The government filed a $2 billion lawsuit against Ernst &Young LLP yesterday, accusing the nation's fourth-largest accounting firm of deliberately withholding knowledge of accounting improprieties at a failed Chicago area bank.
The Federal Deposit Insurance Corp. sued to recover money it lost on last year's failure of Superior Bank FSB, the biggest U.S. bank to fail in a decade. The lawsuit alleges that Ernst & Young was guilty of fraud, accounting malpractice and gross negligence in its reports of Superior's financial condition from 1995 to 2001.
The FDIC says the flawed accounting cost it $750 million. It is seeking $548 million in actual damages plus three times that amount in punitive damages, because the accounting firm agreed in a 1992 settlement not to violate auditing standards when working for federally insured financial institutions.
Federal regulators seized Superior in July 2001 after it lost millions of dollars on risky, high-interest-rate auto and home loans to low-income borrowers. According to the suit, Ernst & Young delayed notifying regulators about the accounting troubles because the disclosures would have endangered the then-pending sale of its consulting arm to French company Cap Gemini for $11 billion.
Ernst & Young admitted in January 2001 that Superior's assets were overvalued by $270 million, the suit says. The value of the assets was later reduced $150 million more.
Ernst & Young spokesman Lawrence J. Parnell said yesterday that the company had not reviewed the complaint and would not comment on it.
Ernst & Young has tangled with the government before over the integrity of its audits of financial institutions. In 1992, the firm paid the federal government $400 million to settle potential claims arising out of its audits of more than 300 failed savings and loans associations.
The latest lawsuit comes at a time of growing criticism and scrutiny of accounting firms and high-interest-rate lenders, known as subprime lenders. Many lawmakers and regulators say both too often put short-term profit ahead of sound business practices.
Ernst & Young audited Superior for 10 years, beginning in 1990. For the last three, the suits says, the accounting giant audited the bank and also sold it consulting services. One of those services, the suit contends, was to "bless the conclusions" that the auditors made about the value of some Superior assets "during the time that disclosure of a $270 million error" might disrupt the Cap Gemini negotiations.
The billionaire Pritzker family and its business partner in Superior, New York developer Alvin Dworman, agreed last December to pay bank regulators $460 million to resolve a federal investigation into the bank's failure. Neither admitted liability.