Ernst & Young LLP's failure to reveal auditing mistakes didn't give a former Superior Bank official time to escape "the sinking ship," a lawyer said at a trial of the official's lawsuit over the bank's demise.
Had Ernst & Young acknowledged the errors, ex-official Alan Schein would have been able to leave Superior before the bank was seized by federal regulators in 2001, Schein's attorney Jack Scarola said today in his closing arguments.
"Alan Schein would have been able to take his deferred compensation and escape the sinking ship," Scarola told jurors in state court in Fort Lauderdale, Florida.
Schein is seeking at least $200 million in damages over claims Ernst & Young failed to detect problems at the bank that led to its July 2001 seizure. Schein claims he relied on Ernst & Young's auditors when he sold a mortgage-marketing business to Superior, once co-owned by the billionaire Pritzker family, before joining the bank in 1998. Ernst & Young was the bank's auditor for a decade.
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 SA, Scarola said.
"Fraud is not only the misstatements, the false statements, the lies by Ernst & Young," Scarola said. "It is the omissions, the failure to include information that should have been in the reports."
Barry Richard, an attorney for Ernst & Young, called Schein's claims "full of holes," saying the Cap Gemini deal wasn't affected by the firm's auditing business.
"He's taken a series of events and connected them together to create a conspiracy," Richard told jurors in his closing. "The regulators always had the power to order the bank to change and they never did. Were they part of the conspiracy too?"
Ernst & Young's accountants acknowledged the mistakes after the Federal Deposit Insurance Corp. began probing the bank's operations in 2000.
Superior, based in Hinsdale, Illinois, was taken over by federal regulators after losses on home and car loans to people with tarnished credit depleted capital reserves. Those losses were tied to mortgages involving high-risk borrowers that were packaged as investments, the FDIC said.
Ernst & Young lawyers argued during the trial that the bank's involvement in "shady" subprime lending led to its failure. Scarola argued the opposite.
Why No Action?
"If Ernst & Young, the independent auditor, really believed Superior Bank was engaged in the kind of shady lending practices that Ernst & Young, the defendant, claims, why didn't they ever say anything in 1997, 1998, 1999 or 2000?" Scarola said.
Richard argued that Ernst was nothing more than an auditor and didn't design the method Superior used to value its assets.
"Ernst & Young doesn't write the bank's financial statement," Richard said. "It's not Ernst & Young's job to teach them how to do it or make them do it differently."
Ernst & Young paid $125 million to settle regulators' claims over its audits of Superior's books. Superior's owners, including Pritzker family members, agreed in December 2001 to pay the government $460 million over the bank's collapse.
Penny Pritzker, who helped oversee fundraising for President Barack Obama's 2008 campaign, served as head of the bank's board until 1994, according to court filings. The Chicago-based Pritzkers' holdings include the Hyatt Corp. hotel chain.
The case is Schein v. Ernst & Young LLP, 03-000266, Complex Litigation Unit, Circuit Court, 17th Judicial Circuit of Florida, Broward County (Fort Lauderdale).