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AUSA Life Insurance Co. v. Ernst & Young

United States Court of Appeals for the Second Circuit
206 F.3d 202 (2d Cir. 2000)


AUSA Life Insurance Company (AUSA) (plaintiff) invested in the securities of JWP, Inc. (JWP), by purchasing notes in November 1988. AUSA continued to purchase more notes through March 1992, in accordance with note agreements that contained JWP’s financial representations, future procedures, and assurances of financial viability. AUSA relied on JWP’s past financial statements, including annual reports certified by Ernst & Young (E&Y) (defendant). The reports were required to be kept in accordance with generally accepted accounting principles (GAAP). E&Y was also required by the agreement to provide to JWP a letter containing an audit statement and proof that JWP was compliant with the financial covenants. However, E&Y’s statements were consistently inaccurate and were not always in accordance with GAAP. E&Y would notice the failures, protest against the failures, and then acquiesce to the failures. In particular, John LaBarca, the partner in charge of audit, and Ernest Grendi, the chief executive officer of JWP, seemed to bully or persuade others that the books did not need to be adjusted. JWP rapidly expanded between 1984 and 1992 due to aggressive acquisitions financed by private placements of debt securities. JWP’s acquisition of Businessland, Inc. (Businessland), in 1991 turned out to be a failure and led to JWP’s involuntary bankruptcy in December 1993. As a result, AUSA lost approximately $100,000,000 of its $149,000,000 in total investments. AUSA then brought suit against E&Y, but the district court dismissed for failure to prove loss causation. AUSA appealed.

Rule of Law


Holding and Reasoning (Oakes, J.)

Concurrence (Jacobs, J.)

Dissent (Winter, J.)

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