Failed Venture Prompts Wealthy Investors to Sue KPMG

A Houston investment fund, which started as a promising money-maker for a group of wealthy, well-connected acquaintances, has ended in a Texas district court with accounting firm KPMG on the hot seat.

Investors include the Staley family, founders of the Chicago Bears, the man who brought Nintendo to America, the Cullen family and a former Harris County (Texas) District Attorney, who have all made wise investments in the past. This particular investment fund, put together by a man named Charles Underbrink, was not one of them.

The Houston Chronicle reported that the investors are suing KPMG, alleging negligent accounting, investment fraud and conspiracy to withhold damaging information from the limited partners, who are seeking more than $28 million.

“Wealthy people are really no different than people with 401(k)s," said John Zavitsanos, a lawyer representing the investors. "If they see something that appears to be successful, other people like them are in it and a national accounting firm is watching it, they get in with the same level of care as anyone.”

KPMG spokesman Tom Fitzgerald told the newspaper that the firm was retained solely to audit the financial statements of the funds and not to monitor compliance with the funds' investment guidelines or strategy.

"KPMG fully complied with all applicable professional standards," Fitzgerald said. "Investment decisions and strategies were the responsibility of the general partners in the funds themselves."

Bob Staley said his Chicago broker recommended investing in the partnership, which would make short-term corporate loans. His broker estimated an 8 percent annual return, and with KPMG auditing the books, “I felt good about that,” he said. Staley and his brothers, whose grandfather founded Chicago Bears football team, invested $1.75 million.

In all, rich investors put $73 million into St. James Capital Partners and St. James Merchant Bankers between 1995 and 1998. The two Houston partnerships took on projects other than bridge loans, including investing in troubled companies.

Paul Dobrowski, Underbrink's lawyer, said the investors knew the investments would be made on "below the radar" or "on the verge" companies. Some will make money, he said. "I'm guessing they're just unhappy they haven't made more money.”

Ronald Judy, of Nintendo fame, put $2 million into the limited partnership but agreed with a fellow investor to hire another auditor to look into the underlying investments.

"It was year after year after year of bad audits,” Judy said.

One of the investors' lawyers said that KPMG knew that a former KPMG tax manager had alleged fraud in a 1999 lawsuit he filed against the general partners; KPMG gave the partnership a clean audit instead of looking into the charges.

"We stand by the unqualified audit opinions on the 1995 to 1999 financial statements of St. James Capital Partners and on the 1998 and 1999 financial statements of St. James Merchant Bankers," KPMG's Fitzgerald said.

You may like these other stories...

Did you know that the tax code allows you to claim tax deductions for household damage caused by thefts, vandalism, fires, floods, hurricanes, and others kinds of casualties? But the law imposes several restrictions.Relief...
Inversions: Loophole Is the ProblemJacob J. Lew, the U.S. Treasury Secretary, published an opinion piece in the Wall Street Journal that "the system has become full of inefficiencies and special-interest loopholes. That...
School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.