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Auditor fined $6.2 million for inflating Miller Energy's value

Matt Lakin
Knoxville
Former Miller Energy headquarters on Cogdill Road in West Knoxville. (News Sentinel file 2011)

A nationally respected account firm will pay $6.2 million in federal fines for helping a failed Knoxville oil company inflate its value by more than a hundredfold.

The agreement reached Tuesday settles the U.S. Securities and Exchange Commission's case against KPMG, which "grossly overstated" by hundreds of millions of dollars the worth of Miller Energy Resources' oil assets in a 2011 audit, according to a SEC news release. The unfounded appraisal - nearly $480 million for a remote Alaskan oilfield bought for just $2.25 million - helped fuel Miller's rise up the stock market charts, along with its crash into bankruptcy in 2015 after SEC regulators determined the value to be bogus.

 KPMG and John Riordan, the managing partner of KPMG's Knoxville office at the time, "failed to properly assess the risks" and either overlooked or ignored issues "that should have raised serious doubts," according to the SEC.

Warning signs ignored

Those red flags included double-counting of Miller's oil assets, purchased from the previous owner in bankruptcy proceedings, which lay in the heart of a tundra surrounded by active volcanoes. Instead, Miller's auditors - Sherb & Co., replaced by KPMG - issued a glowing audit report that essentially rubber-stamped overoptimistic estimates, according to the SEC.

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Miller Energy, which once sold shares for pennies apiece, joined the New York Stock Exchange on the strength of the audit as executives watched stock prices soar to highs of as much as $9 per share.

Miller Energy Resources' Osprey oil platform in Cook Inlet off the coast of Alaska. Miller Energy acquired the oil production platform and other Alaska petroleum assets in 2009 for less than $5 million at a bankruptcy auction. The assets were valued at more than $300 million.

Miller's execs weren't shy about flaunting their profits. The CEO, Scott Boruff, spent $9.5 million to purchase West Knoxville's palatial 37,000-square-foot Villa Collina on an 8-acre estate off Lyons View Pike near Cherokee Country Club. Shareholders began raising claims of overspending at the top.

Boruff has denied he had any reason to suspect his company's value might be inflated.

"I absolutely knew nothing about that," he said last year. "I didn't do the accounting, and I didn't do the legal work."

Scott Boruff

The oil company's fortunes dried up in August 2015 when the SEC filed civil charges of accounting fraud, declaring the Alaskan assets overpriced by at least $400 million. Miller Energy settled the case by paying a $5 million fine. The company filed for bankruptcy three months later.

Shareholders who lost their savings filed various class-action lawsuits. Some of those claims have been settled, while others remain pending in U.S. District Court.

Under the settlement, KPMG and Riordan admit no wrongdoing. The settlement offers no details on a federal probe into claims of insider trading involving Miller Energy's stock, which subpoenas show the SEC opened last year.