Possible Fraudulent "Clean" Audit of Hicks Sports in 2008 May Have Delayed Sale of Dallas Stars 2 Years

Were Tom Hicks and Hicks Sports Group in serious trouble much, much sooner than anyone knew?

That's what Galatioto Sports Partners LLC is alleging in a law suit against KPMG LLC, says a really excellent report from Robert Wilonsky of The Dallas Observer. Give him your clicks for this excellent find.

You might be familiar with the KPMG tower in Dallas but never thought about what they do. From their own web site: "KPMG is a global network of professional firms providing Audit, Advisory and Tax service." KPMG was hired to perform one of said audits of Hicks Sports Group in 2008 and issued an opinion of "clean". Based on that recommendation, GSP loaned Hicks $67 million dollars, part of a larger $540 million line of credit extended based on the audit.

What's happening is this: GSP (nowadays a part of the ambiguous group we call "the lenders" when we talk about the sale of the Dallas Stars) has potentially found another way to recoup some of that money, and it sounds like they have a pretty good argument.

From the lawsuit, via The Observer:

KPMG's fraud inflicted significant losses on GPS and the lenders. Had KPMG exercised professional due care, its March 31, 2008 independent auditor's report would have disclosed both Hicks Sports' inability to continue as a going concern and its breach of the Debt Covenant. Hicks Sports' failure to obtain a clean audit opinion and certification of its compliance with the Debt Covenant would have resulted in a default of the credit agreement. This would have permitted the lenders to exercise several rights to ensure full repayment of the loans, including terminating the credit agreements and asserting control over the equity interested Hicks Sports held in the Stars and Rangers.

Which is to say that all of this mess likely would have happened anyway, but it might have started in 2008, not in February of 2010, changing the course of history for both the Texas Rangers and the Dallas Stars.

The lawsuit, filed at the New York State Supreme Court can be found here, or by searching their online system here, if that doesn't work.

This lawsuit might make KPMG seem like one of the villains of this story we never even knew existed all this time. Digging into the suit, it's clear that Galatioto has enough disdain to go around for both Hicks and KPMG.

Follow me after the jump because you're going to want to see this...

More from the lawsuit...

Hicks used the proceeds of the credit agreements to restructure debt and increase working capital available to it's financially troubled subsidiaries - the National Hockey League's Dallas Stars and Major League Baseball's Texas Rangers. Even with the benefit of the credit facilities, Hicks sports failed to to effect a turnaround and continued to suffer tens of millions in losses annually.

Which is to say, they were giving him money he clearly wasn't good for (in hindsight) and he still couldn't turn the thing around, which we already knew. There is no indication in these documents about how much of the losses back then were attributed to which team, and that's something we'll probably never really know.

Here are the real stomach turners, though keep in mind that this is GSP's opinion and it is a biased one with strong language throughout...

KPMG's fraudulent misrepresentations denied the lenders the ability to enforce their rights, and allowed Hicks Sports to continue drawing funds from the credit facility and to remain in control of it's sports franchises. In the interim, Hicks Sports took several actions adverse to the interests of GSP and the lenders.

Hicks Sports added more than $100 million in liabilities to its balance sheet, attempted to affect a sale of the Texas Rangers that would have diverted millions away from the lenders, and strategically timed its eventual default on March 31st, 2009 to remain in control of its assets until after the conclusion of the 2010 Stanley Cup Finals.

It's jarring to hear to see the Stanley Cup Finals in these legal documents, and to think that even when the Red Wings and Stars played in the Western Conference Finals in 2008, back when we were innocent, this was all in motion and had been for quite some time.

As a result, of Hicks' Sports strategic timing, the lenders were powerless to accelerate and foreclose on the amounts owed at a time when the capital markets were deteriorating.

The result was the sale of the Texas Rangers at a price that left the lenders severely under compensated and a pending sale of the Dallas Stars that is likely to be at a significantly reduced valuation when compared to what would have achieved in 2008.

The first part of that last sentence is interesting because the auction created a great haul for the Texas Rangers by most accounts. "Severely under compensated" is in the eye of the beholder.

The second part of that sentence is true and that's what's stinging the lenders even today. The team was worth far more in 2008. Would they have capitalized fully on it? Was there time? The economy was already swooning by late 2008 surrounding the presidential election and the T.A.R.P. bailout that Fall.

Would they have sold the team before then? Would they have been unaffected by all of that if sold concurrently to those worsening economic conditions? Probably not, but as I said, this document is GSP's opinion and more than a little biased.

We already knew the team had started down this path long before any of us knew about it, this is just the latest pullback of the curtain revealing a little more about how Tom Hicks was swerving all over the road for a good long while before anyone was concerned about it.

If this is true, and a court of law will determine that, not us, then this mess could have been sorted out long ago and Brad Richards....well, you know.