Ernst & Young Aims to Block Subpoena of Former Executive
By SCOT J. PALTROW
Staff Reporter of THE WALL STREET JOURNAL
Ernst & Young LLP is seeking to block its former vice chairman, Robert K. Herdman, now the Securities and Exchange Commission's chief accountant, from giving testimony in a civil lawsuit in which Cendant Corp. accuses the firm of aiding in accounting fraud.
Cendant recently subpoenaed Mr. Herdman to testify in a deposition in a federal lawsuit in New Jersey stemming from Ernst's audits of one of Cendant's main predecessor companies, CUC International Inc. Disclosure that CUC for years had booked phony revenue spurred a $14 billion decline in the value of Cendant stock when the fraud was disclosed.
In a motion seeking to quash the subpoena, Ernst said Cendant had failed to show that Mr. Herdman had knowledge of the fraud. It also said, "There can be no question that allowing Cendant to depose Mr. Herdman would be extremely burdensome and disruptive to his duties and responsibilities at the SEC."
Mr. Herdman in October took the senior SEC post after having served for years as Ernst's vice chairman of accounting and professional matters. Mr. Herdman, through an SEC spokeswoman, has denied any role in approving the accounting treatments but confirmed that he participated in an internal investigation. Mr. Herdman declined to comment on whether Ernst is continuing to represent him in the Cendant matter or if he would be willing to testify in the case.
Ernst's motion attempting to block Mr. Herdman's testimony also seeks to quash subpoenas of eight other current and former Ernst executives, including James Turley, Ernst's current chairman. A court-appointed special master is expected to rule on the subpoena after a hearing July 1.
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In addition to the civil lawsuit, Ernst's role in the CUC audits is the subject of a formal SEC investigation. And the U.S. attorney's office in Newark, N.J., said recently that it has reopened a criminal investigation into possible wrongdoing by Ernst employees in the CUC audits. Ernst, however, has denied that any of its employees are targets of the criminal probe.
The Cendant case is one of several matters under investigation by the SEC involving Ernst's audits of publicly traded companies while Mr. Herdman was a member of the firm's top management team.
People familiar with the Cendant investigations say Mr. Herdman wasn't a member of the CUC audit team and isn't suspected of any direct role in the alleged fraud by Ernst. But Cendant lawyers have indicated that they want to get his testimony about whether he approved any of the accounting treatments used in the CUC audits, about his role in conducting an internal investigation for the firm after the CUC fraud was disclosed.
In a separate civil suit, Ernst in 1999 agreed to pay $335 million to Cendant investors who lost money because of the fraud. Ernst, however, has denied any wrongdoing and says it was the victim of deceit by CUC officials.
Write to Scot J. Paltrow at scot.paltrow@wsj.com
Updated June 24, 2002 |
