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 for fraud and deceit.
What makes this case different is that the claim is lodged solely against the company's auditing firm, Deloitte & Touche LLP.
In the wake of corporate accounting scandals, auditors have been drawn into suits, alleging collusion with top company officials to misstate earnings and mislead investors. But trustee William G. Hays, who was appointed by a bankruptcy judge to represent UCFC'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, Hays says Deloitte & Touche either knew or should have known that UCFC 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 big boys left Louisiana with their ill-gotten treasures and went back to New York City, leaving the employees of the United Companies and their families holding the bag,” the suit says.
The suit does not name any former company officials.
Peter Ricchiuti, a finance professor at Tulane University, said he had never heard of a case where an auditing firm was sued without company leaders also being named. But the Enron 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 already 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.
Harrington said the firm is “confident that the jury will reach the same conclusion.”
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.
UCFC, which was formed in Baton Rouge after World War II to provide home loans for returning servicemen, eventually became a power in making loans to subprime borrowers — those who because of credit problems could not qualify for standard bank financing.
In the 1990s, UCFC began packaging its subprime mortgages into securities — much like the way Freddie Mac and Fannie Mae do in the standard home mortgage market. The sale of the bonds, in turn, provided UCFC with more money to lend.
Wall Street responded, driving up UCFC stock as high as $76 per share on Nasdaq Stock Market.
But as the economy cooled and interest rates dropped, so did the market for UCFC's bonds. And after the method for valuing the securities was questioned, the company took a $605 million earnings writedown for the fourth quarter of 1998.
After filing for bankruptcy protection in March 1999, most of the company's assets were sold off in October 2000 for about $850 million, largely to pay banks that had made loans to UCFC.
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. In addition, the auditors failed to recognize that the securities were overvalued, the suit said.
The suit also said that Deloitte & Touche had auditors who could have properly accounted for UCFC's holdings — but failed to use them.
This is not the first suit stemming from UCFC's collapse.
In February, several thousand former UCFC employees who took part in the company's stock ownership plan reached a $10 million settlement with the company. In August 2002, about 7,500 UCFC stockholders reached a $20.5 million settlement with the company.