FDIC case against Ernst & Young dismissed.A federal court in Texas dismissed the Federal Deposit Insurance Corporation's $560 million claim against Ernst & Young, which arose from the failure of Western Savings Association. Ernst audited Western in 1984 and 1985; in 1986, the thrift was placed into receivership receivership
In law, state of being in the hands of a receiver, a person appointed by the court to administer, conserve, rehabilitate, or liquidate the assets of an insolvent corporation for the protection or relief of creditors. by federal authorities.
Western's problems began in 1982 when Jarrett Woods, Jr., purchased 100% of its stock. Woods, as chairman and chief executive, placed Western on a course of dramatic expansion. Unfortunately, much of this expansion was fueled by risky loans and complex commercial ventures.
By 1984, Western's financial condition had severely deteriorated. This, along with numerous violations of Federal Home Loan Bank Board regulations, caused the board to issue a temporary order to cease and desist Cease and desist (also called C & D) is a legal term used primarily in the United States which essentially means "to halt" or "to end" an action ("cease") and to refrain from doing it again in the future ("desist"). . As part of the terms of the order, Western hired Ernst & Young's predecessor firm, Arthur Young Arthur Young is the name of several notable people
In March 1990, the FDIC FDIC
See: Federal Deposit Insurance Corporation
See Federal Deposit Insurance Corporation (FDIC). filed suit against Ernst, claiming Western's reliance on Ernst's allegedly faulty audits was the cause of the thrift's demise. Ernst countered that Woods, as sole stockholder, chairman and chief executive officer, knew Western's exact financial condition and at no time relied on Ernst's audits in business dealings.
The court, in granting summary judgment for Ernst, ruled the FDIC, as assignee assignee (assign) n. a person to whom property is transferred by sale or gift, particularly real property. (See: assign)
ASSIGNEE. One to whom an assignment has been made.
2. of Western's claim against Ernst, is subject to all defenses that Western would have been subject to had it sued Ernst. Consequently, the FDIC is charged with Wood's knowledge of Western's precarious financial condition before its closing in 1986. As such, the FDIC could not establish that Western's reliance on the alleged negligent negligent adj., adv. careless in not fulfilling responsibility. (See: negligence) audits was the basis for business decisions that led to the thrift's failure.
If the decision survives an appeal, other regulators' suits against accounting firms could be derailed. However, the decision is expected to have a lesser effect on thrifts owned by publicly held companies, whose directors arguably ar·gu·a·ble
1. Open to argument: an arguable question, still unresolved.
2. That can be argued plausibly; defensible in argument: three arguable points of law. would be more likely to intervene if an audit revealed irregularities. (FDIC v. Ernst & Young, U.S. District Court for the Northern District of Texas, no. 3-90-0490-H, 9/30/91)