While it appears the EY split is going off the rails, despite assurances to the contrary from people who stand to make many millions of dollars from it, one former client — or rather, the client’s administrators as the client burned to the ground three years ago — is not satisfied with letting the drama play out and has taken to court to make sure they get their money.
Last spring, administrators for collapsed healthcare group NMC Health filed a big ole negligence lawsuit in London against EY, who audited NMC for 14 years and missed a billion and a half dollars that were inappropriately transferred into NMC founder Dr. Bavaguthu Raghuram Shetty’s bank account before NMC went bust. Shetty, who is in his own legal trouble, is himself suing Bank of Baroda, EY and Credit Europe Bank of the Netherlands in a New York court for $8 billion in damages.
But we’re not here to talk about him, we’re talking about NMC administrators and how they want their couple billion dollars should the court agree with them that EY was negligent in its professional duties. This is from Law.com in May 2022:
Administrators for NMC Health, the one-time London Stock Exchange-listed entity that emerged from a UAE-based restructuring deal last month, have filed a $2.5 billion claim against Big Four auditor EY for alleged negligence.
The claim, which relates to a seven-year period in which EY was engaged to oversee the hospital operator’s accounts, was filed at the High Court in London on Thursday, according to press reports.
“The issues that we found at NMC Healthcare following our appointment were broad, complex and multi-layered,” a spokesperson for Alvarez & Marsal, the joint administrators, told Law.com International.
“As part of our wide ranging investigation into the situation, we have looked at the role of the auditors and have now launched formal legal proceedings against EY in the U.K. for audit negligence with regards to its work with the company between 2012 and 2018. As administrators, we have an obligation to maximise returns for creditors and this action is part of those wider efforts.”
EY naturally does not agree with any of this and has said that “reasonable assurance” does not cover the falsification and concealment of accounting records and other documents.
Obviously these court battles take time and NMC administrators at Alvarez & Marsal want to be sure there will be a cool $2.whatever billion for them to be awarded should the eventual ruling work out in their favor. EY has been understandably quiet about split specifics, though a few weeks ago Global Managing Partner Andy Baldwin did tell Bloomberg Radio that legal liabilities — as in, how to spread around liability currently neatly handled by the partnership structure — and the firm’s unfunded $7.5 billion pension liability were the two big things standing in the way of the partner vote. This was before we found out about internal tensions (“a shitshow”) and fighting over tax people that led to the split being put on pause.
Now on top of their own drama, EY has the Ghost of Clients Past gumming things up.
The administrators asked a judge on Monday to force EY to disclose details of its finances or insurance cover, which would indicate its ability to pay any potential penalty, before going ahead with the planned global split.
The legal claim is not due to reach a full trial until next year at the earliest but lawyers for the administrators on Monday asked the High Court in London to order EY to disclose details of the planned spin-off of its global consulting arm, including in the UK, at least 28 days before it calls a vote on the transaction or, if there is no vote, 28 days before the separation goes ahead.
“NMC harboured concerns that the effect of EY’s planned separation would be to reduce EY’s assets and future income such that EY would be unable to meet the substantial judgment debt (more than $2.7bn) that would arise if NMC prevails,” the administrators said in a written submission to the court during Monday’s preliminary hearing.
“EY has provided nothing in the way of confirmation or comfort that following the separation, it will be in a position to meet the damages award in these proceedings, including by reference to EY’s insurance cover,” they added.
Basically they just want to know that they’ll get their money, just like everyone else in this situation (including former partners).
Lawyers for the NMC administrators said they had asked EY to confirm that it had insurance to cover the amount claimed by NMC’s administrator. If EY could not give this confirmation, the administrators said it should disclose its net asset position in the UK, which stood at £248mn in July 2021.
The administrators said that if EY’s UK net assets were less than the $2.7bn claimed, it should confirm that it would not diminish or dissipate its assets by transferring its audit operations “for less than full market value” or make distributions to its partners. The final request would in effect prevent EY from paying its partners in the UK, who are remunerated out of the firm’s profits.
EY lawyers — who unsurprisingly think this lawsuit is a joke — said that the firm would provide “relevant information” to administrators “in good time.” The lawyers added that this move by NMC adminstrators was “premature and unnecessary” because planning for the separation “is paused”, and said the administrators’ request for information should be dismissed or adjourned, said FT. Take that how you will.
Those comically oversized bags of money partners were dreaming about when the split was first announced last year seem to be getting further and further from their reach…