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Hinsdale bank suing Ernst & Young

Ernst & Young LLP accountants assured Superior Bank executives the institution was financially healthy until just before admitting to regulators they mistakenly signed off on inflated financial statements, an ex-bank official said.

Ernst & Young acknowledged in January 2001 that its auditors had botched loan-valuation accounting and that would force the bank to restate asset values, Nelson Stephenson, Superior's former chairman, told jurors yesterday in a Florida court. A former bank executive is suing Ernst & Young for fraud and accounting malpractice over the firm's miscues.

"I knew my credibility and the bank's credibility had been shattered as a result of Ernst & Young's mistake," Stephenson, 57, testified in state court in Fort Lauderdale.

New York-based Ernst & Young, which served as Superior Bank's outside auditor for a decade, failed to detect problems at the bank that culminated in the 2001 seizure of the institution by federal regulators, lawyers for ex-Superior official Alan Schein contend. Schein alleges he relied on Ernst & Young's auditors when he sold a mortgage-marketing business to Superior before joining the bank in 1998.

Charlie Perkins, an Ernst & Young spokesman, said in an e- mailed statement the company had no comment on Stephenson's testimony.

The accounting firm, which helped Superior become a pioneer in packaging subprime mortgages as investments, owes the former executive at least $200 million in damages for its accounting mistakes, his lawyers told jurors.

The Federal Deposit Insurance Corp. took over Hinsdale-based Superior in July 2001 after losses depleted capital reserves. Those losses were tied to mortgages involving high-risk borrowers that were packaged as investments, FDIC officials said. The bank used improper accounting and record- keeping, they added.

Ernst & Young paid $125 million to settle regulators' claims over its audits of Superior's books.

Superior's owners, including members of the billionaire Pritzker family, agreed in December 2001 to pay the government $460 million over the bank's collapse.

Stephenson, who took over as Superior's chairman in 1995, testified Ernst & Young's approval of the bank's accounting had always made him feel comfortable with the bank's financial stability.

"We had no reason to believe that anyone at Ernst & Young would produce anything but an accurate report," he said.

After learning about Ernst & Young's mistake, Stephenson said he decided to resign and end a 20-year career in banking.

The case is Alan Schein v. Ernst & Young LLP, 03-000266, Complex Litigation Unit, Circuit Court for the 17th Judicial Circuit of Florida, Broward County (Fort Lauderdale).

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