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Trial opens over £2bn Equitable claim against E&Y

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11th Apr 2005
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Royal CourtThe future of Ernst & Young is at stake as the High Court trial begins over a £2bn claim from Equitable Life that could destroy the Big Four firm.

Two cases are being heard simultaneously, one for £2.1bn pounds against Ernst & Young claiming the auditor failed to assess the liabilities of guaranteed annuity return (GAR) contracts accurately, and the other for £1.7bn from 15 former Equitable Life directors.

Equitable closed its books to new business in December 2000 when a House of Lords decision forced it to honour liabilities arising from its Guaranteed Annuity Rate (GAR) contracts. The Lords verdict left the insurer facing multi-billion pound payments it could not afford.

Equitable is claiming E&Y gave unqualified opinions on unrepresentative accounts. The action alleges that Equitable directors would have acted differently if they knew the scale of the GAR problem.

Equitable argues Ernst & Young should have highlighted the uncertainties surrounding the GAR case and ensured there were adequate provisions for the liabilities in the insurer's 1997-99 accounts. If the directors had known about the growing black hole, they would have attempted to sell the company, said Equitable chairman Vanni Treves said.

The case, expected to last up to 26 weeks, could cost as much as £100m and is being billed as the most expensive in British legal history.

At an earlier point in proceedings, the judge who initially denied Equitable the right to sue its auditors warned that if Equitable were to win the case, it would lead to the possible destruction of E&Y and the "bankruptcy of many of its partners". This decision was later overturned on appeal in July 2003.

After winning the right to bring the case to the High Court, Equitable told policyholders its legal costs amounted to £7.9m. It indicated that any compensation it wins will be added to funds to benefit remaining with-profits policyholders.

Ernst & Young denies any wrong-doing and has held out against a negotiated settlement. In a press statement on the trial, E&Y chairman Nick Land commented: "Today sees the beginning of a case that should have never been brought. We believe that by taking this action Equitable is pouring its policyholders' money down the drain.

"Nothing that Ernst & Young did caused Equitable's problems. There is nothing we could have told them that they did not already know. There was no black hole, no fraud and no money lost.

"We have heard Equitable's chairman make misguided threats in the media and its chief executive declare that they can afford to lose the trial and £100m of policyholders' money. These types of remarks underline their approach to this litigation: nothing more than an irresponsible attempt to offload blame for the society's past commercial problems."

The Equitable case is the first in whichnon-executive directors will be tried negligence alongside the society's executive directors at the time. Lawyers for the nine non-execs are said to be planning to attack Equitable's motives for pursuing individuals who have no significant wealth to pay out. According to the Financial Times, Equitable is trying to get the non-execs to admit in court that they would have acted differently if they had been aware of the undisclosed liabilities - paving the way for a larger claim against E&Y's "deeper pockets".

"We don't want to put E&Y and their staff and families into bankruptcy, but we will if we have to," said Treves.

Equitable Life: The story so far

  • E&Y faces £2.6bn writ April 2002
  • Equitable FD's sudden exit raises solvency fears
  • E&Y escapes £2.6bn Equitable claim
  • Court revives Equitable's £2.6bn claim against E&Y July 2003
  • Equitable get permission to sue non-executive directors Oct 2003
  • E&Y faces Equitable Life disciplinary complaints Sept 2004
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