Question

Clott was chairman and chief executive officer of First American Mortgage Company, Inc. (FAMCO), which originated loans and sold the loans to investors, including E. F. Hutton Mortgage Corp. (Hutton). FAMCO employed Ernst & Whinney, a national CPA firm, to conduct audits of its financial statements. Hutton received a copy of the financial statements with an unqualified certification by Ernst & Whinney. Hutton bought more than $ 100 million of loans from FAMCO. As a result of massive fraudulent activity by Clott, which was undetected by Ernst & Whinney during its audit, many of the loans purchased by Hutton proved to be worthless. Ernst & Whinney had no knowledge of Clott’s activities. Hutton’s own negligence contributed to most of the losses it suffered. Hutton sued Ernst & Whinney for fraud and negligence. Is Ernst & Whinney liable? E.F. Hutton Mortgage Corporation v. Pappas, 690 F. Supp. 1465, 1988 U. S. Dist. Lexis 6444 (United States District Court for the District of Maryland)


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