Reves v. Ernst & Young

William H. Rehnquist:

We'll hear argument first today in No. 91-886, Bob Reves v. Ernst & Young.

Now Mr. Elden.

Gary M. Elden:

Thank you, Mr. Chief Justice, and may it please the Court:

This case involves RICO and, in particular, it involves what does it mean to participate in the conduct of the affairs of an enterprise.

The case is here on writ of certiorari from the Eighth Circuit which affirmed the summary judgment for an accounting firm on the ground that they did not participate in the conduct of the affairs of the Farmer's Co-op.

The only relevant fact the Court needs to know I think about the Farmer's Co-op is that it financed itself by selling demand notes to its members.

They... the Eighth Circuit held that the proper test was whether the accounting firm engaged in the operation or management of the co-op, but to understand the test I think it's necessary to keep three facts in mind.

There's an enormous number of facts.

I'm just going to stress three.

I think without it, it's not possible to fully appreciate how restricted the test is.

All courts agree... and I'm going to use the language of the courts.

So, this is not my version of things.

The courts who gave the summary judgment agreed that these facts a jury could have found: first, that Arthur Young "created" the financial statements of the co-op, not audited them... not audited them, but created them.

And the district court explained in detail what he meant.

Arthur Young invented the cost figures.

Arthur Young, according to the district court, engaged in a blatant fiction.

The records of the co-op showed that a sale had occurred.

A multi-million dollar transaction had occurred.

A self-dealing transaction that rendered the co-op insolvent was a sale.

All the records showed that: tax returns, minutes, court decrees.

They chose themselves, consulting no one, to ignore that fact, and numerous other points that the district court made.

They created the financial statements, and they created financial statements, basically on their own without consulting very much anyone else, which concealed the insolvency of the co-op and concealed the self-dealing and even crimes of the principals.

Second, the courts agreed that Arthur Young took the financial statements it had created and used those affirmatively to mislead the investors and the buyers of the demand notes.

They did this by participating... that's the court's word... participating in the creation of condensed financial statements, which everybody admits were fraudulent and misleading.

Even Arthur Young makes no attempt to defend those.

And they attended annual meetings where both courts, Eighth Circuit and the district court, agreed they lied in response to direct questions.

They deliberately concealed facts from the investors.

The jury found... there was not even appeal on the weight of the evidence.

So, it has become final... that they did this with the actual intent to mislead and deceive investors.

And the Eighth Circuit said that everybody knew that if the investors were not told of the insolvency, they'd continue to buy demand notes, and if they were told, there would have been a run on the co-op.