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Accounting Firm Faces $400-Million Suit in Houston Thrift Failure

August 01, 1992|From Reuters

WASHINGTON — The government filed a $400-million lawsuit Friday against the accounting firm Arthur Andersen & Co., charging it with malpractice in the failure of Ben Franklin Savings Assn., a major Houston thrift.

The suit is the largest ever brought by the Resolution Trust Corp. against lawyers or accountants--a key target in the government's effort to make wrongdoers accountable for the multibillion-dollar thrift crisis.

The RTC, the government's thrift cleanup agency, charged Arthur Andersen with professional negligence and breach of contract in auditing the thrift between 1984 and 1988.

Ben Franklin collapsed in 1989 at a cost of almost $1 billion to taxpayers, after its explosive growth strategy failed. The thrift grew a phenomenal sevenfold to $2.6 billion in assets over eight years.

The lawsuit alleges that Andersen agreed to management's use of accounting gimmicks to hide the deteriorating financial condition of the thrift, thus deceiving regulators and failing to alert anyone to the high level of risk at Ben Franklin.

RTC spokesman Steve Katsanos said the suit is significant because of "the extensive malpractice and negligence found."

He said the suit was filed after months of negotiations failed to achieve a settlement between the RTC and the Chicago accounting firm.

Arthur Andersen said in a prepared statement that it intends to vigorously defend itself against the suit and that its professional services were not to blame for Ben Franklin's collapse.

"We believe that this institution's problems were directly related to the collapse of oil prices in 1986 and other related economic forces affecting the Southwest at that time," it said.

Arthur Andersen had issued caveats to its audit reports in 1986 and 1987 and declined to give an opinion on the accuracy of Ben Franklin's financial statements in 1988.

U.S. regulators in recent months have stepped up their suits against lawyers, auditors and others who advised failed thrifts in an effort to make them more accountable.

Earlier this year the thrift agency brought a $275-million suit against the New York law firm Kaye Scholer Fierman Hays & Handler and froze its assets, forcing it into a $41-million settlement.

These actions have set off a firestorm among lawyers who say regulators are intimidating professionals and attempting to rewrite rules of their traditional client relationships.

In the latest suit, filed in federal court in Illinois, the government alleges that Arthur Andersen should have expanded the scope of its audits so it could assess the level of risk Ben Franklin was undertaking.

Its parent, the investment banking and commercial real estate firm Security Capital Corp. of New York, which acquired Ben Franklin in 1981, was not experienced in the savings industry, the suit states.

Ben Franklin grew by purchasing a residential mortgage firm, pushing investments in high-risk adjustable mortgages with graduated payments and teaser rates.

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