Ernst & Young's Error 'Shattered' Bank, Official Says By Jef Feeley and Susannah Nesmith
July 1 (Bloomberg) -- Ernst & Young LLP accountants assured Superior Bank executives the institution was financially healthy until just before admitting to regulators they mistakenly signed off on inflated financial statements, an ex-bank official testified. Ernst & Young acknowledged in January 2001 that its auditors had botched loan-valuation accounting and that would force the bank to restate asset values, Nelson <http://search.bloomberg.com/search?q=Nelson+Stephenson&site=wnews&client=wn ews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfi elds=wnnis&sort=date:D:S:d1> Stephenson, Superior's former chairman, told jurors in Florida today. A former bank executive is suing Ernst & Young for fraud and accounting malpractice over the firm's miscues. "I knew my credibility and the bank's credibility had been shattered as a result of Ernst & Young's mistake," Stephenson, 57, testified in state court in Fort Lauderdale. New York-based Ernst & Young, which served as Superior Bank's outside auditor for a decade, failed to detect problems at the bank that culminated in the 2001 seizure of the institution by federal regulators, lawyers for ex-Superior official Alan Schein contend. Schein alleges he relied on Ernst & Young's auditors when he sold a mortgage-marketing business to Superior before joining the bank in 1998. Charlie Perkins, an Ernst & Young spokesman, said in an e- mailed statement the company had no comment on Stephenson's testimony. $200 Million Sought The accounting firm, which helped Superior become a pioneer in packaging subprime mortgages as investments, owes the former executive at least $200 million in damages for its accounting mistakes, his lawyers told jurors. The Federal Deposit Insurance Corp. took over Hinsdale, Illinois-based Superior in July 2001 after losses depleted capital reserves. Those losses were tied to mortgages involving high-risk borrowers that were packaged as investments, FDIC officials said. The bank used improper accounting and record- keeping, they added. Questions about mortgage-backed securities led to a decline in the U.S. housing market last year and contributed to bankruptcy filings by some of the U.S.'s largest financial firms, including Lehman <http://www.bloomberg.com/apps/quote?ticker=LEHM%3AUS> Brothers Holdings Inc. and Washington Mutual <http://www.bloomberg.com/apps/quote?ticker=WAMUQ%3AUS> Inc. Ernst & Young paid $125 million to settle regulators' claims over its audits of Superior's books. Superior's owners, including members of the billionaire Pritzker family, agreed in December 2001 to pay the government $460 million over the bank's collapse. The Chicago-based Pritzkers' holdings include the 209-hotel Hyatt chain. 'Changed My Life' Penny <http://search.bloomberg.com/search?q=Penny+Pritzker&site=wnews&client=wnews &proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfield s=wnnis&sort=date:D:S:d1> Pritzker, who helped oversee fundraising for President Barack <http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&p roxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields= wnnis&sort=date:D:S:d1> Obama's 2008 campaign, served as head of the bank's board until 1994, according to court filings. Stephenson, who took over as Superior's chairman in 1995, testified Ernst & Young's approval of the bank's accounting had always made him feel comfortable with the bank's financial stability. "We had no reason to believe that anyone at Ernst & Young would produce anything but an accurate report," he said. After learning about Ernst & Young's mistake, Stephenson said he decided to resign and end a 20-year career in banking. The January 2001 meeting with the Ernst & Young auditors on Superior's flawed accounting "changed my life," said Stephenson, who is now a financial adviser. Schein's attorney, Jack Scarola, asked if Stephenson knew that some Ernst & Young's auditors had refused to sign off on Superior's audits as early as 1998. "You're describing a circumstance that as a professional, I would find inconceivable," he said. $11 Billion Sale Schein's lawyers contend Ernst & Young executives covered up the mistaken accounting because they feared disclosure would interfere with the $11 billion sale of the firm's business- consulting unit to Paris-based Cap Gemini. It was only after the FDIC began probing the bank's operations in 2000 that Ernst & Young's the accountants acknowledged they may have erred in assigning values to some subprime mortgages, Schein alleges. Ernst & Young's revaluation of those loans led to a $420 million writedown in earnings and that prompted the FDIC's seizure, Schein contends in court filings. When he joined Superior in 1998, Schein said officials gave him the right to demand a sale of the mortgage-marketing unit with the proceeds being split evenly between him and the bank. Schein, of Dania Beach, Florida, didn't attempt to exercise that option until after Ernst & Young's admitted the mistakes on the audits, the former executive testified. That bid was rejected by FDIC officials, who took control of the bank. Mortgages Questioned "I believed that an auditor as large as Ernst & Young was just too big to be sold out, that their reputation was too important to them to intentionally commit errors," Schein testified yesterday. During cross-examination, Barry Richard, one of Ernst & Young's lawyers, questioned the value of the mortgage-marketing business Schein sold to Superior. The business pitched interest- only loans to allow mortgage holders to invest the equity in their homes. "The bank would be taking a terrible loss today" on such loans, Richard noted. Schein denied the business produced flawed mortgages. The case is Alan Schein v. Ernst & Young LLP, 03-000266, Complex Litigation Unit, Circuit Court for the 17th Judicial Circuit of Florida, Broward County (Fort Lauderdale). --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kantakji Group" group. To post to this group, send email to [email protected] To unsubscribe from this group لفك الاشتراك من المجموعة أرسل للعنوان التالي رسالة فارغة, send email to [email protected] For more options, visit this group at http://groups.google.com/group/kantakjigroup?hl=en سياسة النشر في المجموعة: - ترك ما عارض أهل السنة والجماعة. - الاكتفاء بأمور ذات علاقة بالاقتصاد الإسلامي وعلومه ولو بالشيء البسيط. ويستثنى من هذا مايتعلق بالشأن العام على مستوى الأمة كحدث غزة مثلا. - عدم ذكر ما يتعلق بشخص طبيعي أو اعتباري بعينه. باستثناء الأمر العام الذي يهم عامة المسلمين. - تمرير بعض الأشياء الخفيفة المسلية ضمن قواعد الأدب وخاصة منها التي تأتي من أعضاء لا يشاركون عادة، والقصد من ذلك تشجيعهم على التفاعل الإيجابي. - ترك المديح الشخصي. -~----------~----~----~----~------~----~------~--~---
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