “burner phone” so her conversations could not be monitored.  Similarly, Sweet burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.

*                      *                      *

In addition to a prison term, HOLDER, 53, of Houston, Texas, was sentenced to 2 years of supervised release. Restitution amount was deferred to a later date.

Mr. Berman praised the investigative work of the United States Postal Inspection Service and also thanked the Securities and Exchange Commission, which has brought an administrative proceeding against Holder. 

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Rebecca Mermelstein, Jordan Estes, Martin Bell, and Margaret Graham are in charge of the prosecution.

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that DAVID MIDDENDORF, who was the National Managing Partner for audit quality at the accounting firm KPMG LLP (“KPMG”), and JEFFREY WADA a former employee of the Public Company Accounting Oversight Board (the “PCAOB”), were convicted of wire fraud charges in connection with their scheme to defraud the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections. 

U.S. Attorney Geoffrey S. Berman said:  “As this trial revealed, David Middendorf and Jeffrey Wada were two links in a chain of corruption, where confidential PCAOB inspection information was taken at the behest of high-level executives at KPMG so they could cheat on inspections.  This confidential information was critical to the PCAOB and its core mission of ensuring audit quality.  As a unanimous jury found, the actions of Middendorf and Wada defrauded the PCAOB.”

According to the evidence presented during the trial:

The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms (“Auditors”) with respect to the financial statements of publicly traded companies (“Issuers”).  The PCAOB inspects the largest U.S. accounting firms on an annual basis.  As part of the inspection process, the PCAOB chooses a selection of audits performed by the accounting firm for a closer review, commonly referred to as an inspection.  Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an Auditor does not perform additional work or modify its work papers in anticipation of an inspection.  Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or “comments” with respect to both the specific audits reviewed and the accounting firm more generally. 

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections, and in 2014 received approximately twice as many comments as its competitor firms.  By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel.  At the time, MIDDENDORF was head of KPMG’s National Office, also known as the Department of Professional Practice (the “DPP”), which was broadly responsible for the quality of KPMG’s audits and KPMG’s performance in PCAOB inspections. 

KPMG’s efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, MIDDENDORF and others worked illicitly to acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected in an effort to game the system and improve inspection results.  For example, beginning in 2015, Brian Sweet, a former PCAOB employee who had joined KPMG, provided MIDDENDORF, Thomas Whittle, and others with the PCAOB’s confidential 2015 list of inspection selections, at MIDDENDORF’s request, so that the information could be used by MIDDENDORF, Whittle, and others, to improve KPMG’s performance on PCAOB inspections. 

WADA was an Inspections Leader at the PCAOB, who was obligated to keep confidential the PCAOB’s nonpublic information.  WADA joined the conspiracy in the fall of 2015 and began passing confidential information to KPMG.  In March 2016, WADA provided Cynthia Holder, a KPMG employee, with confidential information on certain of the PCAOB’s 2016 inspection selections.  Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to MIDDENDORF, Whittle, and others.  MIDDENDORF, Whittle, Sweet, and others then agreed to launch a stealth program to “re-review” the audits that had been selected, and agreed to keep their stealth re-reviews within their “circle of trust.”  In order to cover up their illicit conduct, other KPMG engagement partners were given a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to strengthen its work papers.

In January 2017, WADA, who had been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder, referring to it in a voicemail as the “grocery list.”  At the same time, WADA provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG.  Sweet internally shared the preliminary inspection selections provided by WADA with Whittle, another co-conspirator, who in turn shared it with MIDDENDORF, who approved its use to improve the audits on the list.

In February 2017, WADA texted Holder saying, “I have the grocery list. . . . All the things you’ll need for the year.”  WADA then spoke to Holder and provided her with the full confidential 2017 final inspection selections.  Holder again shared the stolen information with Sweet, who shared it with MIDDENDORF, Whittle, and others, so that it could be acted upon to improve the audits on the list. 

In 2017, a KPMG partner learned from Sweet that one of her audits was on the PCAOB inspection list, and she reported the matter to her supervisor.  The matter was then ultimately reported to KPMG’s Office of General Counsel.

*                      *                      *

MIDDENDORF, 54, was convicted of one count of conspiracy to commit wire fraud (Count Two) and three counts of wire fraud (Counts Three, Four, and Five).  WADA, 43, was convicted of one count of conspiracy to commit wire fraud (Count Two) and two counts of wire fraud (Counts Four and Five).  The conspiracy to commit wire fraud and wire fraud charges each carry a maximum prison term of 20 years.  MIDDENDORF and WADA were each acquitted of one count of conspiracy to defraud the United States (Count One). 

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by a judge.

