UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

THE NEW CENTURY LIQUIDATING TRUST AND REORGANIZED NEW CENTURY WAREHOUSE CORPORATION, by and through Alan M. Jacobs, Liquidating Trustee and Plan Administrator,

Plaintiff,

v.

KPMG International,

Defendant.

CIV. NO.:

COMPLAINT AND JURY DEMAND

The New Century Liquidating Trust and Reorganized New Century

Warehouse Corporation, by and through Alan M. Jacobs, as Liquidating Trustee

and Plan Administrator (the Trustee or Plaintiff) (together New Century),

hereby sues KPMG International (KPMGI) and states, on knowledge as to

himself and his actions, and information and belief as to all other matters, as

follows:

INTRODUCTION

I. KPMG Owes a Public Duty

1. Audits of financial statements can only be done by

independent, certified public accountants. Audits of public companies like New

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Century are required by law to protect creditors, the investing public, the

Companys employees and other stakeholders, and the Company itself. Because

of this special responsibility the United States Supreme Court holds auditors like

KPMG to be the public watchdog.

2. As New Centurys auditor, KPMG failed its public watchdog

duty. The result was catastrophic.

3. Founded in 1995, New Century was a mortgage finance

company that both originated and purchased residential mortgage loans, the

majority of which were subprime loans. As the subprime mortgage market grew,

so did New Century New Centurys reported assets grew from $300,000 in

1996 to $26 billion in 2005.

4. With the backdrop of New Centurys rapid growth, New

Centurys Board of Directors and Audit Committee questioned managements

incentives to manage earnings and therefore engage in aggressive accounting

precisely the type of risks an independent auditor is there to watch for and respond

to. New Century and the users of its financial statements depended on its

gatekeeper, KPMG, to ensure that those financial statements were fairly presented

in accordance with GAAP and free of material misstatement due to error or fraud.

5. KPMG did not act like a watchdog. Instead, KPMG assisted

in the misstatements and certified the materially misstated financial statements.

When New Century finally announced its financial statements were false, its stock

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price dropped 90 percent, New Century could no longer borrow money to finance

its lending business and New Century went bankrupt owing billions.

6. As KPMG knew at the time, its audits of New Century had

significant ramifications not just for New Century, but for the public. New

Century was at the center of the housing market boom, and when it went bankrupt,

not only did thousands of people lose their jobs, but as the New York Times

declared: New Centurys collapse ushered in a series of failures among mortgage

lenders ultimately rocking global financial markets, forcing banks around the

world to write down or take losses on nearly $250 billion in mortgage-linked

securities and sending the nations housing market into a tailspin.

7. The job of purportedly independent, certified public

accountants performing audits matters. The failure of KPMG to do its job at New

Century demonstrates why. This complaint holds KPMG responsible for its

failure.

II. KPMG Internationals Agent Is KPMG LLP

8. The brand KPMG refers to one of the worlds largest

accounting firms. Its annual revenue is in excess of $22 billion. It is comprised of

member firms around the world that, according to KPMGI, act according to

common values and provide clients with a globally consistent set of services.

9. KPMGI established these globally consistent services and

common values through rigorous management and control of the KPMG

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brand and the KPMG member firms around the world, including its agent in the

United States, KPMG LLP.

A. KPMG International Promised to Control KPMG LLPs Quality 10. KPMGI specifically represented that it would ensure that

member firms work, including their audits, would meet professional standards

and regulatory requirements: [KPMGI] has established policies and procedures

to which member firms must adhere to help ensure that the work performed by

member firm personnel meets the professional standards, regulatory requirements

and the member firms quality requirements applicable to their respective Audit,

Tax or Advisory services engagements. Via these policies and procedures,

KPMGI promised the public it would maintain the quality and integrity of the

accounting profession [that] is vital to the confidence in our global capital

markets.

11. KPMGIs expansive rights of control ensure globally

consistent services and include the most fundamental right the right to take

away the KPMG brand and put member firms out of business. According to

KPMGIs annual report, membership with KPMG can be terminated if a firm acts

contrary to the objectives of the KPMGI cooperative or KPMGIs policies and

regulations. KPMGI thus can fire KPMG LLP at any time.

12. KPMGI also promised the public globally consistent training

for all auditors within KPMG member firms and enforced its quality

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requirements through an established set of supervisory, review and consultation

standards supported by leading technology.

B. KPMG International Promised KPMG LLP Would Be Independent 13. As to common values, KPMGI repeatedly emphasized to

the public its requirement that member firms maintain the brand through strict

adherence to a Global Code of Conduct. KPMGI promised to ensure that its

member firms were independent, the critical aspect of any KPMG member firm

conducting an audit:

Independence, integrity, ethics and objectivity these are all vital

to the way we work. It is the responsibility of each person working

within a member firm to maintain their integrity and objectivity, to

exercise a high standard of professional judgment, and to comply

with professional judgment, and to comply with professional ethics

and independence policies and requirements.

14. Purportedly to ensure compliance with its ethical

prerequisites, KPMGI established and advertised a comprehensive set of global

safeguards in place to help us meet our commitment to independence. These

include pre-approval checks for every new client or assignment, systems of

avoiding conflicts of interest, and the rotation of audit partners when necessary.

KPMGI thus not only sought to exact adherence to its own ethical standards it

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used its member firms alleged integrity and professionalism as a selling point to

induce the reliance by clients and investors.

III. KPMG International Breaks Its Promises and Harms New Century

15. KPMGI broke its promises.

16. Despite the absolute authority to manage and control KPMG

LLP and even terminate it as a KPMG firm, KPMGI did not ensure the stringent

quality control it promised the public. KPMGI touted the KPMG brand as adding

credibility to a companys financial statements because of the KPMG brands high

standards, yet did not ensure that audits under the KPMG name followed those

standards.

17. KPMGIs broken promise had consequences for New

Century. KPMG LLP was the auditor for New Century, a mortgage finance

company that both originated and purchased residential mortgage loans, the

majority of which were subprime loans. Despite KPMGIs promise that it would

ensure that KPMG LLP audit services would comply with professional standards

and regulatory requirements, KPMG LLP conducted grossly negligent audits and

reviews of New Century that violated both professional standards and regulatory

requirements.

18. As a result, in 2007 New Century announced that its

previously issued financial statements would have to be restated because they did

not comply with Generally Accepted Accounting Principles (GAAP). KPMGIs

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failure to keep its promise and exercise its right and obligation to strictly control

the quality of KPMG LLPs audits cost New Century its existence.

