Singapore Resident Pleads Guilty In Manhattan Federal Court To Soliciting Millions Of Dollars In Pre-IPO Stock Scheme
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.
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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.