September 24, 2020

Big 4 Lawsuits: FDIC vs. EY, Investors vs. Mattel and PwC, Carillion vs. KPMG

Federal regulator sues auditor Ernst & Young for negligence over First NBC collapse [New Orleans Advocate]
The FDIC is suing Ernst & Young in the $1 billion failure of First NBC Bank in 2017, alleging that EY missed clear red flags related to several soured loans and failed to raise the alarm to the bank’s board of directors.

Ashton Ryan

The lawsuit, which seeks at least $125 million in damages from EY and its insurance company, is the latest in a string of legal actions and criminal convictions that have followed the bank’s collapse three years ago in what still ranks as the largest U.S. bank failure since the 2008 financial crisis.

In its filing in federal court for the Eastern District of Louisiana at the end of last month, the FDIC alleges that “EY failed to detect repeated fraudulent conduct by First NBC’s president and chief executive, Ashton Ryan,” and therefore failed in its statutory oversight duties as an auditor.

Several transactions involving Ryan and bank clients in 2014 and 2015 should have been flagged as suspicious during audits, the regulator said. Because they didn’t investigate or point out failures in internal controls, EY allegedly allowed Ryan, an ex-Arthur Andersen auditor, to funnel millions of dollars to poorly-performing loans in order to make it appear that they would be repaid, the FDIC said.

An EY spokesman said the firm did nothing wrong in its dealings with First NBC.

Bernstein Litowitz To Lead Investor Suits Against Mattel, PwC [Law360]
A California federal judge on April 20 consolidated a pair of proposed class actions accusing Mattel and PwC of misleading investors by understating Mattel’s income tax expenses by $109 million for the 2017 tax year and manipulating the company’s accounting to hide it.

U.S. District Judge André Birotte Jr. appointed DeKalb County Employees Retirement System and New Orleans Employees’ Retirement System as lead plaintiffs and approved their selection of plaintiffs firm Bernstein Litowitz as lead counsel. The judge also granted the investors’ request to consolidate the suits.

Investors claim Mattel incorrectly reported a tax valuation allowance of $561.9 million in 2017. That value was understated by $109 million, and the company later overstated its losses by $109 million on its annual report for that year to cover up the first error.

PwC is accused of making false statements on tax forms to conceal the toy giant understatement of losses, the investors said. PwC, which has been Mattel’s auditor since 1974, worked with Mattel to “deceive the investing public,” according to the complaint.

After Mattel disclosed on Aug. 8, 2019, that it had received an anonymous whistleblower letter and that it was canceling a $250 million debt offering that had been scheduled to close that day, stock prices dropped about 15% in one day from $13.43 a share to $11.31, the investors said.

PwC Probably Did Celebrate When It Helped Mattel Cover Up an Accounting Error
Lawsuit: Mattel Shareholders Are Holding PwC’s Feet to the Fire

Carillion Pushes KPMG To Hand Over Docs In Negligence Suit [Law360]
Collapsed British construction giant Carillion PLC has ramped up its efforts to bring a civil suit against KPMG over misstatements in its accounts, as it urged a judge on May 12 to sign an order forcing the Big 4 firm to hand over crucial documents on the audits.

Carillion, which entered into liquidation in 2018, is mounting a professional negligence claim against KPMG LLP and KPMG Audit PLC for audits carried out on the company’s books for 2014, 2015 and 2016. Those audits are being investigated by the Financial Reporting Council.

Rebecca Sabben-Clare QC, counsel for Carillion, said at a virtual High Court hearing that KPMG has refused to hand over papers her client needs to finalize its claim and is wrongly arguing that doing so is not justified so early in the proceedings.

Sabben-Clare said there is already “exceptional” evidence before the court that warrants early disclosure of the additional documents, which are connected to the accounting of contract revenue and goodwill. The liquidators say the working papers, covering nine sample contracts, will help their expert evaluate whether KPMG could be held responsible for misstatements in the accounts.

Jonathan Gaisman QC, representing KPMG in the civil action before the judge, said Tuesday that his client is not in breach of the pre-action protocol. He added Tuesday that the time “has not yet come” for KPMG to provide the key documents.

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