19. Moreover, KPMG LLP failed KPMGIs most important

and heavily advertised objective: independence and integrity. Rather than

exercise professional, independent and ethical judgment, as KPMGI promised it

would, KPMG LLP acted as a cheerleader for management to keep its client

happy.

20. When dissenters within KPMG LLP tried to point out the

misstatements in the financial statements, they were silenced by the KPMG LLP

partner-in-charge of the New Century audits to protect KPMG LLPs business

relationship with New Century and KPMG LLPs fees from New Century: When

a KPMG specialist, John Klinge, continued to raise questions about an incorrect

accounting practice on the eve of the Companys 2005 Form 10-K filing, John

Donovan, the lead KPMG audit partner told him: I am very disappointed we are

still discussing this. As far as I am concerned we are done. The client thinks we

are done. All we are going to do is piss everybody off.

21. KPMG then did the unthinkable for a public auditor it

issued its audit report before its audit was complete, falsely enabling New Century

to file its Form 10-K.

22. Because KPMG LLP lacked independence, it could not even

issue its audit opinions and reviews, and thus its audits failed as a matter of law

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and ethics. KPMGI, as the principal, is responsible for the severely reckless and

grossly negligent acts of its agent.

23. KPMGI itself broadcasts to the public that it would hold its

member firms and their partners accountable for complying with its ethical and

professional requirements: In building a global culture of quality, we require our

people to be in full compliance with our global policies. To this end, we hold

them accountable for their behavior.

24. This complaint holds KPMGI accountable.

25. KPMGIs and KPMG LLPs failure of their public duties

through grossly negligent audits in this case prove the truth of the Supreme

Courts law: KPMGs certification of false financial statements caused New

Century to lose at least millions of dollars, and working people to lose their jobs.

When certified public accountants fail to do their job as auditors, it matters.

PARTIES

26. Plaintiff is The New Century Liquidating Trust and

Reorganized New Century Warehouse Corporation, by and through Alan M.

Jacobs, as Liquidating Trustee and Plan Administrator. New Century Financial

Corporation (New Century)1 was a Maryland corporation with a principal place

of business in Irvine, California.

1 The Liquidating Trustee stands in the shoes of the New Century debtors which are the following entities: New Century TRS Holdings, Inc. (f/k/a New Century Financial Corporation), a Delaware corporation; New Century Mortgage Corporation (f/k/a JBE Mortgage) (d/b/a NCMC Mortgage Corporate, New Century Corporation, New Century Mortgage Ventures, LLC), a California corporation; NC Capital Corporation, a California corporation; Homel23 Corporation (f/k/a The Anyloan Corporation,

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27. Less than two months after New Centurys February 7, 2007

announcement that it would have to restate its financial statements due to

violations of GAAP, on April 2, 2007 New Century and its operating subsidiaries

filed for Chapter 11 bankruptcy.

28. KPMGI is a Swiss cooperative with its principal place of

business in the Netherlands. Prior to 2003, KPMGI operated as a Swiss Verein.

29. KPMGI is one of the largest multinational accounting and

consultancy firms in the world. According to its website, we have 137,000

people operating in 144 countries worldwide, including KPMG LLP in the

United States. KPMGI reports its revenues on a worldwide basis on its web site,

www.kpmg.com.

JURISDICTION AND VENUE

30. This Court has subject matter jurisdiction over this action

pursuant to 28 U.S.C. 1332 and the amount in controversy exceeds $75,000.

31. Venue is proper under 28 U.S.C. 1391(d).

1800anyloan.com, Anyloan.com), a California corporation; New Century Credit Corporation (f/k/a Worth Funding Incorporated), a California corporation; NC Asset Holding, L.P. (f/k/a NC Residual II Corporation), a Delaware limited partnership; NC Residual III Corporation, a Delaware corporation; NC Residual IV Corporation, a Delaware corporation; New Century R.E.O. Corp., a California corporation; New Century R.E.O. II Corp., a California corporation; New Century R.E.O. III Corp., a California corporation; New Century Mortgage Ventures, LLC (d/b/a Summit Resort Lending, Total Mortgage Resource, Select Mortgage Group, Monticello Mortgage Services, Ad Astra Mortgage, Midwest Home Mortgage, TRATS Financial Services, Elite Financial Services, Buyers Advantage Mortgage), a Delaware limited liability company; NC Deltex, LLC, a Delaware limited liability company; NCoral, L.P., a Delaware limited partnership; and New Century Warehouse Corporation (NCW), a California Corporation.

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32. This Court has personal jurisdiction over Defendant KPMGI.

KPMGIs contacts with the United States and New York are regular, profitable

and purposeful. KPMGI contracts with its agent KPMG LLP, with its principal

offices in New York and offices throughout the United States. This contract

provides the basis for KPMGIs pervasive rights to control KPMG LLP, a certified

public accounting firm that owed a duty to the public, the citizens of the United

States.

33. KPMGI released annual reports into New York and the

United States promising supervision and quality control over KPMG LLPs

activities here. KPMGI further represented that because of KPMGIs quality

control, KPMG LLPs use of the KPMG name exclusively licensed to it by

KPMGI would lend credibility to New Centurys financial statements.

34. KPMGI also issued a Global Code of Conduct in which it

sought to demonstrate its commitment to applying appropriate KPMG

methodologies and procedures. According to KPMGIs Chairman, the Code of

Conduct applies to all KPMG partners and employees regardless of title or

position and serves as a road map to help guide actions and behaviors while

working at KPMG. Through the high standards it sets for all our people

worldwide, the Code permits clients and other stakeholders [to] know what to

expect of us wherever we work.

35. On information and belief, KPMGI derives revenue from

KPMG LLP, including KPMG LLPs New York offices, for its marketing and

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quality control functions. KPMGI has regular and pervasive contact into New

York and the United States. These contacts include KPMGIs quality control

review of audits in the United States and New York. KPMGI even reaches into

New York and the United States to require how KPMG LLP conducts its business

from its audits to even the parameters of marketing the KPMG brand.

