KPMG hit with lawsuit over New Century collapse

MIAMI (Reuters) - Accounting giant KPMG was hit with a billion-dollar lawsuit on Wednesday over claims its "grossly negligent audits" helped trigger the collapse of a top subprime mortgage lender at the start of the U.S. housing crisis.

New Century Financial Corp, the largest independent provider of home loans to people with poor credit, filed for bankruptcy two years ago amid mounting customer defaults.

Its failure rippled across the U.S. mortgage lending industry, sparking a string of other bankruptcies that roiled financial markets as banks booked losses on billions in mortgage-linked securities at the heart of the current global financial crisis.

The lawsuit, on behalf of a liquidating trust formed by New Century debtors, was filed against both KPMG International and its U.S. arm, KPMG LLP.

It accuses KPMG of helping cover up "catastrophic" problems at New Century -- including accounting and financial errors -- that led to its collapse.

Its conduct flew in the face of U.S. laws put in place after "the Enron-era of financial reporting and accounting, when the public asked 'Where were the auditors?'" the lawsuit says.

"As New Century's auditor, KPMG failed its public watchdog duty," it states.

KPMG spokesman Dan Ginsburg said he had not seen the suit and had no immediate comment. The company has previously denied any wrongdoing in connection with its relationship at New Century.

The suit demands at least $1 billion in damages.

"KPMG did not act like a watchdog. Instead, KPMG assisted in the misstatements and certified the materially misstated financial statements," the

At one point, KPMG "did the unthinkable for a public auditor," the complaint alleges. It issued a audit report on New Century's 2005 financial results before its audit was complete, "falsely enabling" New Century to file its annual report with the U.S. Securities and Exchange Commission.

Many of the problems at New Century stemmed from aggressive business practices that saw the company grow from originating $357 million in mortgage loans in its first year of operation in 1996 to about $60 billion in 2006.

(Editing by Tim Dobbyn)