Kleinwort sued over firm's failure

MERCHANT bankers Kleinwort Benson are being sued by Ernst & Young for several million pounds over the collapse of Sound Diffusion, the electrical company that went under in December 1988, writes Peter Rodgers.

The move follows an out-of-court settlement in which E&Y, Sound Diffusion's auditors, paid compensation to investors who took up shares in a rights issue in May 1988, seven months before the collapse. Ernst is calling on Kleinwort, as Sound Diffusion's merchant bank advisers at the time of the rights issue, to pick up the tab.

In 1992, Ernst settled out of court for pounds 1.4m with Tunstall Group after the company had sued the auditors for losses it incurred as a result of buying Sound Diffusion shares in the rights issue. Ernst later offered to extend the compensation to other shareholders in Sound Diffusion.

The firm denied liability at the time, but said it was concerned over the costs of legal actions and felt a 'moral obligation to extend the Tunstall deal to other shareholders'. Ernst offered 25 per cent of the value of rights exercised in the issue.