36. As part of its marketing function, KPMGI maintains a web

site on which it represents to New York residents that it supports its American

offices, and ensures consistency of representation throughout each of its member

firms through policies and regulations including submission to the KPMG quality

review process. KPMGI also advertises that member firms compliance with

policies is monitored through vigorous independent activities including reviews

of independence, quality performance and risk management. KPMGI place[s]

so much emphasis on bringing our shared values alive within member firms and

helping to ensure that everyone follows our Global Code of Conduct the very

quality controls that are the subject of this Complaint.

FACTUAL ALLEGATIONS

NEW CENTURY KPMG LLPS GROSSLY NEGLIGENT AUDITS

I. New Centurys Business: Subprime Mortgages and the Need for Proper Reserves

37. New Century was formed in 1995 as, primarily, an originator

of mortgage loans. Throughout its twelve year existence and without regard to

whether it held those loans to collect interest, resold the loans to secondary lenders

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at a profit, or securitized them New Centurys success, like that of all lenders,

was tied to the quality of its loan portfolio and its reserve for risks.

38. Without proper reserves and reserve calculations, New

Centurys financial statements were misleading to the public and to New Century

itself. First, if the correct factors were not included in the reserve calculation,

New Century could not properly plan for changes that might affect its business. It

would continue to take on risks and expand its business when the prudent course

would have been otherwise. Second, when those incorrect factors were used in the

reserve calculation, the reserves were incorrect, causing the financial statements to

be misleading to the public.

39. This dynamic came into particular focus for New Century

when, beginning in the early part of this decade, it started to more aggressively

pursue subprime mortgages. Subprime mortgages are characterized by higher risk

to lenders. The risk can be increased by borrowers with marginal credit scores or

insufficient income or by a higher ratio of loan-to-property value. Lenders assume

this higher risk in exchange for higher interest rates, typically 2 percent higher

than borrowers with better credit, higher down payments, or better documentation.

40. On the whole, the subprime mortgage industry grew

exponentially in the early 2000s. The reasons for the growth of the subprime

mortgage industry are many and include low interest rates and equity appreciation

that attracted many new homebuyers, as well as a variety of newer mortgage

arrangements negative amortization, interest only mortgages, and hybrid or

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adjustable rate mortgages that were designed to allow potential homebuyers who

could not afford or qualify for conventional (lower interest rate) mortgages the

opportunity to own a home.

41. Even in this fast-developing environment, New Centurys

growth stood out. By 2003, the subprime mortgage market had become highly

consolidated, with ninety-three percent of all subprime mortgages being originated

by the twenty-five largest lenders. Of those, New Century was consistently among

the four largest lenders and, in some time periods, was the second largest

originator of subprime mortgage loans in the country.

42. The reasons for New Centurys explosive growth lay in its

openly risky plan. As it repeatedly disclosed in public filings, New Century took

risks in an already high-risk environment, risks that included pursuing fringe

borrowers through temporarily lowered interest rates and layering its risks by

taking on borrowers with multiple risk factors for example, combining weak

credit histories with incomplete or unsubstantiated income documentation and

high loan to value ratios.

43. When New Century attempted to spread its risks by selling

the mortgage loans it originated, some of that risk redounded back to New

Century. New Centurys sale agreements required New Century to repurchase

loans in the event of certain conditions, such as early payment default (EPD), a

default which occurs within several months following the loans sale, or in the

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event of a material breach of the representations or warranties made by the

Company regarding the loans characteristics and origination.

44. A key indicator of the health of New Centurys portfolio was

the rate at which it was required to repurchase loans in addition to having to take

back bad loans and repay lost fees and interest, repurchased subprime loans were

more difficult to resell, and were resold at significant discounts to their repurchase

price.

II. KPMG LLP: New Centurys Auditor, Reviewer and Internal Control Tester

45. To account for the risks it was taking, and to provide comfort

to creditors and investors to whom it disclosed these risks, New Century hired a

professional, independent well-known certified public accounting firm to audit its

financial statements. The auditor was KPMG LLP. KPMG LLP was retained

when the company was formed in 1995, and served as New Centurys outside

auditor until April 27, 2007, when it resigned, having issued twelve unqualified

audit opinions on New Centurys financial statements. These opinions certified

each of New Centurys consolidated balance sheets and the related consolidated

statements of income, comprehensive income, changes in stockholders equity and

cash flows.

46. In addition to serving as New Centurys auditor, KPMG LLP

served several other functions. In addition to its year-end audits, KPMG LLP

conducted a review of New Centurys quarterly financial statements. As with its

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year-end audited financial statements, New Centurys quarterly financial

statements were filed with the Securities Exchange Commission (SEC) for the

public. Beginning in 2004, KPMG LLP also performed audits of the effectiveness

of New Centurys internal control over financial reporting. In connection with

these audits, which were required by the 2002 Sarbanes-Oxley Act, KPMG LLP

was required to audit New Centurys assessment of the effectiveness of its internal

control over financial reporting and identify any significant deficiencies and

material weaknesses in control. As a product of these audits, KPMG LLP

produced annual lists of deficiencies in New Centurys accounting controls that it

recommended for correction.

47. As an auditing firm, KPMG LLP was aware that a companys

stakeholders rely on the companys audits for assurance that the financial

statements presented fairly, in all material respects, the financial condition of the

company in conformity with GAAP. In the case of New Century, KPMG LLP

should have been aware that GAAP compliant financial statements were a

covenant requirement of the Companys loan agreements, and that a failure to

present its lenders with GAAP compliant financial statements would, among other

things, result in a default on the Companys lines of credit on which it relied to

conduct its business, causing irreparable harm to the Company. This is precisely

what occurred.

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48. The harm to New Century resulting from materially misstated

financial statements should have been foreseeable to KPMG LLP at all times for

which it was the Companys auditor.

III. A Key Audit Risk in New Centurys Loan Portfolio: Loan Repurchases

49. As New Century disclosed in its public filings, when selling

mortgage loans, the company was required to repurchase the loans it had sold or

packaged or substitute another loan in the event of an EPD. This repurchase

obligation was required by New Centurys loan sale agreements with secondary

market lenders.

50. In a typical whole loan sale agreement, New Century agreed

to repurchase loans if buyers defaulted in their first payment to the purchaser of

the loan. Thus, generally, if a loan failed within the first 90 days of a secondary

market lenders purchase from New Century, the purchaser was contractually

permitted to require New Century to take back the loan. In addition, the purchaser

could require New Century to repurchase the loan if New Century was in default

on any warranty it had made regarding the loan, regardless of when that breach

was discovered.

