FDIC Suit Targets Ernst & Young

Bank regulators sued accounting firm Ernst & Young on Friday, alleging fraud, negligence and professional misconduct relating to audits of failed Chicago savings institution Superior Bank.

The Federal Deposit Insurance Corp., in a lawsuit filed in the U.S. District Court for the Northern District of Illinois, sought $548 million in compensatory damages, plus punitive damages.

The owners of Superior paid a $460-million settlement to the FDIC in December to resolve claims from the bank’s costly and controversial collapse in July 2001.

“As a direct result of E&Y;’s gross misstatement of Superior’s assets, the bank became insolvent, which ultimately required the FDIC to pay out in excess of $750 million from the Federal Deposit Insurance Fund,” the FDIC said.

Ernst & Young disputed the allegations.

In congressional testimony, FDIC officials have blamed Superior’s board of directors for the bank’s failure, the accounting firm said.

Ernst & Young also cited in its defense government criticism of federal regulators for not identifying problems early enough at the bank.

“Superior’s failure was caused by the unfortunate and unpredictable confluence of three factors: a substantial high-risk subprime loan portfolio, multiple and rapid declines in interest rates beginning early last year, and a deteriorating economy that had a disproportionate impact on subprime borrowers,” the accounting firm said.

But the FDIC said Ernst & Young delayed disclosure of Superior’s true financial condition, and knew its treatment of Superior’s assets was improper and grossly misleading.

The regulator alleged that the auditor knew that making auditing problems at Superior public would have jeopardized the $11-billion sale of the accounting firm’s consulting practice to a French firm, Gemini Cap. Ernst & Young delayed disclosure of its improper treatment of Superior’s assets until after the deal was finalized, the FDIC alleged.