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Right to bring securities fraud and RICO action against auditors upheld.

The U.S. District Court for the Southern District of Florida upheld investors' right to sue a company's auditors for alleged securities fraud and Racketeer Influenced and Corrupt Organizations (RICO) Act violations in connection with private and public security offerings.

Investors in Sahlen & Associates, Inc., brought an action against multiple defendants, including KPMG Peat Marwick (the company's auditor), after Sahlen declared bankruptcy and its stock became worthless.

The investors alleged all the defendants had engaged in a conspiracy--known as "the Project"--to falsely represent Sahlen's true financial condition and induce investment in the company. To further the Project, defendants allegedly created false invoices, forged client's names, altered confirmation letters and set up a separate computer program to portray the falsified information as accurate. The alleged goal was to produce the illusion of a very successful and rapidly growing company.

The scheme was discovered after the company began an internal investigation in response to notice the Securities and Exchange Commission was looking into its accounting practices. Shortly after public announcement of the scheme, Sahlen's common stock was cast into a free-fall and the company sought chapter 11 reorganization.

The ruling allowed the investors to maintain a securities fraud case against KPMG. The court said allegations of violation of generally accepted auditing standards and generally accepted accounting principles, together with allegations that KPMG knew of or recklessly ignored other irregularities in areas such as recognition of accounts receivables, were sufficient to sustain a rule 10b-5 claim under the Securities Exchange Act of 1934. The court also upheld the investors' right to bring a RICO action against KPMG, finding the allegations of multiple misstatements to investors over a period of several years--all to further a scheme to defraud--satisfied RICO requirements.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jun 1, 1992
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