KPMG seeks to block release of Polaroid files

Could affect bankruptcy report

By Jeffrey Krasner, Globe Staff, 8/21/2003

After six months of investigating Polaroid Corp. for allegedly improper accounting leading up to its October 2001 bankruptcy, court-appointed examiner Perry Mandarino has run into a last-minute roadblock: Polaroid's former auditor, KPMG LLP, is seeking to block release of parts of Mandarino's report.

The accounting firm, which audited Polaroid's financial statements in the late 1990s through the bankruptcy, last week wrote to a lawyer for Mandarino, saying that documents it provided during his investigation are confidential, and that it does not want them released in his report.

The report has set off a last-minute scramble as Mandarino seeks permission from US Bankruptcy Judge Peter J. Walsh to include the documents in his report.

Mandarino's report will rely heavily on documents produced by KPMG, and will include several of those documents as exhibits to the report, according to a court filing. If he were to remove the references to KPMG's documents, the report "would be substantially watered-down and would not represent the entirety of the examiner's examination," wrote lawyers for Mandarino.

The legal maneuvering has heightened anticipation about what Mandarino's investigation will reveal about Polaroid's bankruptcy. Creditors, former employees, and retirees of the once-great instant photography firm have claimed in court filings that managers and directors paid themselves bonuses, deferred salary, and pension savings just prior to the bankruptcy filing in 2001. Management also won a court order during the bankruptcy providing "key employees" with retention bonuses.

One shareholder claimed that Polaroid significantly understated the value of its assets in the bankruptcy, raising the question of whether the bankruptcy filing was necessary.

Finally, creditors and retirees have questioned whether the court auction of Polaroid's assets for $255 million in June 2002 was an arm's length transaction, or whether the company manipulated the process to ensure a group led by Bank One of Chicago won the bidding.

Polaroid has declined to say whether anyone from management participated in the buyout group.

Walsh appointed the examiner in February after receiving letters with detailed information that claimed Polaroid had manipulated its financial statements to make the company's condition appear worse than it was. The letter writers claimed management engineered the bankruptcy to enrich themselves.

Mandarino, who was appointed by Walsh and the bankruptcy trustee to investigate Polaroid, has 15 years' experience in restructuring troubled companies and in investment banking. His firm, Traxi LLC of New York, specializes in workouts of distressed firms, disposition of assets, forensic accounting, and liquidation of failed companies.

On March 18, lawyers for Mandarino requested documents from KPMG's auditing work for Polaroid from Steve Georgian at the accounting firm's Boston office. KPMG fought the request, claiming in a court filing that the request was "overbroad," and "could require KPMG to review a voluminous amount of material," requiring the accounting firm to spend too much "time, effort or money" to comply with the request.

The objection was resolved, according to court papers, and KPMG produced the documents, some of them considered confidential by the firm. Court rules allow Mandarino to use confidential documents in his report, as long as he informs KPMG. But in an Aug. 14 letter, the firm objected to that, saying some of those documents raised "confidentiality concerns," including those containing "confidential tax information."

Specifically, the accounting firm objected to the use of documents labeled:

Polaroid Corporation Deferred Tax Assets, Dec. 31, 1999; Meeting Notes of Telephone Conference with Wasserstein 3/24/02; KPMG Corporate Recovery memorandum of March 30, 2001 re: Polaroid; and Polaroid Corporation: Going Concern Assessment Memo, Dec. 31, 2000.

Auditing firms include "going concern" warnings in their reports to management when they believe a company has insufficient funds or other problems that could put the company out of business. KMPG's letter to directors and shareholders in the 2000 annual report, dated Jan. 22, 2001, did not contain such a warning.

"There is a protocol in place to make sure that confidential information is handled appropriately, and we want to make sure that the information is handled under the protocol," said Tim Connolly, a spokesman for KPMG.

A hearing has been requested for tomorrow before Walsh to determine whether to honor KPMG's request for secrecy. Mandarino has asked the judge to deny KPMG's request, or allow him to file the Polaroid report under seal, in which case only a few parties participating in the bankruptcy case would have access to it.

Jeffrey Krasner can be reached at krasner@globe.com.