FDIC Seeks to Blame Bank Failure on Auditor

In an attempt to recover its losses in connection with the failure of Superior Bank, the Federal Deposit Insurance Corporation (FDIC) filed a lawsuit against Ernst & Young (EY), alleging that actions by EY contributed to the bank's collapse. Superior Bank, a $1.8 billion thrift based in a Chicago suburb, failed in July 2001, causing the FDIC to pay out in excess of $750 million. It was the biggest failure of an FDIC-insured bank in nearly a decade.

Superior was in the business of making risky, sub-prime loans. Apparently, FDIC did not learn until some time after EY's opinion was issued that the bank's assets were overvalued. Although this matter might have been expected to surface through regulatory oversight, FDIC is trying to shift the blame to EY. It claims EY was aware of the overvaluation but didn't timely report it to FDIC because of fears the disclosure would hinder the sale of its consulting practice to Cap Gemini.

FDIC's lawsuit calls for a jury trial to investigate its complaint, which is based on accusations of fraud, professional negligence and accounting malpractice. In the meantime, EY has issued a detailed statement, outlining alternative reasons for the bank's collapse.

EY's Statement

The FDIC complaint flies in the face of the agency's own earlier conclusions. The FDIC inspector general told the Senate Banking Committee last February that Superior Bank's failure was "directly attributable" to "the bank's Board of Directors and executives ignoring sound risk management principles."

The inspector general also noted a longstanding pattern of inadequate and ineffective regulatory oversight of Superior. The United States General Accounting Office, also, has been critical of the regulatory oversight of the bank. It said, "Federal regulators were clearly not effective in identifying and acting on the problems at Superior Bank early enough to prevent a material loss to the deposit insurance fund."

It is these factors and the refusal of the bank's owners to follow through on an agreed-upon recapitalization plan, coupled with the deteriorating economy after January 2001, which led to the ultimate takeover of Superior by the FDIC in July 2001. As we said then, and continue to believe, Superior's failure was caused by the unfortunate and unpredictable confluence of three factors: a substantial high-risk sub-prime loan portfolio, multiple and rapid declines in interest rates beginning early last year, and a deteriorating economy that had a disproportionate impact on sub-prime borrowers.

Clearly, Superior Bank's failure was not caused by any action of ours, and we intend to vigorously defend all claims against the firm.

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