From: Anonymous CCCXXIV
Sent:
To: 'Gary S. Gevisser '
Subject: more insurance company / auditor
abuse
Oct 12,
2003 (The Philadelphia Inquirer - Knight Ridder/Tribune
Business News via COMTEX) -- The Pennsylvania Insurance Department has accused
Deloitte, the nation's second-largest accounting firm, of contributing to the
worst insurer failure in U.S. history by hiding its client's poor financial
condition from regulators and the public -- even as it sold the truth to a New
York investment firm.
In
February 2000, Deloitte chief actuary Jan Lommele
signed an audit declaring
But less
than a week later, Deloitte accountants quietly told the Kohlberg Kravis & Roberts investment partnership that Reliance
was suffering a "seriously deficient" $350 million shortfall in its
reserves, according to the department's filing in
The
Insurance Department made the allegations to bolster its effort to force
Deloitte, and its professional malpractice insurers, to pay part of the
estimated $2 billion-plus price tag for Reliance's 2001 financial collapse.
Judge James Gardner Colins is considering whether to
add the new allegations to a civil case the department filed last year, which
accused Deloitte of failing to audit Reliance effectively.
Asked
about
The firm
declined to say what was distorted. Instead, it blamed Pennsylvania Insurance
Commissioner E. Diane Koken and her staff for
Reliance's collapse. According to Deloitte, Koken is
trying to "improperly" fault Reliance's ex-auditors "for a
business and regulatory failure that largely rests with [Koken]
herself."
With $6
billion in yearly fees and 28,000 workers, Deloitte is second only to
In
lawsuits, Koken has accused former Reliance
executives, directors, lawyers and accountants of driving the company out of
business by covering up losses and allowing longtime chairman Saul P. Steinberg
and his family to loot the company, which in 2001 defaulted on its stock, bonds
and loans and left policyholders and industry bailout funds with more than $2
billion in unpaid losses.
Steinberg
and his former colleagues have denied any wrongdoing and are fighting the
suits; they say Koken and her predecessors knew
Reliance's true condition but allowed Steinberg to keep paying himself and his
brother Robert tens of millions in yearly combined salary, bonus and dividends,
until finally acknowledging massive losses that obliged Koken
to take control of Reliance in 2001.
Instead
of warning regulators of Reliance's problems, Deloitte told only KKR,
suppressing public disclosure "in exchange for millions of dollars"
in accounting fees, the state alleges. Deloitte "exploited the competing
interests of KKR and Reliance and benefited financially by receiving payments
from clients on opposite sides" of the proposed investment deal, according
to the state.
The firm
collected $2.3 million from Reliance after Lommele's
audit, and an undisclosed sum from its work for KKR, in connection with its two
conflicting reports, according to the state.
KKR,
which has not been accused of wrongdoing, had no comment on Reliance or the
state's charges, spokeswoman Ruth Pachman said.
Deloitte
was not the only firm that noticed Reliance hitting the skids. The state says
KKR got another opinion from Am-Re Consultants, of Princeton, an affiliate of
American Reinsurance Co. Am-Re estimated Reliance's reserve shortfall at $500
million, the state reported.
Despite
serving Deloitte with a subpoena demanding detailed documents after Reliance's
failure, the Insurance Department was unaware Deloitte had produced a separate
and apparently contradictory evaluation of Reliance for another client until
July 2003.
That's
when Deloitte's Philadelphia lawyer, Arthur Makadon
of Ballard Spahr Andrews & Ingersoll,
sent the state's lawyer, Jerome R. Richter of Blank Rome L.P., a short letter
notifying him that "certain additional documents related to Reliance were
just brought to our attention."
Makadon declined comment on the case. (Makadon
also represents
Richter
responded to Makadon's disclosure by alleging in
court that Deloitte had failed to provide that information under subpoena,
giving him grounds for amending his complaint.
Since
2000, the Securities and Exchange Commission has barred accounting firms from
providing consulting and other services to their audit clients, in hopes of
reducing conflicts of interest.
However,
securities lawyers say accounting firms are not necessarily barred from
providing
No
matter who its other clients may be, a firm that knowingly publishes false
information in an audit faces the prospect of being accused of violating
federal antifraud statutes -- but only after "a fairly lengthy
investigation," said Paul Berger, associate director of the SEC.