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Securities Regulation Keyed to Cox
AUSA Life Insurance Co. v. Ernst & Young
Citation:
206 F.3d 202 (2000)Facts
Between 1988 and 1992, appellants purchased $149 million in privately-placed JWP notes with ten to fifteen-year maturities. The Note Agreements required JWP to maintain books in accordance with GAAP and required E&Y to issue annual “no-default certificates” certifying compliance with financial covenants. From 1987-1991, JWP systematically violated GAAP through improper capitalization of expenses, illegitimate accounting for net operating losses, arbitrary write-ups of inventory, and failure to establish adequate reserves. E&Y consistently discovered these violations, protested them, but then acquiesced, issuing clean audit opinions and false no-default letters. The relationship between E&Y partner John LaBarca and JWP CEO Ernest Grendi was so close that JWP employees joked about “EGAAP” (Ernest Grendi’s Accepted Accounting Principles). In 1991, JWP acquired the failing Businessland company, which became a “cash sinkhole.” Combined with PC price wars and a downturn in commercial construction, this led to JWP’s 1993 bankruptcy. Appellants lost approximately $100 million in principal and unpaid interest.
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