Ernst & Young Lawsuit Will Proceed

Plaintiffs reportedly assert that E&Y's failures enabled now-bankrupt Tower Air to misstate its earnings.
Stephen TaubMarch 17, 2005

Creditors of Tower Air Inc. can proceed in their lawsuit against Ernst & Young, which they accuse of costing them hundred of millions of dollars by helping the bankrupt airline misstate its earnings, a judge has ruled, according to the Baltimore Business Journal.

Baltimore County Circuit Judge J. Norris Byrnes denied E&Y’s motion for a summary judgment, according to the report, which observed that roughly half of all fraud claims against auditors are typically thrown out or dismissed at this stage. Judge Byrnes let stand the fraud claims of 10 of the 15 creditors, as well as negligence claims by three creditors, the paper added.

Last April, Byrnes denied two of the audit firm’s motions to dismiss the case, reported The Daily Record, another Baltimore business publication. That same month, an administrative law judge for the Securities and Exchange Commission ruled that Ernst & Young could not accept new audit clients in the United States for six months because it violated SEC rules on auditor independence.

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Tower Air was founded in 1982 and went public in 1983, when it hired the Big Four firm as accountant and independent auditor, according to the Daily Record. It was primarily a charter airline, noted the Business Journal, best known for flights between New York and Tel Aviv, Israel. Tower filed for Chapter 11 bankruptcy in 2000 with the goal of restructuring its debt. Later that year, however, it converted the bankruptcy to Chapter 7 with the goal of liquidating its assets, according to the Journal.

The lawsuit reportedly asserted that E&Y’s failures enabled Tower Air to report a $4.6 million pretax profit in 1998 when the airline actually lost about $17 million, and that Tower’s reported loss of $3.9 million in 1997 was really at least $41 million larger.

“What we’re saying is that Ernst & Young and [Tower] were in cahoots,” said Robert Weltchek, lead attorney for the trustee for the creditors, according to the Daily Record. “Our clients are third parties who got shafted.” The airline’s creditors reportedly include Fleet Business Credit, GE Capital Aviation Services, the Port Authority of New York and New Jersey, and Annapolis-based aviation company Arinc Inc.

The plaintiffs are seeking more than $380 million in damages.

An Ernst & Young spokesman told the paper, “these charges have no merit, and we will vigorously defend ourselves in court.” Edward Mannino of Akin Gump Strauss Hauer & Feld, an attorney for the auditor, reportedly argued last week that most of the creditors never even read the allegedly false financial statements that E&Y signed off on.

The trial is scheduled to begin March 21, reported the Daily Record.