Mr. Berman praised the outstanding investigative work of the United States Postal Inspection Service and also thanked the Securities and Exchange Commission.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Rebecca Mermelstein, Amanda Kramer, and Jordan Estes are in charge of the prosecution.

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and Philip R. Bartlett, the Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service, announced the unsealing yesterday of an Indictment in Manhattan federal court charging DAVID MIDDENDORF, THOMAS WHITTLE, and DAVID BRITT, former executives of accounting firm KPMG LLP (“KPMG”), CYNTHIA HOLDER, a former employee of KPMG and the Public Company Accounting Oversight Board (the “PCAOB”), and JEFFREY WADA, a former employee of the PCAOB, with conspiracy and wire fraud charges in connection with their scheme to defraud the Securities and Exchange Commission (the “SEC”) and the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections.  MIDDENDORF was arrested yesterday morning in Marietta, Georgia, and was presented before a Magistrate Judge in Atlanta.  HOLDER was taken into custody yesterday morning in Houston, Texas, and presented before a Magistrate Judge in Houston.  WADA was arrested yesterday morning in Tustin, California, and presented before a Magistrate Judge in Santa Ana.  WHITTLE was arrested yesterday morning in Gladstone, New Jersey.  BRITT surrendered yesterday morning in New York, New York.  WHITTLE and BRITT were presented and arraigned before Magistrate Judge Andrew J. Peck in Manhattan federal court.  The case is assigned to U.S. District Judge John Paul Oetken.

 

BRIAN SWEET pled guilty to conspiracy and wire fraud charges in connection with this scheme before Magistrate Judge Robert W. Lehrburger on January 5, 2018.  The Information to which Sweet pled guilty was also unsealed yesterday.  His case is assigned to U.S. District Judge Katherine B. Forrest.

 

Manhattan U.S. Attorney Geoffrey S. Berman said:  “These defendants were each meant to be the watchmen of our financial system.  The defendants who formerly worked for KPMG were vested with the responsibility to audit publicly filed financial statements and issue audit opinions relied upon by the investing public.  The defendants who formerly worked for the PCAOB were supposed to help ensure the quality of the work behind those audits.  But, as alleged, these defendants chose to cheat the system and to undermine the safeguards put in place to protect investors.  We will work tirelessly with our law enforcement partners to root out corruption like this wherever it is found.”

 

Inspector-in-Charge Philip R. Bartlett said:  “As alleged, the defendants took advantage of confidential information stolen from the PCAOB and used it to tip off KPMG partners of impending audit inspections.  This undermined the overall integrity of the program.  The PCAOB was created by Congress as part of the Sarbanes Oxley Act to reduce accounting scandals but, in this case, certain former employees and KPMG insiders created their own corruption scandal.  The Postal Inspection Service stands committed to helping to ensure the integrity of information that affects the marketplace.”

As alleged in the Indictment unsealed today in Manhattan federal court:[1]

 

The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms (“Auditors”) with respect to the financial statements of publicly traded companies (“Issuers”).  The PCAOB inspects the largest U.S. accounting firms on an annual basis.  As part of the inspection process, the PCAOB chooses a selection of audits performed by the accounting firm for a closer review.  Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an Auditor does not perform additional work or modify its work papers in anticipation of an inspection.  Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or “comments” with respect to both the specific audits reviewed and the accounting firm more generally.  The PCAOB transmits these Inspection Reports to the SEC, which utilizes them in carrying out its agency functions.

 

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms.  By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel such as SWEET.  At the time, MIDDENDORF was head of KPMG’s Department of Professional Practice (the “DPP”), which was broadly responsible for the quality of KPMG’s audits and KPMG’s performance in PCAOB inspections.  BRITT was a partner in the audit group within the DPP and WHITTLE was head of the inspections group within the DPP.

KPMG’s efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, MIDDENDORF, WHITTLE, BRITT, HOLDER, WADA, and SWEET worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results.  For example, beginning in SWEET’s first week of employment at KPMG in 2015, MIDDENDORF, WHITTLE, and BRITT began asking SWEET for confidential PCAOB information about which KPMG audits would be inspected by the PCAOB that year.

 

MIDDENDORF told SWEET to remember where his paycheck came from and to be loyal to KPMG, while WHITTLE told SWEET that he was most valuable to KPMG at that moment and would soon be less valuable.  As requested, SWEET shared the PCAOB’s confidential 2015 list of inspection selections.  Shortly thereafter, SWEET helped his former PCAOB colleague, HOLDER, get a job at KPMG, where she reported to SWEET.  During the pendency of her efforts to obtain employment at KPMG, HOLDER – in violation of PCAOB Rules – continued to work on KPMG inspections at the PCAOB.  Once she secured a job at KPMG, HOLDER, like SWEET before her, stole valuable confidential information on her way out of the PCAOB and then passed it on to SWEET, her new boss at KPMG.

