Creditors Blame Auditor for Gas Company’s Fraud

(CN) - Creditors of now-defunct oil and gas company Oceanografia claim in court that an auditor missed blatant fraud, leading to the company's collapse and their loss of $1.1 billion.

KPMG LLC served as the auditor for Oceanografia, formerly Latin America's largest oil and gas company, which was valued at about $2.7 billion shortly before its collapse in 2014, according to a lawsuit filed by Otto Candies and other creditors of the company. They sued KPMG in Delaware Superior Court last week.

"Plaintiffs bring this action for negligent misrepresentation against KPMG for failing to detect and prevent one of the largest financial frauds in the history of Latin America - a debacle in which the U.S. and foreign-based plaintiffs lost in excess of $1.1 billion alone," the Feb. 26 complaint states. "The centerpiece of this massive fraud was a 'cash advance' program in which Citigroup provided hundreds of millions of dollars to Oceanografía on the basis of scores of forged invoices for work Oceanografía had not yet performed, while KPMG - which audited both Citigroup and Oceanografía, and was responsible for exposing their faulty internal controls - stood by and did nothing." (Emphasis in original.)

Citigroup allegedly gave Oceanografia a credit line, allowing it to obtain hundreds of millions of dollars in cash advances secured by invoices purportedly for work performed for Pemex, the Mexican state-owned oil company.

In February 2014, Pemex reported to Citigroup that several Oceanografia invoices contained forged signatures, a fraud KPMG should have easily uncovered as part of its audit procedures, the 147-page lawsuit states.

The oil and gas company's financial problems had become apparent just a month prior, when it announced it would not be able to pay interest on a debt of $335 million because it only had $50 million in its accounts, according to reports.

Citigroup then had no choice but to cancel the cash advance credit line, precipitating Oceanografia's collapse.

"Had KPMG identified and disclosed the systemic internal control deficiencies and failures at Oceanografía, Banamex and Citigroup, which allowed the fraud to fester and grow, plaintiffs' damages would have been prevented or substantially reduced," the creditors say.

Citigroup has allegedly admitted that it fired a dozen employees over the fraud, one of whom was "criminally involved," according to Citigroup CEO Michael Corbat.

The creditors say KPMG should have been especially careful auditing Citigroup transactions in Mexico given that the bank was dinged by U.S. regulators last year for $140 million over its Mexican subsidiary Banamex's lack of money laundering controls.

"Citigroup's failings should have put KPMG on heightened alert of increased audit risk for material undetected errors and KPMG should have planned and executed its audits accordingly," the creditors' complaint states.

The creditors seek punitive damages for negligent misrepresentation. They are represented by David Ross with Ross, Aronstam & Moritz in Wilmington, Del.

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