51. Several aspects of the loan repurchase process affected New

Century, all of them negatively. When New Century repurchased loans, it realized

expenses and losses. In addition to repaying the principal amount of the loan, it

was also required to repay the premium that the lender had paid to purchase the

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loan, any interest due on the loan that had not been paid to that investor, and any

losses that had been incurred. Further, as New Century acknowledged in its public

filings, the repurchased loans were substantially impaired since repurchased

mortgage loans typically can only be financed at a deep discount to their

repurchase price, if at all. As a result, they are typically also sold at a significant

discount to the unpaid principal balance.

52. Beginning in at least 2005, these loan repurchase provisions

began to have an increasingly material, and ultimately overwhelming negative

impact on New Centurys financial statements. As more borrowers defaulted on

their loans, New Century was required to repurchase increasing numbers of bad

loans that it would be forced to put back on its books, and to repay the purchasers

the premiums and lost interest to which they were entitled. More broadly, the

trend of increasing repurchases indicated that the most significant piece of New

Centurys business its loan portfolio was severely weakened.

53. KPMG LLP was fully aware of this trend. Its own

workpapers note that the repurchases had more than doubled from 2004 to 2005,

going from $135.4 million to $332.1 million. Even with this increase in the rate of

repurchases a clear indicator of weakness in the loan portfolio KPMG LLP

failed to expand its procedures or testing of New Centurys reserves. Indeed,

although KPMG LLP expressly acknowledged in its workpapers that the risk

associated with the portfolio had gone from low to high, KPMG LLP did not

expand its audit work in response to this increased risk.

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IV. Accounting for the Loan Repurchases: The Loan Repurchase Reserve

54. The increase in loan repurchases should have been accounted

for in New Centurys financial statements through its allowance for repurchase

reserve (the loan repurchase reserve).

55. GAAP provides for the methods of accounting for loan

repurchase reserves. Specifically, FAS 5, Accounting for Contingencies,

requires the establishment of a loan repurchase reserve for losses and expenses

related to estimated repurchases. According to New Centurys financial

statements, this amount is the Companys estimate of the total losses expected to

occur in connection with the loan repurchase exposure related to loan sales. The

larger the reserve, the greater the volume of loans that New Century expected to

repurchase.

56. The significance of the reserve was not lost on New Century,

nor unknown to KPMG LLP. Indeed, KPMG LLP regularly participated in Audit

Committee meetings where it was questioned about the reserve calculations. For

example, and as reflected in the July 26, 2006 Audit Committee meeting notes:

[KPMG LLP Manager] Mr. Kim reported that KPMG was in the

process of reviewing the Corporations second quarter financial

information and that its review was primarily focused on the

accounting for the Corporations derivatives, allowance for loan

losses, repurchase reserves and residual interests. Mr. Sachs then

asked a question about the adequacy of the Corporations repurchase

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reserves and Mr. Donovan [KPMG LLP] and Ms. Dodge

responded.

57. KPMG LLP knew that the estimation of this loan repurchase

reserve was a critical accounting policy and could significantly impact New

Centurys financial statements, and thus its business.

58. Nonetheless, KPMG LLP ignored its own work product,

which indicated that New Centurys reserve estimation process was not well-

organized or well-documented. Indeed, through KPMG LLPs audits of New

Centurys internal controls in 2004 and 2005, KPMG LLP found that New

Century had internal control deficiencies because it had not adopted formal

policies and procedures for the reserve estimation process. Based on these

findings, KPMG LLP advised New Century to adopt such formal procedures and

policies. When New Century did not take KPMG LLPs recommendation and

adopt formal policies and procedures, KPMG LLP knowing of New Centurys

inability to accurately estimate the reserve did nothing to change its audit

approach relating to the loan repurchase reserve.

V. KPMG LLPs Failures Backlog and Future Claims, Inventory Severity/LOCOM, and Hedge Accounting

59. Many of KPMG LLPs failures are obvious and pervasive.

For example, and inexplicably, KPMG LLP never required New Century to

account for interest recapture the interest payments payable on repurchased

loans that had not been paid by the borrower in calculating an appropriate

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reserve. More ominously, the KPMG LLP audit team repeatedly was alerted to

their errors, but consistently ignored the advice of their own expert personnel.

A. Backlog and Future Claims

60. The loan repurchase reserve that KPMG LLP audited failed to

account for large numbers of loan repurchase claims more than ninety days old

that were already known to New Century and KPMG LLP and logged into

the companys records (the Backlog Claims).

61. Purchasers looking to return loans to New Century gave

notices that were received by New Centurys Secondary Marketing Department

and assigned to different departments within New Century for evaluation

depending on the basis for the claim. The request for repurchase could only be

made if the default occurred within a time period set by the sale contract; however,

the decision whether to repurchase the loan could take much longer. The

decentralization within New Century for dealing with repurchase claims created a

backlog of repurchase claims.

62. KPMG LLP ignored the Backlog Claims entirely. KPMG

LLP accepted a repurchase reserve calculation that assumed that all repurchases

were made within 90 days of the date New Century sold the loans and did not

consider the Backlog Claims.

63. This assumption and KPMG LLPs purported testing of it

are plainly faulty. KPMG LLP claims to have tested the companys

assumption that repurchases could only happen within 90 days of the date New

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Century sold the loan in two ways. First, KPMG LLP says it reviewed the loan

sale agreements to confirm that they required repurchase in the event of repayment

defaults that occur within 90 days of purchase. Second, KPMG LLP claims it

reviewed New Centurys repurchase logs which contained historical information

about repurchases to confirm that repurchases generally were being made within

90 days of the date of sale.

64. If KPMG LLP in fact performed such tests, it did so in a

grossly negligent manner. First, the loan sale agreements, which widely varied in

terms, had different repurchase cut-off periods. Moreover, many requests

remained outstanding beyond the 90 day cut-off period. Second, even a cursory

review of the repurchased log would reveal that a material and growing number of

Backlog Claims the claims existing from the sale of loans beyond 90 days

were becoming a substantial part of New Centurys business.

65. If KPMG LLP had done its job as an auditor, the problem

with the loan repurchase reserve calculation would have been discovered before it

caused hundreds of millions of dollars in damage. Because the loan repurchase

reserve was calculated at least every quarter, if the formula had been correct, New

Century would have seen its loan repurchase reserve grow on an incremental

basis. Instead, KPMG LLP permitted New Century to improperly calculate the

loan repurchase reserve until it was too late.

