Reves v. Ernst & Young

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.