Chicago (July 16, 2004) -- A three-judge panel here ruled that a federal lawsuit against Ernst & Young over its role in the failure of a bank it audited is without merit.

The Federal Deposit Insurance Corp. sued the Big Four firm in 2002 over the July 2001 failure of Chicago savings and loan Superior Bank, alleging fraud, gross negligence and accounting malpractice. The FDIC claimed that E&Y deliberately suppressed its improper accounting of Superior to protect the financial position of the firm and its partners, and alleged that E&Y’s conduct caused large losses to the Savings Association Insurance Fund arising from Superior's failure.

The decision by the 7th Circuit U.S. Court of Appeals modified an earlier decision that the FDIC lacked standing to sue E&Y. Instead, Circuit Judges Easterbrook, Rovner and Evans ruled against the FDIC on merit.

"We're pleased with the court's position," a spokesman for the firm told WebCPA.

In their decision, the judges wrote, "Everything points to FDIC-Receiver as the right entity to pursue any claim against Superior Bank’s accountants." The FDIC brought the suit in its corporate capacity; however, it could also sue in its capacity as a receiver, where it acquires the assets and legal interests of a failed bank. But, as the decision noted, "FDIC-Receiver steps into the shoes of the failed bank and is bound by the rules that the bank itself would encounter in litigation." Ernst & Young's agreement with Superior Bank called for any disputes to be resolved by arbitration.

-- Melissa Klein Aguilar

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