Ex-KPMG Partner’s Fraud Trial: David Middendorf Takes the Stand

Law360 court reporter Jack Newsham wrote on Feb. 28 that it could happen this week, and he was right: Former KPMG partner David Middendorf took the stand this afternoon to testify in his own defense.

David Middendorf

Authorities have said that Middendorf and four of his former KPMG colleagues—Thomas Whittle, Brian Sweet, David Britt, and Cynthia Holder—were the beneficiaries of secret Public Company Accounting Oversight Board audit inspection information that just so happened to illegally land in their laps.

They are accused of using the confidential information on which KPMG clients’ audits the regulator would be reviewing so the Big 4 firm could get a better grade on PCAOB inspections.

Middendorf and co-defendant Jeffrey Wada, who is accused of leaking PCAOB audit inspection plans to the KPMG executives while employed there, were charged with conspiracy and wire fraud in connection with the information-stealing scheme. They have pleaded not guilty to both charges.

On Monday afternoon, Middendorf echoed what his counsel told jurors during the trial’s opening arguments—that he helped thwart the scheme and that Sweet was mostly to blame:

 

Middendorf’s revelation that he was a whistleblower is contrary to what Whittle, the former national partner-in-charge for inspections at KPMG, recently told jurors.

Authorities have said that Wada allegedly read Holder, his former colleague at the PCAOB who was an executive director at KPMG at the time, a list of about 50 stock ticker symbols, which represented the full confidential list of KPMG clients to be inspected by the PCAOB in 2017.

Authorities said Wada was willing to leak secret inspection information to Holder, a former PCAOB inspections leader, because he was hoping to land a job at KPMG.

Holder gave that information to her boss, Sweet, a partner at KPMG, who then shared it with Whittle, Middendorf, and Britt, co-leader of KPMG’s Banking and Capital Markets Group.

But Whittle told jurors on Feb. 20 that another KPMG partner, Diana Kunz, blew the whistle on the scheme, not Middendorf, in February 2017 after she was given a head’s up by Sweet about which of her engagements would be inspected by the PCAOB. In fact, Whittle said Middendorf had a meltdown when he learned that Sweet informed Kunz about the confidential inspection plans.

Scott Marcello, a partner who headed up KPMG’s audit practice, was fired by the firm along with Middendorf, Whittle, Sweet, Britt, and Holder in April 2017. But Marcello wasn’t indicted, unlike the other five KPMG executives and Wada, who were accused in January 2018 of participating in a scheme to defraud the PCAOB and the U.S. Securities and Exchange Commission.

Prosecutors rested their case against Middendorf and Wada last Thursday, according to Newsham, who has done an outstanding job covering the trial. Several key witnesses were called to testify against Middendorf, including Whittle and Sweet.

Sweet, a former associate director at the PCAOB, told jurors that Middendorf and other high-ranking executives at KPMG pressed him for confidential PCAOB inspection information as soon as he joined the firm in May 2015. Sweet, who pled guilty to conspiracy and wire fraud charges in January 2018, also said that Middendorf and Whittle, his boss, encouraged him to stay friendly with his former colleagues at the PCAOB, including Holder, who at that time was a PCAOB inspections leader before joining KPMG as executive director in August 2015.

Authorities said that Holder used her position with the PCAOB to share confidential information about certain pending inspections with Sweet, who would later become her boss at KPMG. She did this while simultaneously seeking employment with the accounting firm.

Sweet told jurors that some of the internal PCAOB documents and tips about its inspection plans he received from Holder were given to her via Wada.

After joining the Big 4 firm, authorities said Holder received confidential PCAOB information on audit selections for KPMG from Wada in both 2016 and 2017, which would be shared with Middendorf, Whittle, and Britt so extra scrutiny would be placed on these audits before they were inspected by the PCAOB.

Attorneys for Middendorf and Wada argued on Feb. 28 that the wire fraud counts against their clients should be dismissed. Amy Lester, a lawyer representing Middendorf, said the inspection plans that were allegedly stolen didn’t constitute “property,” according to Law360. A lawyer for Wada said the notion that he had embezzled the plans, which prosecutors said was a key part of their case, didn’t stand up because Wada hadn’t been entrusted with those plans in the first place.

On Oct. 16, 2018, Holder pleaded guilty in Manhattan federal court to one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud, and two counts of wire fraud. She is expected to be sentenced on April 5 and could face up to 20 years in prison.

Nearly two weeks later, Whittle pleaded guilty to wire fraud and conspiracy charges, pursuant to a plea agreement with the government, in Manhattan federal court. He is expected to be sentenced on Sept. 13.

Britt’s trial will reportedly begin in October.

Related articles:

Ex-KPMG Partner’s Fraud Trial: Opening Arguments
Ex-KPMG Partner’s Fraud Trial: Brian Sweet Takes the Stand
Ex-KPMG Partner’s Fraud Trial: What David Middendorf Allegedly Said Once the Scheme Started to Unravel

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