Lawsuit Targets Auditor, Not Execs
The bankruptcy trustee for United Companies Financial Corp., a mortgage lender and a darling of Wall Street that collapsed in 1999, is seeking to recover $1 billion in losses related to alleged fraud and deceit.
What makes this case different is that the claim is lodged solely against the company’s auditing firm, Deloitte & Touche.
In the wake of corporate accounting scandals, auditors have been drawn into suits alleging collusion with top company executives to misstate earnings and mislead investors.
But trustee William G. Hays, who was appointed by a bankruptcy judge to represent the lender’s creditors and stockholders, contends that Deloitte & Touche painted a pretty but inaccurate picture of UCFC’s profitability.
In a state district court lawsuit filed in Baton Rouge, La., Hays says Deloitte & Touche either knew or should have known that the lender was nowhere near as profitable as the reports the accounting firm approved. The motive, the lawsuit says, was huge fees the firm received for handling UCFC’s bond sales on Wall Street.
“In maintaining the facade of financial health, Deloitte was able to reap millions of dollars in fees for auditing United Companies and performing due diligence reviews for Wall Street underwriters and insurers,” the suit alleges.
The suit does not name any former company executives.
Peter Ricchiuti, a finance professor at Tulane University, said he had never heard of a case in which an auditing firm was sued without company leaders also being named.
But the Enron Corp. collapse, which occurred long after UCFC, has put auditing firms in a different light, he said.
“The Enron collapse got people focused on the accounting firms,” Ricchiuti said.
Most of the allegations have been reviewed -- and rejected -- by the Louisiana Public Accountant Review Panel, which has the power to review claims of accounting misconduct.
“That panel concluded unanimously that the complaint was without any merit,” said Deloitte & Touche spokeswoman Deborah Harrington in New York.
The state court suit now includes a claim of fraud, which the review board did not have the power to consider.
In court papers, Deloitte & Touche denies any fraud. A trial is tentatively set for October.
In the 1990s, UCFC began packaging its sub-prime mortgages into securities. The sale of the bonds, in turn, provided United Companies with more money to lend.
Wall Street responded, driving up UCFC stock as high as $76 a share on Nasdaq.
The trustee’s suit alleges, among other things, that Deloitte & Touche did not account for hundreds of millions of dollars in potential losses due to non-performing loans and overestimated the value of foreclosed property.
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