E&Y in court move to quash Equitable lawsuit

Ernst & Young will on Monday move to strike out a £3.5bn lawsuit filed in the High Court by Equitable Life claiming that it was negligent in its scrutiny of the crippled insurer's accounts.

There has been outrage among Equitable Life policyholders, who have seen their funds slashed by upwards of 30 per cent and been charged 20 per cent to leave the insurer to find better returns elsewhere. They want vengeance, and Vanni Treves, the chairman of Equitable, has said he will not rest until the perpetrators of Equitable's demise have been rounded up and made to pay as a high a price as policyholders. He has vowed to stop at no one, whether it be the Department of Trade and Industry, the Financial Services Authority or former Equitable directors.

The case against E&Y centres on the accounts signed off by the auditor in the years 1997, 1998, and 1999. Equitable is bringing two claims against E&Y for that period, one claiming that negligence by E&Y caused Equitable to miss out on a chance to sell the business for up to £3.5bn.

The second claim is that E&Y should have told Equitable to reduce its bonuses as early as 1997 to conserve capital for the guaranteed annuity rate (GAR) holders. E&Y says both claims fall outside its remit as auditor and is to ask the High Court next week to throw out the case.

E&Y came out fighting yesterday. Giving a series of press briefings, Robert Holman, the head of insurance at E&Y, said the auditor had no intention of settling and would fight Equitable "all the way".

Equitable will argue that E&Y failed to warn directors of the hole in its finances to pay for annuities that guaranteed policyholders a certain sum. If the directors, Equitable will contend, had known the full extent of the problem, they would have realised the company had insufficient capital available to meet the liability and sought a buyer.

At that time, Equitable still had a relatively untarnished reputation, and was the oldest and most venerated insurer in the UK. Equitable should have been able to command a substantial premium from a buyer – it believes in the order of £3.5bn. Equitable's operating assets were eventually sold to Halifax in a deal worth up to £1bn in January 2001, after the House of Lords ruling that it must increase GAR bonuses to the tune of £1.5bn forced it to close to new business.

E&Y will say on Monday that the directors were already fully aware of the need to finance GAR liabilities as far back as 1993, and that it is not possible to conclude whether a sale would have taken place, or at what price.

Equitable's second claim is that E&Y should have made the directors aware of the strain its over-generous bonuses were putting on the company's finances. E&Y, however, will argue it is for the board and the company's actuary to determine bonus policy and its sustainability, not its auditor.

Neither E&Y nor Equitable have disclosed the costs of the suit but Mr Holman said: "When the suit involves billions of pounds, you can imagine the costs are pretty substantial."

Equitable has had a dedicated team at top City law firm Herbert Smith working on the case for the past two years.

Mr Treves is himself a lawyer, partner at Macfarlanes, and is unlikely to be pursuing a claim he believed was doomed to fail.

Paul Braithwaite, chairman of the Equitable Members Action Group, yesterday said policyholders would be "thunderstruck" if the entire suit was thrown out. "It is surely the auditor's responsibility to question their bonus policy. Equitable was overpaying, and it must be the auditor's responsibility to speak up and make sure the business is run prudently."

E&Y is doubly vexed by the Equitable suit, in that it is also facing a Joint Disciplinary Scheme investigation by the accountancy profession over its auditing of the insurer. It had asked the High Court to grant a stay on the investigation while it fought the Equitable suit, but was unsuccessful. The E&Y partners involved feel as if they are under siege.

Meanwhile, Equitable's former directors, including Chris Headdon and Alan Nash, are still being pursued. Equitable's proceedings against them began last year and are scheduled in court in 2004.

The Penrose inquiry, a Treasury-backed investigation, is expected to reveal all the answers about who was responsible for what, and Equitable is awaiting its findings before launching a full-scale suit against government bodies. Observers quietly believe that while Mr Treves may pay lip service to the idea of suing the Government, he is unlikely to initiate a suit. The Penrose inquiry team is due to report in the summer.

Next week's hearing is scheduled to last up to five days. Both sides are convinced of the strength of their own case and will appeal should the judgment go against them. Moving to strike out Equitable's claims is a bold and very public move by E&Y. A spokesman for Equitable yesterday said: "We are convinced our action is the correct one. We believe next week will not only show Ernst &Young have taken the wrong course, but also that we will be successful."