66. As increasing numbers of repurchase claims came in, the

backlog of unresolved claims grew larger. By mid-2006, New Century had

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approximately $224 million of unresolved repurchase claims, of which

approximately $170 million were more than 2 months old and approximately $75

million of those were more than 6 months old.

67. Backlog Claims were the largest component of the misstated

loan repurchase reserve, and KPMG LLP was aware that they were not properly

accounted for as early as the 2004 audit. On January 26, 2005, as part of that

audit, KPMG LLP inquired of New Century for the reason in the jump in

repurchased loans. New Century informed KPMG LLP at that time that the reason

was that many of the loans were from prior quarters and months leading to the

increased volume and discount.

68. Notwithstanding this information, KPMG LLP did nothing to

change its audit approach and the companys public filings brazenly announced

that only claims from within the quarter are considered for purposes of calculating

the loan repurchase reserve. Indeed, as part of its 2004 audit procedures, KPMG

LLP concluded that based on the review of the Companys repurchase log and

conversations with management, it appears reasonable that the most recent 3

months of sales are at risk for repurchase.

69. KPMG LLP agrees today that the Backlog Claims should

have been reflected in New Centurys financial statements in the loan repurchase

reserve.

B. Inventory Severity/LOCOM

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70. In the second and third quarters of 2006, New Century

removed the inventory severity component of the repurchase reserve calculation

altogether. KPMG LLP now admits this resulted in a violation of GAAP.

71. KPMG LLPs approval of this accounting policy is notable

because the decision was based on KPMG LLPs faulty advice that the loss was

already accounted for in the companys lower of cost or market (LOCOM)

analysis.

72. In the second quarter of 2006, KPMG LLPs audit manager

decided that accounting for the loan repurchases as part of the reserve was in

effect double counting and resulted in New Century being over reserved. New

Century was surprised by the changed view of the accounting but, undoubtedly

because it would be reflected in a better looking financial statement, accepted

KPMG LLPs advice.

73. In New Centurys accounting before the second quarter 2006

change, the inventory severity component of the repurchase reserve was

reclassified to a valuation account to appropriately value loans held for sale at the

lower of cost or fair value. After the second quarter 2006 change, the inventory

severity factor was no longer used to effect this valuation. Because of the

interplay between New Centurys loan repurchase reserve and the inventory

severity component of its asset valuation allowance, the discontinuance of the

inventory severity factor as an element of the repurchase reserve resulted in a

material overstatement of loans held for sale on New Centurys balance sheet.

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74. Thus New Century, at the behest of KPMG LLP, dropped its

inventory severity analysis in Q2 and Q3 of 2006. This change increased the

overstatement in loans held for sale, which was already overstated to begin with

because of offsetting losses against gains in two different loan portfolios

repurchased loans and other loans.

75. Again, KPMG LLP was alerted to the wrongness of its policy

this time by its own audit staff. When KPMG LLP auditor Christina Chinn

reviewed the repurchase reserve in connection with KPMG LLPs second quarter

2006 review, she noticed that the inventory severity component of the reserve had

been removed and asked for a memorandum from New Century discussing the

basis for the removal. Rather than support her inquiry, the senior KPMG LLP

audit manager told Chinn to please do not ask the client regarding this anymore.

In accordance with this directive no further analysis was performed in the second

quarter of 2006.

76. New Century materially overstated its loans held for sale in

2005 and for the first three quarters of 2006, and KPMG LLP failed to properly

apply GAAP to New Centurys accounting for loans held for sale in its 2005

reviews, its 2005 audit, and in its 2006 reviews of New Centurys financial

statements.

C. Hedge Accounting

25

77. New Century used derivative instruments to manage its

exposure to interest rate risks associated with its financing on mortgage loans held

for sale, mortgage loans held for investments and residual interests.

78. The accounting and reporting standards for derivative

instruments and hedging activities are governed by FAS 133, Accounting for

Derivative Instruments and Hedging Activities. FAS 133 requires, at the

inception of the hedge, formal documentation of the hedging relationship and the

entitys risk management objective and strategy for undertaking the hedge, the

method which will be used to assess the effectiveness of the hedging derivative,

and the measurement approach to determine the ineffective aspect of the hedge.

79. Due to the complexity of hedge accounting, KPMG LLP

enlisted the help of its internal specialist group, Financial Derivatives Resources

(FDR Specialists) in the review of New Centurys accounting, policies and

procedures of hedging activities.

80. During the 2005 audit, the FDR Specialists informed the audit

team of numerous issues relating to New Centurys hedge accounting activities,

including New Centurys lack of a comprehensive and effective set of policies and

procedures, failure to account for certain interest rate lock commitments as

derivatives, inappropriate interest cash flow assumptions and lack of

contemporaneous hedge documentation.

81. These issues fell on deaf ears. On the eve of filing New

Centurys Form 10-K for 2005, a disagreement regarding the companys hedge

26

accounting practices and documentation came to a head. John Klinge and Ray

Munoz, KPMG LLPs FDR Specialists, held up KPMG LLPs issuance of its audit

report because they disagreed with KPMG LLPs treatment of New Centurys

hedge accounting.

82. For the year-end audit, Klinge and Munoz had been assigned

to provide specialized expertise and quality control on the derivatives and hedging

issues that arose in the context of the audit. Their primary task was to determine

whether the companys hedge accounting conformed with FAS 133.

83. As of March 15, 2006, Klinge still was not prepared to sign

off on the FDR Review of the New Century Audit, having failed to receive

appropriate documentation to determine if New Centurys accounting was proper.

84. Management pressured KPMG LLP to issue its opinion,

notwithstanding the fact that KPMG LLP had not completed its audit work, so that

the reason for any delay would not become public and New Centurys Form 10-K

would be filed on time. KPMG LLP succumbed to the pressure and issued its

opinion minutes before the Form 10-K was due and New Century timely

completed its filing. Klinge was instructed by KPMG LLP to prepare a signoff

memorandum in which he would express his approval.

85. KPMG LLP issued its audit report before the audit was

completed. At the time the audit report was issued KPMG LLP did not know one

way or the other whether New Centurys financial statements were fairly

presented in all material respects with GAAP. In doing so, KPMG LLP violated

27

the audit standards on evidential matter and on generally accepted accounting

principles.

