Ernst & Young sued for £1.3bn over bank failure

The US accounting industry was in the dock again last night as the federal government filed a $2bn (£1.3bn) lawsuit against Ernst & Young for alleged fraud, negligence and professional misconduct in its auditing of a Chicago savings bank that failed in July 2001.

The suit has been brought by the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits. On top of $548m (£350m) of compensation for the amount the FDIC will payout to depositors who lost their money in the collapse of Superior Bank, it is also demanding $1.6bn in punitive damages, plus interest and costs for each of three charges.

E&Y is accused of mis-stating the assets of Superior Bank and deliberately delaying its report of the error, so as not to interfere with the $11bn sale of its consulting division. Last night E&Y denied the charges, saying Superior's failure "was not caused by any action of ours". E&Y said it would "vigorously" defend itself in any court case.

Regulators seized the bank in July 2001 after what was then the largest failure of an insured US financial institution in almost a decade, brought about by excessive mortgage lending to high-risk customers. The lawsuit said the total cost to the FDIC was $750m.

The suit states E&Yadmitted in January 2001 after lengthy denials that Superior's assets were overvalued by $270m. Subsequently, they had to be cut by an additional $150m.