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Reves v. Ernst & Young
United States Supreme Court
507 U.S. 170, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993)
Jack White was the general manager of the Farmer’s Cooperative of Arkansas and Oklahoma, Inc. (co-op). White borrowed $4 million from the co-op in order to finance construction by his company, White Flame Fuels, Inc. (White Flame). On November 12, 1980, the co-op’s board agreed to purchase White Flame from White. Subsequently, however, the parties entered into a consent decree, wherein White was relieved of his debt and the co-op was deemed to have owned White Flame as of February 15, 1980. The co-op later retained an accounting firm, Russell Brown and Company, to perform its 1981 audit. Russell Brown and Company later merged with Arthur Young and Company, which became Ernst & Young (defendant). As part of the audit, Joe Drozal, a partner at Russell Brown and Company, was tasked with determining the value of White Flame. If the co-op acquired White Flame in 1979, the value would have been $4.5 million. If the co-op purchased White Flame at a later time, the value would have been less than $1.5 million, rendering the co-op insolvent. Drozal determined that the co-op owned White Flame in 1979 and gave White Flame a value of $4.5 million. In presenting its findings at the co-op’s annual meetings in 1982 and 1983, Ernst & Young did not disclose its conclusion that the co-op owned White Flame in 1979 or that the co-op’s solvency depended on that ownership date. Ernst & Young also failed to express its doubt that the co-op’s investment in White Flame was recoverable. In 1984, the co-op was unable to honor its promissory notes and entered bankruptcy proceedings. Bob Reves (plaintiff), a bankruptcy trustee, sued Ernst & Young on behalf of the co-op, alleging that Ernst & Young conducted or participated in the conduct of the co-op’s affairs, in violation of § 1962(c) of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The district court granted summary judgment in favor of Ernst & Young, finding that the firm had not participated in the operation or management of the co-op. The court of appeals affirmed. Certiorari was granted.
Rule of Law
Holding and Reasoning (Blackmun, J.)
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