86. By acquiescing to the client and issuing an audit report with

open issues, KPMG LLP was not independent. Therefore, the audit opinion filed

with New Centurys Form 10-K was a nullity and violated auditing standards.

VI. The Residual Interest

87. New Century retained a residual interest in each of the

securitizations it structured as sales. The residual interest represented New

Centurys right to future cash flows or assets that remained in the trust created for

the securitization after the payment to senior interests. New Centurys income

from and valuation of its residual interests depended on the securitized loan pool

actually producing income. Thus, residual interests were directly related to the

quality of the loans in the pool.

88. The Company relied on internally-created models to

determine its residual interest in a particular securitization. Each securitization

had a separate model.

89. Each month, the Secondary Marketing Department would

populate each securitization models with actual data. The model then would be

rolled forward from the prior month to calculate the current residual interest based

on various assumptions (including, most importantly, the prepayment rate, the loss

rate, and the discount rate) that were built into the model at the outset. Changes to

the assumptions affected the value of the residual interest.

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90. If the models had been done correctly, the residual interest

would have been identified correctly on an incremental basis, allowing the

Company to properly run its business.

91. The models were wrong. The models used the wrong

discount rates, used stale information from the late 1990s to calculate prepayment

rates and inexplicably assumed that the loans would be sold at par value if the

securitization collapsed. Moreover, the assumptions in the models were

undocumented and unsupported.

92. To audit the financial statements, KPMG LLP had to apply

audit procedures to the models. KPMG LLP was grossly negligent in not

detecting the errors, or when it did detect control deficiencies, not taking steps to

protect the public and New Century. As was its practice, KPMG LLP was not

skeptical of Managements assumption underlying the models, but instead was a

defender of management. KPMG LLP allowed the models to be used even though

the discount rates were plainly too low and allowed Management to artificially

increase asset values. Moreover, as discussed below, Management had dismal

internal controls, and thus there was a lack of documentation to support

Managements assumptions for the models. Nonetheless, KPMG LLP accepted

and defended Managements assumptions.

93. For example, in 2005 when experts within KPMG LLP found

that the Companys documentation of the discount rate used was insufficient and

29

the discount rate was too low, the KPMG LLP audit team sided with Management

and found the discount rate to be reasonable.

94. In 2006, experts within KPMG LLP tried again, and again the

KPMG LLP audit team sided with Management instead of the public interest.

KPMG LLPs audit team and Managements interest won again, and no change

was made.

95. KPMG LLPs audit team knew that the problems were more

than theoretical. KPMG LLP repeatedly discovered that the models used to

calculate the residual interest valuations generated errors. KPMG LLP also had

actual knowledge of errors in the data New Century was putting into the models.

This occurred at least as early as the 2004 audit.

96. KPMG LLP ignored these problems despite the fact that only

a few years earlier, in 2000, a calculation error in the residual interest models led

to a $70 million write down and New Centurys first loss in its history.

Management was determined to not let this happen again, and KPMG LLP

knowingly or with a blind eye assisted Management.

97. In violation of auditing standards, KPMG LLPs audit team

did not exercise professional skepticism, which required KPMG LLP to adopt an

attitude that includes a questioning mind and a critical assessment of the audit

evidence. Moreover, auditing standards required KPMG LLP to test not just

accept Managements assumptions, and to obtain sufficient evidence to support

those assumptions.

30

98. Even when KPMG LLP repeatedly noted deficiencies in the

models, and indeed New Centurys lack of any consistent criteria in the models,

KPMG LLP failed to take the necessary steps to ensure that the residual interests

were fairly stated in accordance with GAAP.

99. A number of significant deficiencies existed with respect to

New Centurys residual interest valuation process, including:

(a) the absence of documentation describing how the residual

interest valuation models worked and how the assumptions used in

the models were established, revised or approved;

(b) a failure to increase the discount rate used to value residual

interests in 2005 and 2006 to reflect increased risk in the pools;

(c) a failure to adjust its prepayment assumption to reflect

changing market conditions despite the advice of the KPMG LLP

specialists to do so;

(d) the unilateral decision by Secondary Marketing in early 2006

to stop making changes to assumptions in pre-2003 securitization

models; and

(e) the assumption that the likely value of remaining loans in a

securitization at the time the trust was cleaned up or terminated

would be a par value, regardless of the pools delinquency status

or estimated market conditions.

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100. These problems existed at least as early as 2004, and thus

again KPMG LLP could have stopped the problem before these problems helped

lead to New Centurys demise. However, by the third quarter of 2006, New

Century held residual interests in over thirty securitizations structured as sales that

were reported on its balance sheet as $223 million.

101. In early 2007, New Century itself concluded that, when

proper assumptions were applied in the valuation of its residual interests, its

residual interests would need to be written down by approximately $90 million

from the amounts at which they were valued as of September 30, 2006.

VII. KPMG LLP Negligently Audited New Centurys Internal Controls

102. KPMG LLP audited New Centurys internal control as

required by Sarbanes-Oxley and PCAOB Auditing Standard No. 2, An Audit of

Internal Control Over Financial Reporting in Conjunction with an Audit of

Financial Statements. Such audits over internal control were required by law in

response to the Enron-era of financial reporting and accounting, when the public

asked Where were the auditors? The law required KPMG LLP to audit and

report on (i) managements assessment of internal control and (ii) the effectiveness

of internal control over financial reporting.

103. KPMG LLP identified internal control deficiencies in 2004,

again in 2005, and again in 2006, but failed to take appropriate steps to protect the

public, the specific purpose of Sarbanes-Oxley. Moreover, despite KPMG LLPs

direct knowledge of the lack of proper internal control, it did not take appropriate

32

steps in its audits of the financial statements to detect material misstatements due

to error or fraud.

104. KPMG LLP found significant deficiencies with the internal

controls of the exact same issues that caused the now admitted material

misstatements in New Centurys financial statements, and ultimately caused New

Century to declare bankruptcy. KPMG LLP stated in its letters to New Century

that we considered internal control in order to determine our auditing procedures

for the purpose of expressing our opinion on the consolidated financial

statements, demonstrating either gross negligence in its auditing procedures or

simply false statements to it audit client.

105. For example, in 2004 KPMG LLP found a deficiency in the

internal controls for the now admitted material misstatements arising from the

calculation of residual value and allowance for loan losses. KPMG LLP found

that [m]anagement neglected to create adequate documentation of its

calculations that prevented assurances of data integrity underlying the

calculations.

