Path: bloom-picayune.mit.edu!enterpoop.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post
Newsgroups: americast.wpost
From: americast-post@AmeriCast.Com
Organization: American Cybercasting
Approved: americast-post@AmeriCast.com
Subject: Ernst & Young Pays $400 Million To Settle Thrift Regulators' Claims<By Susan
Date: Tue, 24 Nov 92 04:42:49 EST
Message-ID: <13.1992Nov24.044249@AmeriCast.com>
Lines: 129

Ernst & Young Pays $400 Million To Settle Thrift Regulators'
Claims<By Susan Schmidt<Washington Post Staff Writer=

 Ernst & Young, one of the nation's largest accounting firms,
yesterday paid the federal government $400 million to settle po-
tential claims arising out of its audits of more than 300 failed
savings and loans, including some of the country's most notorious
institutions.

 The firm's settlement was second in size only to the $500 mil-
lion paid earlier this year by the investment banking firm of
Drexel Burnham Lambert Group Inc. and its junk bond king, Michael
Milken, and underscored the government's efforts to pursue claims
against lawyers, accountants and other professionals involved
with failed S&Ls.

 Included in yesterday's settlement were claims arising out of
the failure of four of the nation's biggest and most profligate
S&Ls: Charles Keating's Lincoln Savings and Loan  Association of
California; Western Savings Association of Phoenix; Vernon Sav-
ings and Loan Association of Dallas; and Silverado Banking Sav-
ings and Loan of Denver, where President Bush's son Neil served
as a director.  "It's a very important step forward toward the
cleanup of the thrift industry," said Harris Weinstein, general
counsel of the Office of Thrift Supervision, one of the three
federal banking agencies to agree to the settlement. "It estab-
lishes standards for audit work that should be done at financial
institutions now and in the future."

 The settlement, agreed to by the Federal Deposit Insurance Corp.
(FDIC) and the Resolution Trust Corp.  (RTC) as well as the OTS,
is part of the government's effort to recover funds for taxpayers
in the S&L cleanup. The costs of the S&L debacle are still being
tallied, but already losses covered by taxpayers total $158 bil-
lion.

 The size of the settlement dwarfs any previous settlement with
accounting or law firms that did work for S&Ls. In March, the OTS
reached a $41 million settlement with the New York-based law firm
of Kaye, Scholer, Fierman, Hays & Handler after taking the unpre-
cedented step of freezing the firm's assets.  Federal officials
said $300 million of yesterday's settlement is being covered by
various Ernst & Young insurers, including Lloyds of London. The
firm said the remaining $100 million will be financed out of
operating revenue over the next four years.

 The firm neither admitted nor denied wrongdoing in agreeing to
the settlement, which covers any future claims that might arise
out of S&L investigations.

 Government lawyers said they already had potential claims of
more than $1 billion against Ernst & Young.

  "The decision to settle reflects a practical assessment of what
makes sense for the firm as a business organization," said Ernst
& Young Chairman Ray J. Groves.  "We were worried about the time
and expense in the future of defending all these cases."

 Groves said the firm now generates about $2 billion in revenue
annually. The settlement will reduce profits, but individual
partners will not be assessed to cover the costs.

 Ernst & Young, Groves said, remains financially sound.

  Groves charged that the accounting profession is being used as
a "scapegoat" in the aftermath of the collapse of the thrift in-
dustry, noting that most of the nation's biggest firms are tar-
gets of federal claims.

 "We were worried about the viability of the accounting profes-
sion in view of the significant amount of litigation that ex-
ists," he said.

 The accounting industry has been mounting a counterattack
against federal officials, seeking to place limits on damages in
liability awards.  Lawrence Weinbach, chairman of Arthur Andersen
& Co., has said that the nation's biggest firms - the so-called
Big Six - spent 9 percent of their revenue last year on litiga-
tion.



S&L audits that were covered by yesterday's settlement were con-
ducted over a seven-year period by Arthur Young and Ernst & Whin-
ney, which merged in 1989 to form Ernst & Young.

 In addition to the financial settlement, one current Ernst &
Young partner and two former partners have been permanently
barred from auditing financial institutions, and seven others
must take further training before doing such audits.

  One former partner barred for life is Jack D. Atchison, who did
audit work for Lincoln Savings. Within days of a 1987 audit by
the accounting firm, Atchison took a job with Keating, according
to testimony in an Arizona civil trial.

 In April 1987, when Keating was feuding was federal thrift regu-
lators, it was Atchison who wrote a letter to five U.S. senators
who later intervened on Keating's behalf.

 Groves, acknowledging that some of the thrifts his firm regulat-
ed committed fraud, said, "we regret in hindsight that we had
some of these people as clients."

 According to the government, Ernst & Young's audits were inade-
quate in reviewing real estate appraisals, transactions with in-
siders and improper recognition of income. An example of the
latter cited in the charges was the firm's alleged failure to
challenge Lincoln's fictitious sale of real estate, in which the
thrift would provide all the financing.

 Ernst & Young initiated settlement talks with the government
eight months ago, around the time a federal judge here ordered
the firm to comply with an OTS subpoena and produce more than 1
million pages of documents from 20 failed S&Ls.

 FDIC General Counsel Alfred J.T. Byrne said that pursuing Ernst
& Young in court on substantial claims that have arisen from a
dozen thrifts would have cost at least $150 million.

 The FDIC's share of the recovery is $271.7 million, and the
RTC's share $128.2 million.  02:08 11-24C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

For more information, send-email to American Cybercasting Cor-
poration (usa@AmeriCast.COM)