Firm fined for trickery
Ernst & Young, one of the world's largest accounting firms, must pay a $134,614 fine for intentionally misleading a court about the company's net worth, Butler County Judge S. Michael Yeager ruled Friday.
Yeager said Ernst & Young must pay the money to Barbara Reilly as compensation for attorneys' fees and costs resulting from the company's "contemptuous actions."
In November, Yeager awarded Reilly $103.7 million -- believed to be the largest civil award in Butler County history -- blaming Ernst & Young for bankruptcies that led to the collapse of Seven Fields Development Co.
Yeager awarded her $84 million in compensatory damages plus punitive damages of $18.7 million, reflecting 5 percent of what was believed to be the company's net worth.
In the original finding, the judge wrote: "Although a source of great controversy in this case, the court is satisfied, for the purposes of assessing punitive damages, with the defendant's net worth being $374 million."
Yesterday's ruling says that figure was based on historical value -- what an asset cost at the time of purchase -- rather than current value. Yeager called it a deliberate attempt to establish a lower value for the company and said Ernst & Young took "indefensible" actions by failing to provide witnesses and documents he specifically ordered.
The new ruling does not state the company's current net worth or say whether it will affect punitive damages. Reilly's lawyers and
Ernst & Young spokesman Ken Kerrigan declined to comment, citing a longstanding gag order by Yeager.
Ernst & Young had 110,000 employees worldwide and $10 billion in sales in 2002, according to Hoover's Handbook of International Businesses. The privately held company is not required to disclose its finances. Ernst & Young was formed in a 1989 merger of two companies founded in the early 1900s.
Reilly's lawyers argued before Yeager on Dec. 29 that the company's net worth could be $1.4 billion.
But a judge in Indiana put the value at $5.53 billion in a Sept. 21, 2002, ruling on the divorce case of former Ernst & Young chief executive Richard Bobrow and his wife, Jan.
On Oct. 2, 2002, Yeager ordered Ernst & Young to provide its top financial officer and documentation about the company's net worth for the Butler County case.
Ernst & Young Controller James Hart testified in October 2002, about three weeks after the divorce ruling, that the company's net worth was $374 million.
Ernst & Young officials testified that they decided to send Hart because they thought he would be the best person to answer questions about the company's worth.
Yeager said the decision to send Hart instead of Jeffrey Dworken, Ernst & Young's highest ranking financial officer, "was with wrongful intent and designed to mislead this court."
Dworken did not testify until Dec. 29, 2003.
"Simply stated, when this court ordered the attendance of the defendant's (chief financial officer) or equivalent, it expected the attendance of the defendant's CFO or equivalent," Yeager wrote. "This order was not intended to provide the defendant with options."
Yeager said Ernst & Young also withheld a credit agreement and related documents that included a heading of "net worth."
Yeager said the original order stipulated that the company produce documentation "on every entity in which the defendant had an interest, even including those interests that might be located in Timbuktu."
In the original lawsuit, Thomas Reilly charged that the accounting firm overstated the liabilities and understated the value of four companies he helped found. Law enforcement officials said Thomas Reilly was involved in a real estate scam that cost 2,500 investors nearly $57 million.
They charged that Earned Capital Corp., partially owned by Thomas Reilly, took money from Seven Fields real estate investors, promising high returns while submitting false tax forms to the investors. Thomas Reilly served four years in prison after pleading guilty to tax evasion. Barbara Reilly was not convicted.
Thomas Reilly blamed Ernst & Young for bankruptcies that resulted in the couple losing millions of dollars from their stake in Seven Fields real estate. The judge agreed, but said he could not award Thomas Reilly any money because of his involvement in the scam.