106. Nonetheless, in 2005 KPMG LLP only identified the risk of

misstatement as moderate. However, in 2005 KPMG LLP again found thirteen

control deficiencies relating to the residual interest valuation alone. Still, KPMG

LLP took no steps in its audits to correct for the lack of control, repeatedly giving

in to Managements wishes.

33

107. In 2006, KPMG LLP incredibly still found that

[m]anagement does not have a regular, documented process in place to determine

a threshold at which to adjust assumptions in the residual asset models. Had

KPMG LLP done its job in 2004, the incorrect residual interest valuation would

have been fixed before it helped cripple the Company.

108. Similarly, as KPMG LLP and New Century admitted, the

internal controls for the calculation of the loan repurchase were inadequate and

failed. As late as 2007, KPMG LLP declared that there was a material weakness

in internal controls because there were no controls in place to monitor the buildup

of claims for repurchases during the year.

109. Of course, KPMG LLP should have been aware of this

backlog of repurchase claims, discussed above, at least as early as 2004. In

connection with the 2005 audit, KPMG LLP was specifically informed in an email

entitled Repurchase Requests at 12/31/05, that New Century had outstanding

repurchase requests of $188 mm at year end. However, KPMG LLP accepted the

flawed, 90-day back formula that estimated only $70 million repurchases.

110. Moreover, in KPMG LLPs 2004 internal control audit,

KPMG LLP identified problems with the LOCOM internal control, including that

there was no documentation of New Centurys review and approval of the

LOCOM analysis.

34

111. New Century publicly acknowledged in 2007 that there were

material weaknesses and significant deficiencies in its system of internal controls

over financial reporting in at least 2005 and 2006.

112. New Century also publicly reported in 2007 that the

Companys consolidated financial statements for the year-end 2005 (the 2005

Financial Statements) and interim financial statements for each of the first three

quarters of 2006 (the 2006 Financial Statements, and together with the 2005

Financial Statements, the Financial Statements) were not prepared in accordance

with GAAP and were materially misstated.

113. Specifically, New Century advised, among other things, that

the Financial Statements:

(a) failed to properly account for and report the repurchase

reserve in accordance with GAAP;

(b) failed to properly account for and report the lower of cost or

market (LOCOM) valuation adjustment for repurchased loans

in accordance with GAAP;

(c) failed to properly account for and report the valuation of

residual interests in accordance with GAAP;

(d) materially understated the repurchase reserve, materially

overstated the value of repurchased loans, and materially

overstated the value of residual interests;

(e) materially overstated pre-tax earnings; and

35

(f) should not be relied upon.

114. The deficiencies that existed during at least 2005 and 2006 in

New Centurys system of internal control over financial reporting included, but

were not limited to, a failure to establish or develop:

(a) effective policies and procedures for calculating estimates,

including the repurchase reserve and the valuation of residual

interests;

(b) safeguards and controls to prevent the revision of or deviation

from accounting policies and related assumptions without

adequate supervision and review;

(c) safeguards and controls to insure the remediation of identified

internal control deficiencies;

(d) safeguards and controls to identify and process efficiently

repurchase requests; and

(e) safeguards and controls to ensure that the repurchase reserve

estimation process accounted for all outstanding repurchase

requests.

VIII. New Centurys Audited Financials Violate GAAP

115. All parties concede that New Centurys financial statements

were not presented fairly in accordance with GAAP.

116. On February 7, 2007, a day before its 2006 fourth quarter and

year-end results were scheduled to be released, New Century publicly announced

36

that it needed to restate its earnings for the first three quarters of 2006 due to its

failure to account properly in accordance with GAAP for probable and estimable

expenses and losses in its loan repurchase reserve. In particular, New Century

explained that the companys methodology for estimating the volume of

repurchase claims to be included in the repurchase reserve calculation did not

properly consider, in each of the first three quarters of 2006, the growing volume

of repurchase claims outstanding that resulted from the increasing pace of

repurchase requests that occurred in 2006, compounded by the increasing length of

time between the whole loan sales and the receipt and processing of the repurchase

request.

117. New Century further explained in that announcement that

errors leading to these restatements constitute material weaknesses in its internal

control over financial reporting for the year ended December 31, 2006.

118. On March 2, 2007, New Century filed a notification of late

filing with the SEC, in which it stated, among other things, that:

Although a full review is ongoing, the Company currently expects that the modifications to the allowance for loan repurchase losses will result in restated net income for the first three quarters of 2006 that is significantly lower than previously reported in the Companys 2006 interim financial statements.

* * *

Although the Companys mortgage loan origination volume increased in 2006 when compared to 2005, the Companys results of operations for the quarter and year ended December 31, 2006 will reflect declines in

37

earnings and profitability when compared to the same periods in 2005. The Company currently expects that it will report a pretax loss for both the fourth quarter and full year ended December 31, 2006.

119. On March 12, 2007, New Century reported that the majority

of its lenders had declared New Century in default and as a result had accelerated

New Centurys obligation to repurchase loans for a total of $8.4 billion in

outstanding repurchase requests. New Century further disclosed that it lacked the

liquidity to keep pace with repurchase requests. In addition, by the end of March,

all of New Centurys lenders discontinued financing for the Company and New

Century had to cease its mortgage loan originations.

120. Following these public announcements, New Centurys stock

fell by more than 90 percent and was delisted by the New York Stock Exchange.

121. On May 24, 2007, New Century publicly announced that the

Audit Committee had concluded that it is more likely than not that . . . errors in

the aggregate resulted in a material overstatement of pretax earnings in the

[Companys] 2005 Financial Statements, and that the Board had concluded that

the 2005 Financial Statements should no longer be relied upon.

122. On April 2, 2007, New Century filed for bankruptcy in the

United States Bankruptcy Court for the District of Delaware to orderly liquidate.

123. On June 1, 2007, the Bankruptcy Court issued an order

directing the United States Trustee to appoint an examiner to investigate the

accounting and financial statement irregularities at New Century. Eight months

38

after his appointment, the Examiner released a 551-page final report that was filed

with the Bankruptcy Court on February 29, 2008 (the Examiners Report).

124. The Examiner concluded that KPMG LLP was negligent in

its audits. Moreover, the Examiner concluded that the engagement team acted

more as advocates for New Century, even when its practices were questioned by

KPMG LLP specialists who had greater knowledge of relevant accounting

guidelines and industry practice.

