WASHINGTON -- The accounting firm Ernst & Young agreed Monday to pay the federal government $400 million to settle charged that it contributed to the failure of several banks and thrifts.
The firm had contracts with at least 300 institutions that failed. A regulatory spokesman said Ernst & Young, though not responsible for all of the collapses, was accused of causing a dozen failures because of lax standards and violations of federal regulations.
Ernst & Young neither denied nor admitted any wrongdoing.
The settlement with the Office of Thrift Supervision, Federal Deposit Insurance Corp., and Resolution Trust Corp. - the largest of its kind - followed eight months of negotiations.
The FDIC will receive $271.8 million, and the RTC $128.2 million.
The government could have claimed $1 billion if the case had gone to court, according to the OTS.
"This settlement is a tremendous achievement for the American taxpayer," said attorneys for the three agencies in a joint announcement. "It secures just recovery of losses attributable to audit failures, avoids huge litigation costs, and assures that future audits of insured institutions will be conducted according to the highest professional standards."
Covered by Insurance
The accounting firm said it will pay $100 million of the settlement and insurance will cover the balance.
"The comprehensive settlement closes a difficult chapter in the life of Ernst & Young," the firm said in a press release. "Although this is a costly settlement, it is the only realistic solution to an endless stream of lawsuits that would have been even more expensive to defend."
In addition, Ernst & Young consented to a cease-and-desist order by the OTS that requires it to make changes in its accounting practices. Partner George Derr, and two former partners, Jack Atchinson and Edward Flaherty, consented to orders prohibiting them from ever working in an insured financial institution again.
Training Courses Ordered
Six partners and a former partner signed consent cease and desist orders with the OTS requiring them to take additional professional training courses.
The charges were detailed in a 139-page OTS document signed by agency Director Timothy Ryan. The OTS alleged that Ernst "failed to discover patent evidence" that some of the nation's most infamous thrifts - Silverado Banking Savings and Loan Association, Denver; Lincoln Savings and Loan Association, Irvine, Calif.; and Vernon Savings and Loan Association, Dallas - were engaged in transactions that violated generally accepted accounting principles. These violations should have been uncovered by Ernst & Young, the OTS said.
|Contrived' Loan Deals
For example, in 1986 and 1987, Lincoln Savings, the S&L operated by Phoenix real estate developer Charles Keating Jr., was involved in at least 11 "contrived" loan transactions, where funds were lent to affiliates solely to boost Lincoln's income by $143 million, the OTS said.
But Ernst & Young - then called Arthur Young - signed off on Lincoln's financial statements, saying they were fairly presented.
"Ernst & Young knew of the facts for these transactions, but allowed Lincoln to recognize full profit recognition, ignoring the economic substance of the transaction," the document said.
In another case, Ernst & Young failed to require Vernon to make proper allowances for loan losses. From 1982 to 1983, Vernon's construction loan commitments soared to nearly $274 million from $18.5 million. But the thrift recognized losses only when loans went unpaid, which violated generally accepted accounting principles, the OTS said.
Instead of conducting thorough, on-site audits, Ernst & Young relied on Vernon's management to provide it with loan information, the OTS said.
Only 16 of Vernon's 91 construction loans in 1983 were reviewed by the accounting firm, the regulators said. In May 1984, federal examiners criticized 23 Vernon construction loans for $120 million.