Ex-KPMG Partner’s Fraud Trial: What David Middendorf Allegedly Said Once the Scheme Started to Unravel

OK guys, things are starting to get good in the David Middendorf trial. We now know the identity of “Partner-5”—the person at KPMG who allegedly blew the whistle on the information-stealing scheme that five KPMG executives and one Public Company Accounting Oversight Board employee were involved in to help KPMG know ahead of time which of its audits would be inspected by the PCAOB.

We also know how Middendorf, KPMG’s now-former national managing partner for audit quality and professional practice, reportedly reacted when he found out that the scheme had been foiled. (Spoiler alert: He wasn’t happy.)

But first, let’s go back to February 2017. The scheme involving Middendorf, Jeffrey Wada (a PCAOB employee who wanted a job at KPMG), Cynthia Holder (KPMG executive director), Brian Sweet (partner at KPMG), Thomas Whittle (national partner-in-charge for inspections at KPMG), and David Britt (co-leader of KPMG’s Banking and Capital Markets Group) had been going on for nearly two years.

As Caleb reported early last year, Wada allegedly read Holder, his former colleague at the PCAOB, 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 get hired by KPMG.

Holder gave that information to her boss, Sweet, who then shared it with his boss, Whittle, who then shared it with his boss, Middendorf. The client list was also shared with Britt. According to the indictment, they discussed “which engagement partners should be notified that their engagement had been selected for inspection.”

But as Caleb wrote, this is when the scheme started to unravel. The indictment states:

On or about February 6, 2017, an engagement partner (“Partner-5”), who had been informed by Brian Sweet that Partner-5’s engagements would be inspected by the PCAOB, reported the conversation to Partner-5’s supervisor. Partner-5’s supervisor reported the matter further and by February 13, 2017, the matter had been reported to KPMG’s General Counsel. Shortly thereafter, members of KPMG’s Office of the General Counsel (“OGC”) reached out to speak to both Sweet and CYNTHIA HOLDER, the defendant.

Law360 reported on Feb. 20 that “Partner-5” is Diana Kunz, a KPMG partner in Chicago. Sweet testified last week that Whittle scolded him for sharing that information with Kunz and that he and Holder—a former FBI agent—tried to get their stories straight before being interviewed by OGC.

Whittle took the stand on Feb. 26 and implicated Middendorf in the scheme, according to Law360. He described to jurors his boss’s angry reaction to learning that Sweet told Kunz about the confidential inspection plans:

“‘What the fuck is Brian Sweet doing?’” Whittle recalled Middendorf saying, apologizing to jurors for repeating the profanity his boss used. “‘Why is he telling people they’re being inspected?’”

“He told me to call Mr. Sweet and tell him to stop telling engagement partners they were on the final list,” Whittle continued, referring to a secret 2017 inspection plan that Sweet allegedly obtained from PCAOB staffer Jeffrey Wada. “We were caught. We were caught with having confidential information that wasn’t ours.”

If you remember, during the trial’s opening arguments, Middendorf’s attorney, Nelson Boxer of Petrillo Klein & Boxer, told jurors that his client, not Kunz, “blew the whistle to KPMG’s compliance department when he learned of the scope of Sweet’s misdeeds.”

Somebody’s not telling the truth.

Middendorf and Wada were both charged with conspiracy and wire fraud in connection with the scandal, and are pleading not guilty to both charges.

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.

Sweet pled guilty to conspiracy and wire fraud charges in January 2018. Britt’s trial will reportedly begin in October.

Middendorf’s and Wada’s trial is scheduled to continue on Wednesday.

Related articles:

Ex-KPMG Partner’s Fraud Trial: Opening Arguments
Ex-KPMG Partner’s Fraud Trial: Brian Sweet Takes the Stand

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