 

In March 2016, HOLDER obtained the PCAOB’s confidential 2016 inspection selections for KPMG from WADA, who was still working at the PCAOB but who had recently been passed over for a promotion.  WADA – who was not responsible for KPMG inspections at the PCAOB

– accessed and stole valuable confidential information from the PCAOB and passed it on to HOLDER.  HOLDER, in turn, provided the 2016 inspection selections to SWEET, who passed them to MIDDENDORF, WHITTLE, and BRITT.  MIDDENDORF, WHITTLE, BRITT, and SWEET then agreed to launch a stealth program to “re-review” the audits that had been selected.  In order to cover up their illicit conduct, BRITT gave other KPMG engagement partners a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

 

In January 2017, WADA, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to HOLDER.  At the same time, WADA provided HOLDER with his resume and sought her assistance in helping him to acquire employment at KPMG.  SWEET shared the preliminary inspection selections provided by WADA with WHITTLE and BRITT, while noting that the information was only preliminary.  WHITTLE’s response was to ask SWEET to confirm that they would get the final list as well.

 

In February 2017, WADA texted HOLDER saying “I have the grocery list. . . . All the things you’ll need for this year.”  WADA then spoke to HOLDER and provided her with the full confidential 2017 final inspection selections.  HOLDER again shared the stolen information with SWEET, who shared it with MIDDENDORF, WHITTLE, and BRITT.  MIDDENDORF, WHITTLE, BRITT, and SWEET agreed to inform engagement partners on the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections.

 

In 2017, a KPMG partner who received early notice that his/her engagement was on the confidential 2017 inspection list reported the matter, as a result of which KPMG’s Office of General Counsel launched an internal investigation.  Thereafter, HOLDER and SWEET took a number of steps to destroy or fabricate evidence relevant to the investigation.  For example, HOLDER deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a “burner phone” so her conversations could not be monitored.  Similarly, SWEET burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.

 

Count One of the Indictment charges MIDDENDORF, WHITTLE, BRITT, HOLDER, and WADA with participating in a conspiracy to defraud the United States.  Count Two charges MIDDENDORF, WHITTLE, BRITT, HOLDER, and WADA with participating in a conspiracy to commit wire fraud.  Count Three charges MIDDENDORF, WHITTLE, and BRITT with wire fraud.  Counts Four and Five charge MIDDENDORF, WHITTLE, BRITT, HOLDER, and WADA with wire fraud.

 

*                      *                      *

 

Set forth below is a chart containing the names, ages, residences, charges, and maximum penalties for the defendants.  The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.

 

Mr. Berman praised the investigative work of the United States Postal Inspection Service and also thanked the Securities and Exchange Commission, which has brought an administrative proceeding against the defendants.  Mr. Berman also thanked Trial Attorney Heidi Boutros Gesch of the Department of Justice’s Public Integrity Section for her assistance in the investigation.

 

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Rebecca Mermelstein, Amanda Kramer, and Jessica Greenwood are in charge of the prosecution.

 

The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

 



DEFENDANT





AGE





RESIDENCE





CHARGES





MAXIMUM PENALTY





DAVID MIDDENDORF





53





Marietta, Georgia





Conspiracy to

defraud the United States;

Conspiracy to

commit wire fraud;

Wire fraud (three counts)





85 years in prison





THOMAS WHITTLE





54





Gladstone, New Jersey





Conspiracy to

defraud the United States;

Conspiracy to

commit wire fraud;

Wire fraud (three counts)





85 years in prison





DAVID BRITT





54





New Canaan, Connecticut





Conspiracy to

defraud the United States;

Conspiracy to

commit wire fraud;

Wire fraud (three counts)





 

85 years in prison





CYNTHIA HOLDER





51





Jersey Village, Texas





Conspiracy to

defraud the United States;

Conspiracy to

commit wire fraud;

Wire fraud (two counts)





 

65 years in prison





JEFFREY WADA





42





Tustin, California





Conspiracy to

defraud the United States;

Conspiracy to

commit wire fraud;

Wire fraud (two counts)





 

65 years in prison



 

 

           

 



[1] As the introductory phrase signifies, the entirety of the text of the Indictment, and the description of the Indictment set forth herein, constitute only allegations, and every fact described should be treated as an allegation.