125. When the economic landscape began to change, New Century

thus faced a shifting market without an independent public accountant, and with

false assurances that it had resources it could use instead of reserve. Had KPMG

LLP done its job and upheld its public duty, the problems that caused New

Century to fail or at least to spectacularly increase the enormity of its failure

could have been stopped before they started and materially misstated financial

statements would not have been issued in the public marketplace. Moreover, had

its financial statements been fairly presented in accordance with GAAP, New

Century could not and would not have incurred billions in liabilities to repurchase

mortgages or direct liabilities to lenders.

VICARIOUS LIABILITY OF KPMGI FOR KPMG LLPS GROSS NEGLIGENCE

I. KPMGI Is Vicariously Liable for the Loss Caused by KPMG LLP

Because KPMG LLP Was KPMGIs Agent.

39

126. KPMGI has the right to control KPMG LLP through

agreements and policies that dictate how KPMG LLP conducts its business,

including its audits.

127. Through these policies and agreements, including a

membership agreement executed by both KPMGI and KPMG LLP, KPMGI

manifests its understanding that member firms like KPMG LLP will act on

KPMGIs behalf and subject to its control. By agreeing to the terms set forth in

the membership agreement and by its actions, KPMG LLP accepts its role as

KPMGIs agent.

128. To carry out its object and to make money KPMGI

stresses the quality of its global network and the stringent standards and quality

controls imposed and implemented by it on each of its member firms, including

KPMG LLP. KPMGI creates and fosters the belief that the audit reports issued by

it and its member firms should be relied on because they are backed by the

expertise of its global network, an expertise that KPMGI represents is ensured by

the strict quality controls imposed and implemented by KPMGI.

129. KPMGI promises the public that it will strictly control the

quality of member firms. For example, KPMGI states:

To provide high quality services across the globe, KPMG recognizes

the critical importance of good governance in promoting our values and

performance.

40

KPMGI promulgates policies of quality control including

independence for its member firms audit practices . . . These policies

and their associated procedures were established to provide KPMGI

with reasonable assurance that its member firms comply with relevant

professional standards and regulatory requirements.

[KPMGI] has established policies and procedures to which member

firms must adhere to help ensure that the work performed by member

firm personnel meets the professional standards, regulatory

requirements and the member firms quality requirements applicable to

their respective Audit, Tax or Advisory services engagements.

To strengthen and enhance quality control, KPMGI and its member

firms will continue to provide training, technology based tolls, and

methodologies that contribute to quality audits.

Audit engagement teams in all member firms follow the KPMG Audit

Methodology.

130. Specifically, the agreements and policies give KPMG LLP

the right to put the KPMG logo and name on audited financial statements,

including the audited financial statements for New Century at issue in this case.

If KPMG LLP fails to maintain the necessary level of standards, in performing

audits, KPMGI can fire KPMG LLP.

131. KPMGIs strict quality controls failed here. KPMG LLPs

negligent conduct of the New Century audits included a series of systemic failure

41

of standards and quality controls that damaged New Century in other words, the

standards and quality controls for which KPMGI was responsible.

132. In short, by failing to implement an audit procedure and

conduct an audit, through its member firm, in accordance with auditing standards,

KPMGI failed New Century, its audit client, and is therefore responsible for

damages suffered by New Century.

FIRST CAUSE OF ACTION (Vicarious Liability)

133. Plaintiff repeats and realleges paragraphs 1 through 132 of

this Complaint as though fully set forth herein.

134. Pursuant to the agreements between the KPMGI and KPMG

LLP and the policies imposed by KPMGI and accepted by KPMG LLP, KPMGI

acknowledged that KPMG LLP would act for it, and KPMG LLP accepted that

undertaking.

135. KPMGI had the right to control KPMG LLP pursuant to the

agreements between the KPMGI and KPMG LLP and the policies imposed by

KPMGI and accepted by KPMG LLP.

136. KPMGI had the right to make management and policy

decisions affecting its agent, KPMG LLP.

137. KPMGI had the right to monitor KPMG LLP to determine

whether it was complying with the policies and directions of KPMGI.

138. KPMGI had the right to terminate KPMG LLP.

42

139. KPMGI had the power to direct the policies and practices of

KPMG LLP every day it operated.

140. KPMG LLP therefore is KPMGIs agent, and KPMGI is

liable for the harm caused by KPMG LLP.

SECOND CAUSE OF ACTION (Deceptive and Unfair Business Practices)

141. Plaintiff repeats and realleges paragraphs 1 through 140 of

this Complaint as though fully set forth herein.

142. KPMGI intentionally engaged in deceptive and unfair

business practices. KPMGI promised to strictly control its agent KPMG LLP to

entice the public, including consumers, its clients and New Century to use KPMG

LLPs services.

143. KPMGI had a public duty to direct the policies and

procedures of KPMG LLP, the certified public accountants KPMGI required to

follow its audit and independence policies.

144. KPMGI knew that its promises were false when made.

145. KPMGI broke its promises and breached its public duty by

failing to strictly control the quality of KPMG LLPs audits, including the audits

of New Century, harming the public interest.

146. As a proximate cause of KPMGIs unfair business practices,

New Century was damaged.

43

PRAYER FOR RELIEF

WHEREFORE, Plaintiff respectfully requests judgment against

Defendant, under all applicable causes of action, as follows:

1. actual compensatory and consequential damages in an amount to be

proven;

2. rescission or rescissory damages;

3. restitution;

4. treble damages;

5. punitive damages;

6. injunctive relief stopping KPMGIs false and deceptive business

practices;

7. attorneys fees and costs of this suit as allowed by law;

8. pre-judgment and post-judgment interest as allowed by law; and

9. such other and further legal and equitable relief as the Court deems

just and proper.

44

JURY DEMAND

Plaintiff hereby requests a trial by jury on all claims in this complaint.

Dated: April 1, 2009 Respectfully submitted,

Emily Alexander (EA-3946) THOMAS ALEXANDER & FORRESTER LLP14 27th Avenue Venice, California 90291 Telephone: (310) 961-2536 Facsimile: (310) 526-6852 Attorneys for Plaintiff THE NEW CENTURY LIQUIDATING TRUST AND REORGANIZED NEW CENTURY WAREHOUSE CORPORATION, by and through Alan M. Jacobs, Liquidating Trustee and Plan Administrator