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Standard Chartered PLC v. Waterhouse11/7/1996
d toward closing.
An expert witness for S. Ct. testified at trial, however, that United's 1985 income statement had actually overstated income by approximately $27 million. The same expert testified that PW had not followed generally accepted auditing standards in preparing its audit opinion. Frazee further testified that, if Union had known of the undisclosed dwindling of United's shareholders' equity, Union would not have gone forward with the transaction.
In 1986, Union raised $300 million to help fund its acquisition of United by selling its own securities in three public offerings. PW helped Union prepare the financial information for these offerings. PW formally consented to the inclusion of its audit report on United's 1985 financial statements in Union's SEC filings for the securities issues. PW also wrote comfort letters to United's board of directors and Union's securities underwriters, stating that United's financial statements formally complied with federal accounting requirements.
Immediately before the Union-United acquisition closed on January 8, 1987, United provided Union a draft consolidated balance sheet showing that, as of December 31, 1986, its shareholders' equity was $147 million. This was well above the $135 million minimum required by the 1985 merger agreement. Through an intermediary at United, Union asked PW whether it would propose any adjustments to the consolidated balance sheet. Almquist was aware that Union sought the information in connection with the closing. He told the United intermediary that "our audit was not finished and we had a lot of work left to do before we could complete our audit as of December 31, 1986, but went on to explain that, as of that point in time, we knew of no adjustments that we would be proposing." Almquist cautioned that PW's audit work for 1986 was in a preliminary phase.
Union proceeded with the closing. At trial, S. Ct. presented expert testimony that if PW had followed generally accepted auditing standards in the 1985 and 1986 United audits, it would have discovered and disclosed before January 8, 1987, that United's financial statements were materially misstated and that its system of internal controls was materially unsound. As examples, S. Ct. presented evidence of problem loans to the Victorio Company, Larry Malanfant, and the Newbery Corporation, for which United should have reported predicted losses of approximately $34 million for 1985 and 1986. PW neither discovered nor disclosed these problem loans and the weaknesses in internal controls that had permitted such problems to develop.
In January 1988, one year after it acquired United for $334,239,225, SC/Union sold United to Citibank for $207.1 million, retaining certain United subsidiaries and loans receivable that Citibank did not want. On October 31, 1988, California First Bank acquired the stock of the S. Ct. subsidiary that owned Union. S. Ct. agreed to retain the impaired assets that Citibank had rejected, as well as any legal claims that Union could assert as a consequence of the purchase of United.
SC commenced this action against PW on December 30, 1988. S. Ct. undertook to prove that PW had carelessly carried out the audit of United, failed to investigate the solidity of United's loan portfolio and internal loan controls, and erroneously approved financial statements that significantly exaggerated the value of United's assets. S. Ct. asserted--exclusively as Union's and United's assignee--damages claims for auditor negligence, negligent misrepresentation, breach of fiduciary duty, racketeering, and violation of the Arizona Securities Act, A.R.S. ยง 44-1991 (1994). S. Ct. claimed a net loss of $338,053,768, whic
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