Docket (0 Docs):   https://docs.google.com/spreadsheets/d/1ag3JGmYpTJ1JeIlktVXjOlRB2il-puC6xzzm64HcdsY/edit#gid=0
  Last Updated: 2020-11-01 19:26:46 UTC
Description: The fiscal year of the data file obtained from the AOUSC
Format: YYYY

Description: The code of the federal judicial circuit where the case was located
Format: A2

Description: The code of the federal judicial district where the case was located
Format: A2

Description: The code of the district office where the case was located
Format: A2

Description: Docket number assigned by the district to the case
Format: A7

Description: A unique number assigned to each defendant in a case which cannot be modified by the court
Format: A3

Description: A unique number assigned to each defendant in a case which can be modified by the court
Format: A3

Description: A sequential number indicating whether a case is an original proceeding or a reopen
Format: N5

Description: Case type associated with the current defendant record
Format: A2

Description: A concatenation of district, office, docket number, case type, defendant number, and reopen sequence number
Format: A18

Description: A concatenation of district, office, docket number, case type, and reopen sequence number
Format: A15

Description: The status of the defendant as assigned by the AOUSC
Format: A2

Description: A code indicating the fugitive status of a defendant
Format: A1

Description: The date upon which a defendant became a fugitive
Format: YYYYMMDD

Description: The date upon which a fugitive defendant was taken into custody
Format: YYYYMMDD

Description: The date when a case was first docketed in the district court
Format: YYYYMMDD

Description: The date upon which proceedings in a case commenced on charges pending in the district court where the defendant appeared, or the date of the defendant’s felony-waiver of indictment
Format: YYYYMMDD

Description: A code used to identify the nature of the proceeding
Format: N2

Description: The date when a defendant first appeared before a judicial officer in the district court where a charge was pending
Format: YYYYMMDD

Description: A code indicating the event by which a defendant appeared before a judicial officer in the district court where a charge was pending
Format: A2

Description: A code indicating the type of legal counsel assigned to a defendant
Format: N2

Description: The title and section of the U.S. Code applicable to the offense committed which carried the highest severity
Format: A20

Description: A code indicating the level of offense associated with FTITLE1
Format: N2

Description: The four digit AO offense code associated with FTITLE1
Format: A4

Description: The four digit D2 offense code associated with FTITLE1
Format: A4

Description: A code indicating the severity associated with FTITLE1
Format: A3

Description: The title and section of the U.S. Code applicable to the offense committed which carried the second highest severity
Format: A20

Description: A code indicating the level of offense associated with FTITLE2
Format: N2

Description: The four digit AO offense code associated with FTITLE2
Format: A4

Description: The four digit D2 offense code associated with FTITLE2
Format: A4

Description: A code indicating the severity associated with FTITLE2
Format: A3

Description: The title and section of the U.S. Code applicable to the offense committed which carried the third highest severity
Format: A20

Description: A code indicating the level of offense associated with FTITLE3
Format: N2

Description: The four digit AO offense code associated with FTITLE3
Format: A4

Description: The four digit D2 offense code associated with FTITLE3
Format: A4

Description: A code indicating the severity associated with FTITLE3
Format: A3

Description: The FIPS code used to indicate the county or parish where an offense was committed
Format: A5

Description: The date of the last action taken on the record
Format: YYYYMMDD

Description: The date upon which judicial proceedings before the court concluded
Format: YYYYMMDD

Description: The date upon which the final sentence is recorded on the docket
Format: YYYYMMDD

Description: The date upon which the case was closed
Format: YYYYMMDD

Description: The total fine imposed at sentencing for all offenses of which the defendant was convicted and a fine was imposed
Format: N8

Description: A count of defendants filed including inter-district transfers
Format: N1

Description: A count of defendants filed excluding inter-district transfers
Format: N1

Description: A count of original proceedings commenced
Format: N1

Description: A count of defendants filed whose proceedings commenced by reopen, remand, appeal, or retrial
Format: N1

Description: A count of defendants terminated including interdistrict transfers
Format: N1

Description: A count of defendants terminated excluding interdistrict transfers
Format: N1

Description: A count of original proceedings terminated
Format: N1

Description: A count of defendants terminated whose proceedings commenced by reopen, remand, appeal, or retrial
Format: N1

Description: A count of defendants pending as of the last day of the period including long term fugitives
Format: N1

Description: A count of defendants pending as of the last day of the period excluding long term fugitives
Format: N1

Description: The source from which the data were loaded into the AOUSC’s NewSTATS database
Format: A10

Description: A sequential number indicating the iteration of the defendant record
Format: N2

Description: The date the record was loaded into the AOUSC’s NewSTATS database
Format: YYYYMMDD

Description: Statistical year ID label on data file obtained from the AOUSC which represents termination year
Format: YYYY

Data imported from FJC Integrated Database
F U C K I N G P E D O S R E E E E E E E E E E E E E E E E E E E E