The Work

December 18, 2009 11:52 AM

Latham, Mayer Brown, Wilmer Lead on Unprecedented Ernst & Young Settlement

Posted by Zach Lowe

Wilmer Cutler Pickering Hale and Dorr and Mayer Brown split lead counsel duties advising Ernst & Young in settlement talks with federal regulators overs the accounting firm's failure to report illegal activity at one of its clients--Bally Total Fitness (repped by Latham & Watkins).

In total, 11 Am Law 200 firms advised Ernst, Bally and eight individuals sanctioned by the Securities and Exchange Commission as part of a settlement believed to be the first ever in which the head of a major accounting firm's national office faced sanction from a federal regulator, according to The New York Times

That would be Randy Fletchall, the partner in charge of Ernst's national office. Fletchall, who turned to Fried, Frank, Harris, Shriver & Jacobson for representation in the case, was officially censured for his role in the Bally scandal. (Bally has previously admitted committing accounting fraud from 1997 through 2003 and has filed for bankruptcy twice since 2007, according to our colleague Brian Baxter's prior reporting.)

Ernst's initial intentions in the Bally matter appear to have been good, the NYT reports, The firm got wind that Bally was manipulating its earnings in a way that violated accounting rules and, apparently unnerved by Enron and other scandals, advised Bally to stop. But Ernst also instructed Bally not to admit past violations--an admission that would have forced it to restate earnings and admit larger losses, the NYT says. 

Interestingly, the case--and others like it--have some reformers pushing for a law that would require public companies to switch auditors every few years to avoid the development of overly friendly relationships. Congress has considered such a rule change before but ultimately decided not to include it in Sarbanes-Oxley, the NYT reports.

Under the deal struck with the SEC, Ernst will pay $8.5 million in fines, and six Ernst partners accepted sanctions ranging from censure to a two-year ban on auditing public companies. Two Bally executives--both former Ernst partners--also settled charges with the SEC. 

Latham represented Bally in the matter, according to the SEC. The firm also advised Bally in its most recent Chapter 11 proceeding, work that marked Latham's more aggressive move into representing debtors in bankruptcy. (The firm had traditionally focused on creditor representations.)

Harry Weiss of Wilmer and Stanley Parzen of Mayer Brown either declined to comment or did not return calls. Mayer Brown and Ernst have been interconnected for years; Kathryn Oberly, Ernst's longtime general counsel who left last year for a federal judgeship, came to Ernst from Mayer Brown, according to the Legal Times, an Am Law Daily sibling publication.

The full lineup of Am Law partners on the settlement: Arnold & Porter's Scott Schreiber advised former Ernst partner John Kiss; John Sturc and Thomas Dupree, Jr., of Gibson, Dunn & Crutcher represented ex-Ernst partner William Carpenter; Richard Morvillo and Jeffrey Robertson of Schulte, Roth & Zabel advised current Ernst partner Kenneth Peterson; Lawrence Robbins of Robbins, Russell, Englert, Orseck, Untereiner & Sauber advised current Ernst partner Mark Sever; Therese Pritchard of Bryan Cave represented ex-Ernst partner Thomas Vogelsinger; James Dunlop of Jones Day advised former Bally controller Theodore Noncek; and Thomas Newkirk of Jenner & Block advised John Dwyer, Bally's former CFO. 

Attorneys declined to comment on the record, citing restrictions from Ernst & Young.

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I used to work at Ernst & Young.

I am soooooo surprised!!!


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