KPMG L.L.P., New York, has settled a lawsuit stemming from the 2000 failure of General American Life Insurance Company, St. Louis, regulators say.[@@]

State liquidators with the Missouri Department of Insurance sued the accounting firm in a state court in Jackson County, Mo., in December 2002. The liquidators accused KPMG of being negligent in its performance as General American’s auditor.

General American ran into financial trouble in 1999 when it was unable to meet the demands of institutional investors for immediate payment of principal and interest on its guaranteed investment contracts. The investors sought repayment of $6.5 billion for the GICs after the company’s ratings were downgraded.

A spokesman for the state insurance department says KPMG agreed late last week to settle the matter for $18 million. Although the firm agreed to settle at the urging of the court, KPMG did not admit any wrongdoing, the department spokesman says.

The department alleged that KPMG failed to advise General American of the high risks of the GICs and did not exercise due care in auditing General American.

A spokesman for KPMG says the company decided to settle for “practical business reasons.”

The settlement “allows us as a firm to focus on our primary mission of ensuring quality audits for our clients and to help further restore investor confidence in the capital markets,” the spokesman says. “KPMG is confident that the audit services we provided to General American were consistent with professional standards and industry practices.”

Part of the $18 million settlement will pay attorney’s fees. The rest will go the 300,000 customers who held General American policies Jan. 5, 2000, when the company was sold to MetLife. The $1.2 billion from that sale plus $200 million in investment income also went to policyholders, the Missouri Insurance Department spokesman says.

Early last week, the Missouri department filed a lawsuit against Morgan Stanley & Company Inc., New York, which owned a majority stake in a financial firm that developed and marketed the fatal GICs for General American.