KPMG fined £13m over sale of Silentnight to private equity firm

9th August 2021

The Financial Reporting Council (FRC) has fined KPMG £13 million over the firm’s role in the sale of the mattress company Silentnight to the private equity firm HIG.

The accounting watchdog also severely reprimanded KPMG and ordered it to appoint an independent reviewer to establish ‘root causes’ of its failings.

David Costley-Wood, former Partner and Head of KPMG Manchester Restructuring was also fined £500,000, severely reprimanded and banned from the insolvency industry for 13 years.

The fines follow a referral from The Pensions Regulator and an investigation undertaken pursuant to the Accountancy Scheme* in relation to Costley-Wood’s conduct in respect of the Silentnight group of companies in the period August 2010 to April 2011.  An independent Disciplinary Tribunal made findings of Misconduct following a four-week hearing during November and December 2020 and sanctions were determined following a hearing in June 2021.

The Tribunal made findings of Misconduct in respect of breaches of the fundamental principles of Objectivity and Integrity.

It described the history of KPMG’s involvement with Silentnight in this case as deeply troubling as KPMG failed to act solely in its client’s interests, acted in fundamental respects contrary to those interests and in those of a party whose interests were diametrically opposed to those of Silentnight. It concluded that the lack of objectivity in this matter went to the core of the relationship between Silentnight and KPMG.

The Tribunal also held that, in addition to the lack of objectivity in relation to his dealings with Silentnight, Costley-Wood acted dishonestly and therefore he and KPMG acted with a lack of integrity including in their dealings with the Pension Protection Fund (“PPF”) and the Pensions Regulator (“tPR”) despite Costley-Wood acknowledging that there was an obligation to act transparently in relation to a regulator.

The Tribunal commented that “Breaches of the principles of integrity and objectivity risk seriously undermining public confidence in the standard of conduct of Members and Member Firms and in the profession generally, all the more so where, as here, the professional has acted dishonestly. Dishonesty is inimical to everything that a profession stands for and especially destructive of public confidence.”

The Tribunal found that Misconduct had been established in that throughout the period 16 August 2010 to 14 January 2011 Costley-Wood advised and/or assisted both Silentnight and HIG in relation to a proposed acquisition of Silentnight by HIG at a time when there was a conflict of interest between the interests of Silentnight and HIG, and as a result the Respondents’ judgement was compromised and objectivity impaired.

Costley-Wood assisted with a strategy designed to drive Silentnight into an insolvency process, or to the brink of such a process (a “Burning Platform”), with a view to passing Silentnight’s Pension Scheme to the PPF at the expense of Pension Scheme members and PPF levy payers. In this context Costley Wood provided advice and assistance to HIG so that it could acquire Silentnight as an otherwise profitable business without the burden of the Pension Scheme liabilities.

The Respondents failed, in addition, to consider the self-interest and familiarity threats which arose from their relationship with HIG and from their desire to nurture that party as a client and keep them ‘onside’. Costley-Wood was conscious of the importance of the potential relationship of HIG to KPMG throughout. The Respondents’ loss of objectivity underlay or drove much of what they did in relation to Silentnight throughout the relevant period, including assisting and advising HIG in its plan to acquire Silentnight free of the Pension Scheme liability from the summer of 2010.

Costley-Wood dishonestly advanced and associated himself with untrue and misleading and/or materially incomplete statements to the PPF, tPR, Silentnight and the Trustees of the Silentnight Pension Scheme as to the causes of Silentnight’s difficulties in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.

KPMG is legally liable under the Accountancy Scheme for the conduct of Costley-Wood, and accordingly findings of Misconduct by KPMG were made by the Tribunal in respect of the same matters.

The Tribunal ordered that KPMG pay £2,450,000 towards Executive Counsel’s costs of the investigation together with the costs of the Tribunal (amounting to a further £305,814).

Elizabeth Barrett, Executive Counsel, said “The scale and range of the sanctions imposed by the Tribunal mark the gravity of the Misconduct in this matter. The decision serves as an important reminder of the need for all Members of the profession to act with Integrity and Objectivity and of the serious consequences when they fail to do so.”