FDIC files $548 million lawsuit against accounting giant Ernst & Young

Friday, November 1st 2002, 12:00 am

By: News On 6

CHICAGO (AP) _ The government filed a $548 million fraud and negligence lawsuit Friday against accounting giant Ernst & Young in connection with the failure of a savings and loan in 2001.

The lawsuit, brought by the Federal Deposit Insurance Corp., accused Ernst & Young of misstating Superior Bank's assets and deliberately delaying reporting of the error for fear it would hurt an $11 billion sale of the accounting firm's consulting arm.

In a statement, Ernst & Young said: ``Clearly, Superior Bank's failure was not caused by any action of ours and we intend to vigorously defend claims against the firm.''

The lawsuit comes on the heels of the Enron debacle and the involvement of Big Five accounting firm Arthur Andersen LLP. Andersen was found guilty in June of obstructing justice with its handling of Enron documents. Andersen is now just a shell of its former self.

The lawsuit against Ernst & Young warned of the dangers of mixing auditing and business consulting. ``E&Y's misconduct was exacerbated by rampant conflicts of interest in the valuation of Superior's assets,'' the lawsuit said.

Federal regulators seized Superior Bank, based in the Chicago suburb of Oakbrook Terrace, in July 2001. The savings and loan was the biggest insured U.S. financial institution to fail in nearly a decade. The lawsuit said the cost to the FDIC was $750 million.

The thrift had lost millions on risky, high-rate home loans to borrowers with tarnished credit.

The Chicago-based Pritzker family and their equal partner in Superior, New York developer Alvin Dworman, admitted no liability in Superior's failure and no sanctions were imposed on them by thrift regulators.

The lawsuit said Ernst & Young admitted in January 2001 after lengthy denials that Superior's assets were overvalued by $270 million. After further investigation, the value of the assets had to be reduced by an additional $150 million, the lawsuit said.

Ernst & Young, which is based in New York, blamed Superior's problems Friday on the thrift's failure to follow through on a recapitalization plan and the deterioration of the economy.

The lawsuit noted that Ernst & Young had paid $400 million and signed a cease-and-desist order stemming from improper audit practices involving ``some of the most notorious failed financial institutions of the 1980s savings and loan crisis.''

But it said the penalty appeared to have ``little or no impact on E&Y's behavior'' and the firm soon began ``improperly accounting for Superior's assets.''

Ernst & Young was negotiating to sell its consulting arm to a French firm, Cap Gemini, at the time, the lawsuit said.