KPMG hit with lawsuit over New Century collapse

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 of dollars 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.

"As New Century's auditor, KPMG failed its public watchdog duty," the suit says.

KPMG spokesman Dan Ginsburg said he had not seen the suit but issued a statement saying the company had acted "in accordance with professional standards" in its dealings with New Century.

"We will vigorously defend our audit work. Any implication that the collapse of New Century was related to accounting issues ignores the reality of the global credit crisis. This was a business failure, not an accounting issue," the statement said.

'DOING THE UNTHINKABLE'

The suit demands at least $1 billion in damages.